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Analysis of Arsenal's financial statements

For the first time in 16 years and only the 3rd time since 1975 (publicly available financial history for Arsenal), Arsenal FC reported consecutive losses before taxes. Also, for a 2nd successive year, Tottenham’s revenue has exceeded Arsenal's. How has a historically profitable club, located in the financial capital of Europe, suddenly become loss-making? Let's dive in!


Profit/Loss

For the first time in 16 years and only the 3rd time since 1975 (publicly available financial history for Arsenal), Arsenal FC reported consecutive losses before taxes. Also, for a 2nd successive year, Tottenham’s revenue has exceeded Arsenal's. How has a historically profitable club, located in the financial capital of Europe, suddenly become loss-making?


Arsenal's 2020 loss of £54m (68% year-on-year increase) is attributable to several things asides from the impact of Covid-19. The club is undergoing restructuring at various levels: the coaching department, playing squad and club management.

These changes, coupled with the club's continued absence from the UEFA Champions League (UCL) and subsequent effort to return to UEFA's elite club competition, are responsible for the losses. In the post-Wenger years, Arsenal's EBITDA has worsened. More worrying is the increasing gulf between the club and "rivals", especially North-London neighbour's Tottenham.

Revenue

Despite winning the FA Cup and receiving ~£7m in prize money, Arsenal's broadcast and matchday revenue for 2020 decreased by 35% and 18%, respectively (combined reduction of £82m).

The 8th placed finish in the 2019/2020 EPL season (lowest in 27 years) and an early exit in the UEFA Europa League (UEL) knockout stage was responsible for the drop in broadcast and matchday revenue. Arsenal's financial year-end is May (usually June for most clubs). Therefore, broadcast and matchday revenue from EPL and FA Cup games played between June and July were not recorded in the 2020 accounts. Arsenal estimates that £48m (of the £82m drop in revenue) is due to the year-end timing difference.


Arsenal's commercial revenue of £142m grew by 28% and now represents 42% of total revenue. The increase is due to the £60m per annum kit deal with Adidas (effective from 2019/2020) that replaced the previous £30m agreement with Puma. Despite the growth in commercial revenue, Arsenal is yet to maximise its brand value fully. A club that has won the FA Cup a record-breaking 14 times and has a substantial global fanbase should generate more revenue from its brand.


Arguably, UCL absence limits the club's bargaining power in commercial deal negotiations.

However, the historical figures show that commercial revenue only grew marginally while the club was in the UCL. At £279m, Manchester United's commercial revenue is almost twice Arsenal's. London rivals, Chelsea and Tottenham, respectively, earn £28m and £19m more than Arsenal.


Player wages

The club's 2020 wage bill of £234m did not change from 2019. A recurring theme of discussion at Arsenal was Mesut Ozil's wages. This is because the player reportedly refused to accept a wage reduction scheme in the early days of the pandemic - the scheme eventually saved the club £19m in wages. Though the 2020 figure includes Ozil's wages (and other players sold in the summer and January), it doesn't reflect the new wages for renegotiation of contracts (e.g Pierre Aubameyang) and the summer signings (e.g Willian).

The net effect of transfers (in and out) and renegotiation of contracts should reduce Arsenal's current (2021) wage bill. Nonetheless, Arsenal's wages-as-a-percentage of revenue is 69%, behind only Chelsea.

However, Chelsea's ability to sell players at a profit makes up for the high wage percentage. Dwindling revenue due to on-field performances and inadequate commercial activity is why Arsenal's wage percentage has worsened.


Impact of missing out Champions League Football

Josh Kroenke, A Director and son of Arsenal's owner Stan Kroenke, likened Arsenal's wages to that of a club in the UCL while operating on a UEL budget. Though his statement irked fans, the facts support his assertion. To put it in context, Arsenal's 2019 defeat in the UEL final to Chelsea earned the club at most €17m in matchday revenue. In comparison, if they had only played in the group stages of the UCL and were knocked, Arsenal would have received ~€24m. Not to mention broadcast revenue of €877m shared by 32 teams in the UCL compared to €252m shared by 48 teams in the UEL. The difference is clear. As it stands, Arsenal might not play in the UEL in 2021/2022 season and could miss out on the now customary UEL money.


Player transfers

Arsenal's spending on player recruitment has increased since Arsene Wenger left the club in 2018 (effectively, his last major transfer window was in 2017).

Coincidentally the club is yet to qualify for the UCL even though investment in player acquisition has increased. In hindsight, Arsene's achievements of constant UCL qualification despite the sale of key players was outstanding.


The club has rejigged the recruitment team several times in the past five years. However, it seems player acquisition is yet to yield the desired effect. North-London rivals Tottenham have spent less than Arsenal and have qualified for the UCL and finished above Arsenal for three seasons.

With key players such as Sanchez, Ramsey, and Ozil leaving for free, receipt from players' sale has not been optimal.


Debt

The financing for the construction of the Emirates stadium represents a large portion of the club's debt. Due to the pandemic, the club refinanced the stadium-related debt. The debt agreement requires an amount of Arsenal's cash balance (£27m of £109m in 2020) to be set aside for debt servicing.

A few weeks ago, due to the continued impact of Covid-19, Arsenal borrowed £120m from the Bank of England via the Coronavirus Corporate Finance Facility. The purpose of the loan is to protect the club’s operations from cash shortfall and is due to be repaid in May 2021. Also, the 2020 accounts reveal that Arsenal owes other clubs £157m for players' transfers. In contrast, other clubs owe Arsenal £46m for players' transfer.


Conclusion

The current restructuring at Arsenal began in 2019 with the appointment of Edu and Mikel Arteta. A rebuild at any football club requires patience from the fans and decisiveness from the board/management. The financial impacts of Covid-19 and absence from the UCL are significant hurdles that might derail the club's vision of being reestablished as a domestic and continental powerhouse. Potentially, the club's commercial operation can be a stopgap solution for the revenue shortfall. With 185 supporters' clubs worldwide, historical success and fan engagement on social media (signings of Partey and Pepe), Arsenal has significant bargaining chips to negotiate more and better commercial deals.


Most importantly, the recruitment of players in the summer transfer window would need to be fit for purpose and astute given the club's limited financial might. Only time would tell if Arsenal is able to return as the biggest club (financially and in football terms) in London.


Written by Bolaji Alabi