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Arsenal and Aston Villa: what happened after the battle for fourth

In yesterday afternoon’s article Paul Collins reminded us in passing of the battle between Arsenal and Villa for fourth a year ago.

Clearly we all know what happened on the pitch both last year and this (today Villa are 18 points behind us with three games in hand, six points off fourth with two games in hand).

But in the past year there have been other developments – developments which will affect the long term future of both Aston Villa and Arsenal – and that’s the point of this little piece.

Aston Villa, despite their long and elegant history (and we have to acknowledge that they did once win the Euro Cup) are now a much smaller club than Arsenal in terms of financial turnover – Villa having a turnover of £84m against Arsenal’s £312.3m.

But as anyone who has spent 13 seconds in business knows, turnover is nothing if you can’t turn it into profit (see Man U for example).   According to the Times (March 6 2010) Villa lost £43.7m last year, while Arsenal made a profit of £58.8m.

And this takes me to my main point.  Villa’s loss is way up – it is £13m more than the previous year – and it is hard to see how they are ever going to pay it off.

This is a vital point because (and excuse me if you are in business, as you’ll know all this) long term building work, such as developing a training ground or facilities for fans, affects profit slowly over time.  The costs of such developments are written down over anything between 3 and 20 years.

So this loss was nothing to do with a sudden development of the infrastructure, but rather to do with a massive leap in player wages.

The areas where Villa score over Arsenal are in debt (Villa have £72m, Arsenal £297) and (given that debt) interest payment (Villa spend £9m and Arsenal £16.6m).  (As pointed out in the correspondence below the Arsenal figures has reduced further – I took my figures from the previous annual report, to try and avoid arguments over what has happened in the past six months).

But immediately you’ll see the disparity here.  Arsenal have a debt of four times that of Villa (obviously due to the stadium), but have to pay interest at a rate of under twice the Villa level.

The reason for the difference in interest is that Arsenal’s debt is wholly based on the re-development of the Highbury area, and so is secured in something real and long lasting.  Villa’s debt is partly secured in that way (the training ground and the supporters hotel near the ground), but is mostly down to trying to buy their way into the top four.

Since mid-2008 the owner (Mr R Lerner) has put £82.5m into the club.  He has done this in terms of shares and loans, but the exact details of all this only show up when the accounts of the club and the holding company (Reform Acquisitions Ltd) are read together.  So if someone announces a different (and more favourable) set of Villa figures that will probably be because they are reading the club figures without the Reform figures.

Mr Lerner’s total investment is now £179m with £94m in equity, and £85m in loans on which interest is paid to him at the going rate.

Now when I pointed this out before I had a few emails telling me I didn’t know what I was talking about when I suggested that Mr Lerner was doing ok out of this deal, because he made a fair old profit out of the interest.  It was argued in several quarters that the donor has to charge interest in this way, otherwise he pays massive levels of tax.

I’m not an accountant, but I knew that was not how matters worked in my company, so I went looking, and it seems several clubs have owners who do not charge interest on their loans.  Fulham and Stoke City are two whose accounts clearly show no interest being paid on massive loans.

Anyway, back to Villa, I should add that these figures don’t include the £62m that Mr Lerner paid the previous owners for the club in the first place.

Aston Villa also has a £13m bank loan secured against the ground and a £10m overdraft.  The loans to Mr Lerner are repayable in full in December 2016.  The club pays £7.6m in interest a year to the owner, plus £1.37m to the bank and £7.7m was paid in management charges to the holding company in the US.  Which sounds a bit like… Man U maybe?  Although to be fair more money came in than went out at Villa, while at Man U it all goes out.

Villa will face a minor crisis in 2016 when the owner’s bank loan is repayable, although of course he can extend it.

So overall there is a bit of a problem. The interest level is getting higher and higher.  The owner could just decide to move out, and then the club would owe him lots of dosh.   They have debts bigger than their turnover, which is generally thought by more conservative economists to be a suicide note.

To get out of this Villa have to get more revenue, and quickly.

They could get more in the ground for ordinary league matches, and/or they could get in the Champs League, they could develop more youngsters and become a nursery club and…  Well, I don’t know.  I don’t think they have much property to sell, so I am not sure what else they do.  They can’t build a new stadium like Arsenal, because unlike Arsenal at Highbury they are not filling the existing stadium every fortnight.  (Arsenal remember got their loans for the Ems because they not only sold out Highbury every time, they also packed 75,000 into Wembley for Euro games, thus showing the support was really there.)

