Tuesday, October 11, 2016

Borussia Dortmund - The Sound Of The Crowd

After a disappointing 2014/15 season, when they flirted with the relegation zone before recovering to finish seventh, Borussia Dortmund came back with a bang in 2015/16. Under new coach Thomas Tuchel, the Schwarzgelben once again emerged as Bayern Munich’s main challengers, finishing second in the Bundesliga, losing in the German Cup final and reaching the Europa League quarter-finals where they lost to Liverpool.

This was a mightily impressive first season for Tuchel, whose team played an exciting, attractive brand of football, culminating in them being the highest scorers in the German top tier.

The former Mainz coach had an incredibly tough act to follow, as his predecessor, the charismatic Jürgen Klopp, was the most successful coach in Dortmund’s history. With him at the helm, the club won the league and cup double in 2012, the Bundesliga the previous year and reached the Champions League final in 2013, where they were defeated by (guess who) Bayern.

"Warrior of the Wasteland"

Tuchel comfortably embraced the challenge, though Dortmund are no strangers to bouncing back. Perhaps their most remarkable recovery is from the serious financial problems of a decade ago. They splashed out on expensive signings and high wages, effectively gambling on regular qualification for the Champions League to fund this massive spending.

When this was not achieved, they only succeeded in building up nearly €200 million of debts, leaving the club in a “life-threatening situation”. As chief executive Hans-Joachim Watzke admitted, the club was “a millimetre away from going bust.”

That was then, this is now, as evidenced by the latest 2015/16 financial results, which management described as “a successful year in which the club laid the foundations for competing in the coming 2016/17 UEFA Champions league season.”

Revenue grew by 36% to a record €376 million (€285 million excluding player sales), which Watzke described as “a clear sign of BVB’s earnings power”, while pre-tax profits surged €28 million to a hefty €34 million (€29 million after tax).

The main reason for the improvement was profit on player sales which shot up €61 million from just €2 million to €63 million, comprising transfer income €95 million less transfer expenses €32 million. This was largely due to the sales of Mats Hummels to Bayern Munich, Ilkay Gündogan to Manchester City, Kevin Kampl to Bayer Leverkusen, Ciro Immobile to Sevilla, Jonas Hofmann to Borussia Mönchengladbach and Kevin Grosskreutz to Galatasaray.

Excluding transfer fees, revenue rose €4 million (1.5%) from €281 million to €285 million. Match day was €7 million (17%) higher, mainly due to hosting four more European games than the previous season plus “moderate” price increases, while the other big riser was advertising, up €9 million (12%) to €85 million. Broadcasting was flat at €83 million with the income lost from not competing in the Champions League being effectively offset by an increase in Bundesliga TV money.

Other operating income fell €13.5 million from €17 million to €3.5 million, as there was no repeat of the previous season’s insurance payment from the policy taken out against the risk of not qualifying for the group stage of the Champions League. This is an interesting approach, given that such arrangements are banned in English football as a protection against match-fixing.

"This Charming Ousmane"

Following investment in the squad, the wage bill increased by €22 million (19%) from €118 million to €140 million, while player amortisation (including impairment) rose €6 million from €33 million to €39 million. Other expenses were up €12 million (11%) to €121 million, mainly from additional match day (catering) costs and higher performance-related advertising agency commissions.

On the other hand, net finance costs on loans fell sharply by €5 million (71%) from €7 million to €2 million, reflecting the debt reduction and lower interest rates.

As a technical aside, I am using the Deloitte definition of revenue here in order to facilitate comparisons with other European clubs, so have excluded €95 million of transfer income, but included €4 million of other operating income. Adding these adjustments to my revenue of €285 million gives the €376 million announced by Dortmund.

It is clear that “Borussia has developed itself economically and on a sporting level continuously over the last few years”, as Watzke put it. So much so, that they have now reported profits for six consecutive seasons, which the club said, “again demonstrated its economic stability.”

In fact, they have accumulated €161 million of pre-tax profits in this period, which represents a spectacular turnaround, as the club had reported losses in five of the previous six years, including €55 million in the annus horribilis of 2004/05 and €23 million the year after.

Indeed, Dortmund expect to post another profit (“net income”) for the 2016/17 season. In fairness, the Bundesliga is generally a profitable environment, with 11 of its 18 clubs making money in the 2014/15 season.

