A difference in financial approach: Arsenal & Chelsea

During the time before the Icelandic banks and Northern Rock went bang, it was obvious to a number of people who were watching from the wings that things could not go on as they were.  I remember a colleague saying to me one day, “either we’ve totally misunderstood how finance works, or they have.”

I thought of this today, while reflecting on the issue of KGB Athletico Fulham with their latest announcements.   Apparently they aim to be self-sustaining from next season –  means no more money from the owner Absent Abramovich.   Given that he pumped in another load of dosh this past year (mostly to pay for the managers he got rid of) this is going to be quite a bumpy ride.

Their aim is to set to one side the £750m that Absent Abramovich has put into the club so far (half of which is now in newly created shares, and half in loans which are repayable with 18 months notice).  That situation remains – what is new is that there will be no more money after the end of this season.   So, for example, if Mr A N Other (the manager of KGB next season) wants to buy Hardly Anyone from Venezuela then he has to sell someone else first.

Assuming that the KGB team is not really spot on at the moment, (and it isn’t – look at their ages) that is going to be tough.  All the clubs near the top of the league except Arsenal operate in the buy now pay later market, and since KGB have this year sacked their head of youth development, and all their scouts who were supposed to emulate Arsenal’s world-wide scouting system, it is hard to see how this is going to happen.

Which brings me back to Northern Rock and Iceland.   One looks at KGB as one looked at Northern Rock and Iceland and says, “no – I just don’t see how this works” but meanwhile these organisations carry on and people throw money at them, and anyone who says “actually this cannot work” is called a doom-monger, or is accused of lacking imagination.

The key question is, what was the idea of converting half of the loan from Absent Abramovich into stock?   The only implication I can see is that he wants to sell up to half the club, and selling stock of course is the way forward.

Selling stock won’t release any money for players – it is just someone else’s money going to Absent Abramovich in return for part ownership.  It is not quite the same as Leeds, but the fall could be similar.

Now finally compare this with Arsenal.  As Arsenal have had a few board room changes and Mr Usmanov has increased his share holding there has been article after article in the press about chaos at Arsenal.  Yet in effect nothing has changed, because the club is self-sustaining financially.  Even a year out of the top 4 won’t hurt the club, since it is not budgeting for 60,000 crowds and the Champs League every year.

Yet here is Chelsea on the brink, and no one really notices too much.

Funny ol game.

(c) Tony Attwood 2009

5 Replies to “A difference in financial approach: Arsenal & Chelsea”

  1. Cynics might suspect another reason why Г-н Abramovich has converted loans into stock.

    UEFA are making increasingly loud noises about clubs having to be run on a sound economic basis – ie actually paying their way. So far the noises from UEFA have been mostly about capping player related costs as a proportion of general trading but other conditions may follow, including stricter tests of economic viability. £750M+ in loans which cannot possibly be paid back – ever – from Chelsea’s current operating income have begun to look very risky. Even if as was always claimed it was just a matter of one of Ambramovich’s businesses loaning the money to another it wouldn’t matter if a strict test was applied. Q: Chelsea FC – can you meet all your debts? A: No, but…. Result: sorry, no buts, you’re out of Europe.

    The financial sleight of hand used to convert part of the loans to stock makes it slightly more likely that Peter Kenyon can now produce a business plan which shows Chelsea being able to cover its debts over some notional period. Of course it will still be a fairytale but it will look slightly more believable than when it was 3/4 of a billion and therefore slightly less likely to fall foul of UEFA oversight. Hopefully UEFA would see it for what it is.

    I wonder if poor old Liverpuddle and the Mancs, amongst others, who owe hundreds of millions to various banks and other institutions can manage the same trick. I’m sure the banks must have so much cash swilling around that they’d be delighted to turn interest-bearing loans into stocks with little or no yield. Ha ha (not) very funny.

    It’s a shame that it takes intervention from UEFA to address this kind of thing as the FA should be doing it. If a club wants to play professional football then they should have to be able to pay their bills. When a smaller club goes into liquidation because they can’t pay off debts of a few hundred thousand, the FA dock them umpteen points and ofter enough demote them. When a bigger club has debts a thousand times higher, owing hundreds of millions which also they have no way of paying off, the FA say carry on boys, business as usual.