There’s a real problem with the top four slot, because Arsenal, Man U and Chelsea still look dominate (although Man U could go bust sometime soon).  But even then Man City, Liverpool, Tottenham and Villa all pushing for one final spot in the top four.   There is the Europa of course, but last season Villa sent a reserve team to Russia just so they could focus on coming fourth in the EPL.  Which they didn’t.  Bit of a bummer that.

There’s one final thing: The Times (which tends to caution in these matters) agreed that Villa will not be allowed to have a licence to enter the Champs League under the new deal recently announced by UEFA because of the level of borrowings.

——————-

Financial news on all the EPL clubs (and in the near future some non-EPL as well) is carried in Untold Disaster: a regular summary of the clubs in the biggest financial mess There’s a permanent link to the column  (and to all our recent articles) on the home page: www.blog.emiratesstadium.info

Please do remember I am not an accountant, and there might be errors in the figures in various places, but I do try and correct all factual inaccuracies as we go along.

30 comments to Arsenal and Aston Villa: what happened after the battle for fourth

  • Sven

    Tony, please do correct me if I am wrong but i read that Arsenal had reduced their debt to £203.6 million through selling more appartments. You mention in your article that the outstanding debt is £297 million.

    http://www.businessweek.com/ap/financialnews/D9E3RO200.htm

    Has more debt been taken on?

  • muzo

    Good article as always…very informative and analytical. keep it up!

  • walter

    Another frightning article, Tony. Well that is if one is a Villa fan.

    I agree that having more debt than turnover is killing any normal company unless you can raise the turnover. Like you said the only way they can do this is by entering the CL as this would mean (a lot – if they win some games) extra income. But the dilemma that they maybe could not enter the CL because of their financial situation makes it even more difficult.

    The only sensible thing that could benefit a lot of clubs is that the wages go down as this is the main cost in most clubs. But this could kill the team as the best players would leave and this would bring worse results.

    It really looks that they have no escape route at all ??

    And we Arsenal fans, can sit back and relax and look at how our board and our manager are handling our financial situation and keep us out of trouble. And while doing this even playing the best football in the EPL and keeping us in the top of football in England and Europe.

    I’m having another fine day as a Gooner…

  • Sam

    Many of us Arsenal fans have been guilty of criticising Wenger for not spending his way to success like Chelski.

    But Wenger has once again proved that he is light years ahead of his peers! Whilst every other club is being battered by debts (for player acquisition and wages, not for real assets) and interest payments; Wenger have instead focussed his energies on creating an assembly line of superb talent and a great financial future for the club! Arsenal FC will forever be indebted to Wenger for what he has done for the club!

  • Wonderman

    There are several points for discussion here. I am an accountant and in my opinion you would only buy a football club for one of two reasons. 1) the sporting reason and the associated kudos 2) financial reasons. The sporting reason would envolve money you coul afford to lose for the love of being intimately involved with your club of choice. The financial reason would be to make as much as you could as quickly as you could
    What alot of people fail to understand is that Turnover is vanity, Profit is sanity but cash is King !. Normally when you invest in a business the two things at the forefront of your mind would be the return on your investment ( that is how much on top of my investment will I make) and payback time ( how quickly will my initial investment be paid to me). Whilst Lerner has been lauded in the press as the model owner it would appear from the numbers in the article ( and I am sure they are not wildly out)that he has enjoyed a significant inflow of cash as interest payments plus management charges total £15.3 per annum and £61m over the four years he has been in charge. Considering he paid £62.6 for the club you can see he isn’t doing too badly, furthermore I dont know if he is drawing a salary.I would argue that Mr Lerner has masqueraded as a sports fan but is really a sharp financial operator.

    Alan Sugar is no mug, and he quickly realised the madness that is football. Historically Arsenal have always been run by wealthy people who did not fleece the club’s cash reserves and ran the club within it’s means . They have not taken dividends for years howeever they have enjoyed astronomic rise in the value of their share holding and have thus benefitted that way, however, they have contributed to the long term improvement of the brand.

    What this article has highlighted is that

    1) the authorities will be forced to deal with football club ownership in the very near future as the smoke and mirrors ownership deals that have been agreed in the past and continue to be agreed will be directly responsible for clubs going bankrupt

    2) Football player wages are on the way down

    3) Portsmouth is not the only premiership club in intensive care

  • countryman

    Great article Tony. Just one point of correction – in the latest financial results (to end November 2009) Arsenal announced substantial paying down of debt during 2009 to the point where the debt is now £203.6M, not £297M as you say. So the interest charges will reduce from now on as well. We expect to make further one off cash benefits from the Queensland Road development, where all costs have now been covered with three tranches of land still to sell or develop. That money can either be used for strengthening the team or further paying down debt.