However, Dortmund would have made a €29 million loss without significant player sales in 2015/16. As the club put it, “Transfer deals at the end of the financial year more than offset the income lost from not competing in the Champions League.” The sales of Gündogan and Hummels might not have been popular, but they did help to balance the books.

Dortmund further explained, “A player might be sold based on financial considerations in cases where this would not have happened had the decision been made purely on the basis of sporting criteria.”

The increasing importance of player sales to Dortmund’s business model is evident: in the last four seasons transfer income averaged €41 million a season (profit €25 million), compared to only €14 million in the preceding four seasons (profit €8 million). The 2012/13 season was boosted by the sale of Mario Götze to Bayern Munich, while the comparison would have been even starker without the free transfer of Robert Lewandowski to Bayern in 2014 after the prolific striker ran his contract down.

Indeed, the 2015/16 season was the first time that transfer income (€95 million) represented the revenue item (in Dortmund’s terms) with the largest share (25%) of total revenue.

The high impact of player sales on Dortmund’s bottom line is set to continue, as the €42 million sale of Henrikh Mkhitaryan to Manchester United will be included in the 2016/17 accounts. Dortmund also retain many valuable “assets”, such as speedy forward Pierre-Emerick Aubameyang. In his case, Watzke said that the club would only discuss massive offers of €120 million, noting that “it was no coincidence that we renewed his contract until 2020.”

Dortmund have added EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) to their list of key performance indicators “in light of the rise in investment activities and the associated increase in depreciation, amortisation and write-downs.”

On this basis, Watzke said, “the club’s performance is more than comfortable”, as EBITDA shot up from €56 million to €87 million in 2015/16, though it should be noted that Dortmund’s definition includes net transfer income.

Using the more generally accepted definition of recurring income, i.e. excluding lumpy profits from player sales, the story is not quite so impressive. After many years of steadily rising EBITDA, this fell from €54 million to €24 million last season. That’s still not too shabby, but to place it into perspective, Manchester United have just announced EBITDA of €230 million, i.e. nearly ten times as much, so it’s not surprising that they could throw so much money at Mkhitaryan.

Even so, Dortmund’s revenue growth has been hugely impressive, rising by €177 million (165%) from €107 million six years ago, though it has slowed down a little since 2013 with the increase being only €29 million in the last three years.

Since 2010 the main driver of revenue growth has been commercial income, which has increased by €91 million (150%), but the two other principal revenue streams have also shot up: broadcasting by €61 million (291%) and match operations by €23 million (100%).

Dortmund “expect to generate” €340 million in 2016/17, though this includes transfer income, mainly from the Mkhitaryan sale. That said, “Other revenue items are expected to increase in the coming financial year.”

Indeed, excluding transfer income, investment analysts Edison forecast a €26 million increase to €311 million in 2016/17, thanks to the return to the Champions League, and a further €33 million increase to €344 million in 2017/18, due to the new Bundesliga TV deal.

Dortmund’s main challenge, of course, is to compete with the titan that is Bayern Munich. The Bavarians’ 2014/15 revenue of €474 million is by far the highest in Germany, some €189 million more than Dortmund’s 2015/16 revenue of €285 million. The gap to their other domestic rivals is even higher: Schalke €254 million, Hamburg €355 million and Stuttgart €366 million.

Moreover, only Dortmund have kept pace with Bayern’s insatiable revenue growth. Since 2009, they have both increased revenue by around €180 million, while Schalke’s growth was around half of that at €95 million. Stuttgart were essentially flat and Hamburg’s revenue has actually declined.

As Dortmund said in their annual report, “revenue alone is not sufficiently meaningful, nevertheless it provides a clear indicator of the company’s economic strength, especially when compared against that of competitors.”

Watzke neatly summarised Dortmund’s position, “In the Bundesliga the challenge is to leave the clubs in third and below even further behind. We’ll never overtake Bayern Munich, but if we have a good year, we do have the opportunity to catch them in a sporting sense. But that would need Bayern to wobble. The problem is, that hasn’t happened for several years. Should they do so, then BVB wants to be in position.”

For the last four seasons Dortmund have been in 11th position in the Deloitte Money League, which is more than respectable. Watzke went one step further: “Dortmund is among the top ten clubs in Europe: we are a first-class address.”