  2. This notion of Chelsea breaking even is just not going to happen. Their wage bill is huge and they will need to spend money on their squad. Abramovich will have the choice of watching Chelsea start to slip down the league or sticking his hand in his pocket again. I reckon he will give them yet more money.
    Once players hit 30 there is a good chance that the pace starts to go or they become more injury prone. Some players like Giggs go on and on, others like Ljungberg show a steep decline.
    Chelsea have too many players of this age group: Lampard, Ballack, Deco, Drogba, Ferreira, Carvalho, Belletti and Anelka (30 next month). There are far too many to replace without spending money. The choice is simple: spend or slip away. The ‘club’ has no vision – just Roman’s money.

    By the way – if anyone would like to submit an article in the upcoming Highbury High fanzine, please email me at ian.trevett@ntlworld.com.
    Only one requirement – keep it positive!

  3. just as the global financial bubble ‘burst’, so will the premier league bubble burst. i’m no financial genius, but even I can see the obvious flaws in the financial structures of a lot of epl clubs. thanks to the myriad complex laws surrounding business ownership and management, every clubs finances are structured individually. liverpool and chelsea have very different problems, but they both have serious problems. manu have their issues as do portsmouth, newcastle, sunderland etc etc.

    the problem of ‘hobby’ owners is that as soon as their own personal finances get a bit sticky, the club wont continue to be a positive or interesting investment, more like the proverbial millstone.

    chelseas situation could well develop like leeds did. one problem they are going to have is offloading their aged players for anything resembling a percentage of what they paid for them. if the continuing global financial crisis continues, clubs will be less and less likely to stump up massive fees. Man city aside.

    our prudent use of the transfer market and our reluctance to over-pay players, however unpopular it is with some fans, and our excellent youth system should put us in good stead for the next few years.

    like any other fan in the world, i want to see our team win everything every year. but manu’s tropy current trophy cabinet may become a memorial to better times if they go bust.

  4. I have been affected by the credit problem and I am sure every one has even a 1 year old has been affected by it but it is all good for the world.

    It is good it is happening to football too. Now clubs will know it does not take over spending and inflating the market to run the club.

    I will be sincerely happy to see Chelsea turned Leeds united, they asked for it and they will get it. I can 89% sure Abramobitch will sell the club to some one who may have some sense but the deed must have been done.

    One wonders how well they will cope without champions league football, not only are they going to miss out on Uefa’s money but the ticket fees which is what they depend heavily on.

    I just hope those that were mocking us criticising Wenger know see the reason why we must live within what we have.

    What economic sense is in paying 30 million for a play who is not worth 15 million after just 3 wasteful years. I have always known Chelsea will never be a threat to us in the long term and those glory seeking Leeds united turned Chelsea fans can now start showing their true colors.

    All in all, the credit crunch will not destroy the game but help make the game better than it was before the credit crunch.

    http://soccerfanbase.com

  5. I do not think that the threat by UEFA is the reason of that stock conversion. I believe that Abramovitch wants or needs to sell.
    However without that stock conversion, whoever buy Chelsea FC would be liable to a huge capital gain tax. Not a very appealing proposition. By converting now, Abramovitch takes the hit now, but can still offset that gain with some other losses.
    Another point is that if loan is not to his own name but to an external company, creditors of that company may be able to force a recall of the loan creating a full collapse of the Club. Forcing to sell illiquid private stock is much more difficult and risque.
    Journalist have reporting the disbandment of Chelse’s scouting network, but they have not reported (or at least not a lot of them) the full extend of their belt tightening. During the winter window, they were trying to loan youth players to counterparty willing to pay their wages. Unfortunately most of the foreign youngster were unknown to British Championship manager (meaning a risk they or their chairman were unwilling to take). They could not loan them in their country of origina as most of them are on salary much higher than local youth pro can earn and in some case even higher than seasoned professional. Those youth players unless they have long contract or can show they can step up will all be shipped out during summer.
    I also believe that in order to balance the book Chelsea will sell their main asset to the highest bidder. Terry will end up at Man City and Drogba at Inter or Marseille. Lampard will stick around as with the split with his spanish girl friend means that he does not have reason to move to Spain. Ballack and Deco will be let go.
    Unless they decide that they have better, younger and hungrier players or they put in charge a miracle worker a la Wenger I can only see an irresistible downward slide toward mediocrity for Chelsea FC or a catastrophic financial meltdown.

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