  • well-endowed gooner

    How big is the support for Aston Villa? I would’ve thought that as the biggest club in Birmingham, they would be able to fill a 50,000 seater quite easily.

    I’m thinking about whether all these billionaires are dipping into football because of the internet broadcasting thing that’s going to happen in the near future. Broadband’s set for another upgrade in five, six years. And didn’t you say Lerner’s loan expire in 2016? Didn’t the Glazers PIK expire around 2017 as well? Didn’t Kroenke get a 50% stake in future internet rights at the Arsenal?

  • The only way clubs like Villa could make it to the Champions League is to really bust the bank, as Chelsea did when Abramovich came in – and even then the League was much less competitive.

    If I was a club starting towards this aim now I would scrap all these 5 year plans. Instead put together a good team of staff, and build the club from the inside, using youth.

    Make a 10 year plan, and in doing so budget so that you won’t have to sell your young players as they mature.

    In any case – it’s a difficult task. Man City may make it this season, but remember that Liverpool have been awful and City have spent hundreds of millions just to get where they are.

  • It is true that the Arsenal debt figure is now lower than I quote – I think (and I haven’t had a chance to check) that the last statement was a six monthly report from Arsenal, and it showed that, as indeed is said above, there was a further paying off of the debt. So Arsenal’s position is indeed substantially better than reported in the article, in terms of debt.

    Sorry, I didn’t make that clear – I was working from the last year’s accounts, I think. (I also wrote the piece at 7.30am, which is too early for me to do figures).

  • We’re lucky in the fact that Wenger had the forward planning to turn us into the club we are and consolidate our position in the years he did.

    The League is harder to establish oneself in now, and clubs trying to do the same thing might find it tough.

  • walter

    I wonder if any other team could do the same like we are doing/have done ?
    Like Wenger has said on several occasions: the other teams that built a new stadium are all down now. Are there any other managers who are thinking 10 years ahead like Wenger does ? Are there any other clubs and boards who will give a manager 10 years time to do this ? I doubt it. And this will be one of the main reasons in our comming succes. We will have the City’s and Chelsea’s rich owners every now and then but no one will copy, or will be able to copy our way of working even if they would love to do it.

  • Phil

    Great piece Tony, as ever provoking some excellent comments.

    Wonderman: A good post, but I have to disagree with you regarding the direction of football wages. The trend for football wages is very closely tied to the trend in revenues. Revenue takes three main forms. Matchday, broadcasting and sponsorship.

    Matchday revenues have mostly peaked, given the % of capacity utilisation (attendances as a percentage of total ground capacity). As a trend however, I can only see this rising via stadium expansion in the short to medium term as clubs see the “Emirates Effect”, and as lending conditions ease in the economy. Verdict: upward trend.

    Sponsorship deals in the Premier League are considered undervalued by many, myself included. Consider what you get: your logo on various items of merchandise that are sold throughout the world, as well as your brand on a shirt that is broadcasted into millions of homes. For evidence of this, see the record-breaking sponsorship deals agreed on during the recession (when value for money is paramount). Verdict: upward trend

    Finally: broadcasting. The latest TV deal was an increase on the previous, but as a trend the rate of TV growth is falling. It seems fair to assume that TV money won’t be a major source of revenue growth but what of the internet broadcasting that is mentioned as a possibility in the near future? In the medium-long term, broadcast revenues could well grow again.

    So overall, don’t be surprised if wages continue to grow! Football clubs are lossmaking because they spend too much, not due to declining revenues. For every club like Pompey, that is failing due to excess spending there is another like Tottenham buying their players off of them.

    I sense an article coming in the near future!

  • Bongo

    Besides nearly pipping us to fourth last season I have nothing but respect for Villa and they’re the only team I’d like to see in fourth. In Martin O’Neill they have arguably one of the most astute, passionate and honest managers in the game. I’d even have him as our next manager when Wenger eventually retires.

    I’m extremely proud of Wengers financial handling of the club, I feel more proud of our financial situation and the fact we have stayed consistently a top team than I would be of winning a trophy each season but being financially fleeced by the owners, such is the situation with the mancs. Their glory days are coming to an end and they will go down hard. Ferguson is irreplacable simply because he has managed to continuously introduce crappy players like Nani and Anderson into a squad and still win stuff.

