As I covered last time, Alisher Usmanov recently upped his stake in Arsenal, positioning himself for a possible battle with Stan Kroenke over ownership of the Gunners.
The question this blog asks: Is this a sound business deal or just another billionaire looking for a high profile plaything?
Arsenal FC: Financial Analysis
Turnover & Income
Turnover for the club improved dramatically with the completion of the Emirates in 2005. Gate and Matchday revenue now account for 42.4% of the total compared to 27% prior to the opening. Broadcast revenue has increased substantially as well and counts for 30.6% of turnover.
In the past 5 operating years Arsenal have been consistently profitable, netting (after taxes) almost £26m alone in 2008. Player sales contributed significantly to income, accounting for almost half of profit in 2007 and 2008. In 2006 player sales actually allowed Arsenal to remain in the black after sustaining a loss in normal club operations.
Throughout this period the board has diluted shareholders by 5.5%, issuing more shares to partially fund the stadium development. Earnings per share (EPS) has increased steadily.
- 2004: £138.29
- 2005: £138.91
- 2006: £127.01
- 2007: £286.05 (This is a fluke for analysis purposes though, as this inflated number was due to one-time tax relief the club received. Actual figure should be £45.26)
- 2008: £413.49
Summary: Arsenal are very healthy from an income standpoint, particularly for a football club. The group has successfully diversified its revenue stream away from a complete reliance on broadcast income by increasing matchday revenues and gate receipts. Even given this increase in club operation income, player transfers contribute a significant percentage of income and are likely to play a large part in the business plan for years to come until debt levels are paid down.
Balance Sheet & Liquidity
As of May 31, 2008 Arsenal had total shareholder equity of £159.1m. Theoretically if the club were liquidated there would be £159m quid to distribute to shareholders (probably not enough money to whisk directors away from the pitchforks of angry Gunners supporters though).
Total Debt has increased from £488.94m (2006) to £644.45m (2008). While this is to be expected after having to fund the new stadium debt levels are something all clubs need to be watching in the current credit environment.
Cash in hand sits at £93m and represents 28.3% of current assets.
An interesting point to note is that at this point Arsenal actually were ‘upside-down’ from a current ratio perspective. What this means is that the liabilities coming due within the next year exceeded the easily saleable (current) assets available to the club. The most significant portion of the liabilities maturing was £138m in bank debt, the shortfall would need to have been plugged either with a refinancing of the debt including the shortfall or by generating extra income. The deficit was not large (~£5.5m) but perhaps it was a contributing source of pressure for the transfer of Emmanuel Adebayor. Given the price he garnered from Manchester City his departure may have been a very welcome financial relief.
Summary: The balance sheet reflects the cost of the Emirates and particularly the impact of the financial crisis. On a current basis Arsenal have (had) a short term liquidity problem, in the long term trimming debt is the number one priority. The board has kept the balance sheet conservative however, and given the club’s position in the international football world and prudent style of management it is likely that the balance sheet will continue to improve.
In 2007 Arsenal issued approx. £255m worth of bonds, comprised of £205m fixed rate securities and £50m issued at a floating rate.
Prior to 2007 Arsenal relied primarily on secured bank loans to fund club operations and expansion. During 2007 the mix of capital changed to include the issuance of fixed and floating rate instruments. This switch was most likely due to a large increase in risk aversion at the banks due to the accelerating financial crisis, and still favorable rates in the debt securities market for a unique issuer like Arsenal.
Overall Arsenal have bank debts to pay back within one year of £138m, after which significant debt maturities tied to the issued 2007 bonds are more than two years out. Debt (hard debt) as a % of capital increased to 54%. The majority of the bonds are at a fixed rate of 5.8%. The cost of debt servicing directly tied to the bonds is approx £14m a year (my calculation).
Summary: Arsenal have successfully navigated the financial crisis and secured financing at a favorable rate for the duration of outstanding debt. Servicing costs are easily manageable given the new improved revenue base and maturities are far into the future. Assuming that management continues to be conservative in expansion debt should not be a problem for Arsenal.
Kroenke, Usmanov and Purchase Prices
Share purchase data is scattered and probably slightly unreliable, but I am going to rely on the British press figures to get a rough average purchase price for both owners.
- 9,123 shares for £75m = £8,221 / sh
- 190 shares for £1.7m = £8,947 / sh
- Weighted Average = £8,235 / sh
The press have reported several times on Kroenke’s purchases:
- 4,977 shares for £42.5m = £8,539 / sh
- 200 shares for £1.7m = £8,947 / sh
- 80 shares for £680k = £8,500 / sh
- Weighted Average = £8,537 / sh
So the two have paid roughly the same price for their stakes, with Kroenke paying slightly more.
Is it a good price though? The prices paid by the two value Arsenal at between £512-£531 million. Arsenal’s most recent results reported an after tax profit of £35.2 million and an increase in shareholder equity to £194.3m. Based on Kroenke’s price this would result in purchase multiples of:
- Price / Earnings = £531m / £35.2 = 15.04
- Price / Book = £531 / £194.3 = 2.732
Just based on these two quick metrics it looks like an excellent purchase for both of them. While the multiples are rich for a privately held company a premium is certainly due given the absolutely unique position Arsenal hold in the football world, the earning power of the Arsenal brand, and the consistency of the management team and players. If the club stands still and does not grow financially it would already be an excellent investment, stagnation seems unlikely though with some of the best young talent in the world coming to the Emirates and a competent manager to wield them.
Additionally with the stadium already built any large capital investments are likely to be far off in the future. In effect the existing board took the risk expanding the club and the incoming owners are going to take the spoils.
Summary: Can I borrow some money from you to buy Arsenal shares with? Because Kroenke and Usmanov look to be getting a hell of a deal. It will be interesting to see what happens in the coming months and if there is a battle for control. This certainly ain’t no Chelsea.
Reader question: Would you buy Arsenal at these prices? Respond in the comments.