  • Rhys Jaggar

    I guess he might need to ‘do an Arsene’ and sell one or two players a year for much more than they cost to pay down the debt. I guess if you are talking £100m in 6 years, you need £20m a year to do it, what with the racking up interest.

    Milner seems the first choice as he is Champions League potential and I doubt anything but a top 16 European club would pay that much for anyone in the current climate…..

    Whether the market would bear that right now I dunno.

    By the way, when you quote Arsenal’s income this year, it’s inflated significantly by Highbury Square property income, which isn’t sustainable. Football segment T/O right now is about £225m.

  • Phil

    Bongo: That seems to be the popular view, but I’ve got to be honest, I’m not a fan. He seems to have an obsession with English-born players to the detriment of his squad. Look at the money he has played for players such as Davies and Luke Young: without a shadow of doubt, he could’ve bought better players for the same or less cost as he’s paying a premium for English players.

    IS it admirable for sticking to English players? Or simply xenophobic, ignorant and utlimately contrary to what he should be seeking to do (win matches!)? I’m going for the former. Midtable manager.

  • Ole Gunner

    Sir Tony is unusually off with the Arsenal numbers. As someone pointed out, the published figure for Arsenal’s debt is down to about £206M, but in an interview Ivan Gazidis said the debt has been reduced even further to below £190M!

    http://www.arsenal.com/news/news-archive/ivan-gazidis-video

  • Phil

    If anything, Tony’s slip and subsequent correction further strengthens his argument! No doubt it was totally intentional 😉

  • Paul C.

    Rhys is dead right. We have to be careful with our turnover figure right now because it is indeed inflated due to all the property stuff we have going on. That will not be the long-term figure, which is more like the 225million that Rhys quotes.

    It still puts Villa in the shade though!!!!

  • Phil

    Turnover’s a relatively poor measure of actual performance: profit after tax, depreciation, interest and amortisation (outstanding transfer fees still to go throught the balance sheet) is the measure you want.

    Case in point, United dwarf us in terms of turnover, but aren’t profitable. Turnover reflects the “size” of the club, profit more how well it is run.

  • Paul C,

    Yes, Rhys is right but with a caveat. We will probably get a cash windfall once the property business has been set right and tidied up.

    That will go into investments in the club, and there is a good chance it will see the footballing side expand even further.

    The football side has been growing quite a lot as well.

  • deephenry

    @Sven
    please read the blog correctly. read what the blogger has written in the brackets after the 297mil pounds.

  • Ian Trevett

    Bongo said – “Ferguson is irreplacable simply because he has managed to continuously introduce crappy players like Nani and Anderson into a squad and still win stuff.”
    I agree that Ferguson is an incredible manager but I wouldn’t give him too much credit for Nani and Anderson – after all they did cost about £30m in transfer fees, which is more than the combined fees for our two most expensive players, Nasri and Arshavin.

  • Wonderman

    @Phil I find it interesting that you think salaries will continue to increase and you put forward a good case.However, we are already seeing the two biggest spenders Chelsea and Man City, baulking at the demands of Joe Cole and Shaun Wright-Phillips respectively along with the owner of Man City ironically calling for a salary cap.I read an article last year which stated that only 3 Premiership clubs made an operating profit last season Sp*rs,us and I think the other was Wigan. That means that most of last season’s teams are running their financial affairs badly. If you were a potential sponsor or media provider would you be looking to provide even more funds or take advantage of their existing perilous position. I do concede that a couple of things could help to boost club income

    a) the advent of a european league
    b) games being streamed ppv on the internet

  • Phil Gregory

    Wonderman: If you’re going to consider a trend for the PL as a whole, you have to consider the overall situation, not just individual examples. Indeed, if you look at Chelsea and City neither of them are doing anything even approaching wage restraint: look at the contracts handed out to Terry and Lampard (and the length too) recently. The same goes for City (SWP is not worth anymore, so hey aren’t being “restrained” per se, just not plainly daft!

    Again, it’s a slightly abstract concept but wages aren’t related to profits but revenues. A large increase in revenue (eg an increased TV deal) won’t increase profits for long, as wages will go up accordingly. So profit trends are irrelevant; indeed, it could be argued that low profitability proves wages are still rising (wages account for anywhere between 50 and 80% of turnover for clubs, with 60% being the recommended amount).

    Spurs won’t be turning out a profit anytime soon unless there is more dodgy accounting going on as they have roughly £30million of transfer fee payments due over the course of this season and the next (hence their lack of spending in the summer). Wigan are similar, benefitting from loans from Dave Whelan as well as regular injections from players sales (Heskey, Palacios etc).

    There’s no such thing as “profit” in a football club. There’s various ways of cutting profit figures up. I presume the figures you saw for Tottenham and Wigan were PBITDA (profits before interest, taxation, depreciation and amortisation). Translated, a profit figure called PBITDA is not taking into account interest (Wigan in particular will have a lot of this assuming Whelan’s loans aren’t interest-free) taxation (Pompey – case in point the sizeable tax bill clubs pay/should pay on a regular basis) and amortisation is the cost of all transfer fees divided by the duration of the players contract. So a £10million player with a four year contract’s transfer fee will enter the balance sheet as an amoritsation cost of £2.5mill per year. So this again is a bloody HUGE amount of money.

    And yet they chat about PBITDA figures as if it is something to be proud of. For an article in the near future, I may go through the Spud’s accounts and just show what a shocking state they are in!

  • Wonderman

    Phil:’There’s no such thing as “profit” in a football club’ come on the rest of your post tells me you are comfortable with financial jargon so that statement perplexes me.The reason why I singled out Chelsea and Man City is that they are the only two clubs who are in the position to ignore wages trends and do what they want, but even they are attempting some form of redress. The other clubs are not in the position to borrow their way out anymore as loans are no longer as easy to come by. Even Man U were forced to go down the bond route. Take our last set of 6mth accounts t/o £196m of which £100m was football t/o . Gross profit was £29m of which £18m was football. Please do not confuse balance sheet with profit and loss numbers as balance sheet represents overall value of the business at a particular point in time and profit and loss relates to trading over a particular period.The accepted wisdom is that your profit and loss generates profits which in turn grow your balance sheet. The amortisation figures to which you refer are an accounting exercise in prudence, particularly in arsenal’s case as we almost always sell a player at a massive profit. The subject of the article focussed on villa and their attempt to get into the champions league. However, with their owner stripping it of cash and the expected forthcoming rules on debt they are on a sticky wicket.

    I think we need to be careful, no-one thought Lehman Brothers or ITV digital would go bust and look at the current state of British airways. If stream quality improves (as it inevitably will)and clubs start to invest in that medium we have a totally different ball game where as you say wages may go up as the clubs will then be able to afford it

  • LRV

    Wonderman: I agree with two out of your three point summary up there. As for players’ much inflated wages, it will, in all probability, eventually go down, but not in a hurry. It will still take quite some time for that to happen.

  • walter

    The problem will be that the wages have to go down in all the big football country’s. As long as there will be one big league that has plenty of money the others will have to go along with that country or it will lose their best players.

  • Phil

    I was saying football clubs simply refer to “profit” which doesn’t exist per se, as you can take profit before or after player trading, before or after tax and before or after amortisation (transfer fee costs). So while yes there is such a thing as profit, profit itself is useless unless you say HOW it is measured.

    So naturally, United can for example quote that they’re in profit 50mill, but if that figure is before interest payments, we know they’re most likely making a loss. Hence unless you know what “sort” of profit figure they are quoting, it’s basically useless as a guide.

    As I said, whiel City have made the odd attempt at controlling inflation, this is by no means a trend. Terry’s summer contract is a case in point. Odd examples prove nothing, you need to consider the broader spectrum

    The whole amortisation thing is an accounting thing, yes, but it is how clubs account for transfer fees. If you take a profit figure before amortisation, a club like Tottenham seem massively profitable. Amortisation is vital if a profit figure is actually worth looking at.

    In hindsight, some of my original points are quite long term (the online PPV and matchday revenues growing via stadium expansion). In the short term, I’d expect a slowing-down of wage growth but not a fall, due to continued revenue growth (football has proven very resilient in the recession!)

    LRV: Don’t be so sure! Players wages have grown since the game became professional, with only short-term falls and the like. While revenues grow, wages will follow.

  • LRV

    Phil: Even if the wages do not go down directly, it will eventually stagnate.

  • Wonderman

    @Walter there is no money left…look at the last two transfer windows the only people spending money have been Real Madrid and Man City and despite their vast spending could both still end with nothing to show for it. Banks are currently increasing their lending criteria therefore clubs will increasingly be forced to rely on what they are generating. In Spain the situation is slightly different in that unlike in the UK where the tv money is negotiated by the premier league on behalf of all their clubs Barcelona and Real Madrid negotiate their own tv business. So unless a player was wanted by those two it is unlikely he would be offered more money by any of the other clubs

    @LRV totlly agree and stagnation will be hit by inflation