The problem is that Dortmund’s €281 million was far below the leading clubs, such as Real Madrid €577 million, Barcelona €561 million, Manchester United €520 million, Paris Saint-Germain €481 million and (crucially) Bayern Munich €474 million. Not only that, but the gap is widening with the big three all announcing solid growth last season: Manchester United €690 million (at the average Euro rate of 1.34 for 2015/16), Real Madrid €620 million and Barcelona €612 million.

Watzke is acutely aware of this challenge: “We can't win the race against them. We could never compete with Real Madrid, Barcelona or Chelsea over a period of ten years. But this is not the target. As long as we try our best and battle, it's fine.”

If we compare Dortmund’s revenue with clubs in the 2014/15 Money League top ten, we can see that they face challenges across the board, as they are almost universally lower in each of the three main revenue streams, though they have done better commercially than Juventus, Liverpool, Chelsea and Arsenal.

On the other hand, this analysis highlights the scope for improvement in broadcasting income, which will be partially addressed by the new Bundesliga TV deal starting in 2017/18.

This is much needed, as the gap between Dortmund and the 10th placed club in the Money League widened in 2014/15 to €43 million, after being as low as €7 million in 2012/13. It is likely that this gap will further widen in 2015/16, as Juventus, the current 10th placed club, has announced 2015/16 revenue of €341 million, i.e. €56 million more than Dortmund.

From a domestic perspective, Dortmund’s revenue shortfall against the top club (Bayern Munich) was €193 million in 2014/15, which is only surpassed in France, where PSG are €371 million ahead of Marseille. However, the gap is much smaller in Italy, England and Spain.

Watzke does not seem too disheartened: “If you're a David, you feel and behave differently to when you're a Goliath. We do not complain that we are number two in Germany. If you're the challenger, you can act differently to the king. So for Bayern, it's an obligation to win; for us, it's an opportunity.”

Moreover, Dortmund benefit from a fairly large gap to the 3rd placed club in Germany, with their revenue being €61 million higher than Schalke. This is much more than the gaps in England, Italy and France, so Dortmund cannot complain too much. If Bayern should more often than not win the gold medal, Dortmund should similarly grab the silver.

As we have seen, the largest revenue category at Dortmund is commercial income, which accounts for more than broadcasting and match day combined. That said, the fastest growing revenue stream is broadcasting, up from 20% in 2010 to 29% in 2016. As a consequence, match day has diminished in importance from 22% to 16% over the same period.

Dortmund’s commercial revenue grew £10 million (7%) from €142 million to €152 million in 2015/16, mainly due to advertising, up €9 million (12%) from €76 million to €85 million, while merchandising and conference, catering and miscellaneous were relatively flat at €40 million and €27 million respectively.

Dortmund’s commercial revenue was the ninth highest in the 2014/15 Money League. Over the past few years, they have fallen down this league table, though this is partly due to a combination of “friendly” deals at PSG and Manchester City plus the favourable exchange rate for English clubs (which has now very much changed).

Nevertheless, the relative importance of commercial income to Dortmund remains clear, as is the case with other German clubs. They had the third highest percentage of their total revenue from commercial of any Money League club. This was only behind PSG, thanks to their deal with the Qatar Tourist Authority (worth a reported €200 million), and the commercial behemoth that is Bayern.

Despite their growth, Dortmund’s commercial income is still only around half of Bayern’s, partly due to the €38 million revenue the Bavarians earn from the Allianz Arena, though their sponsorship and merchandising are also much higher.

Bayern’s former president Uli Hoeness said that Dortmund would need to have a more consistent track record of winning trophies if they hoped to match Bayern’s global appeal, but in truth they’re doing very well compared to almost every other club on the planet.

The club’s commercial strategy is similar to Bayern’s, namely to establish strategic partnerships with long-standing partners. All three main sponsorship deals are long-term in nature: stadium naming rights partner Signal Iduna to 2026; shirt sponsor Evonik to 2025; and kit supplier Puma to 2020. Not only that, but each of these companies have acquired equity interests in the club: Evonik 14.78%, Signal Iduna 5.43% and Puma 5%.

On top of that, Dortmund have a 12-year agreement with marketing partner Lagardère (formerly Sportfive) until 2020.

"Close, but no cigar"

Another objective is to sign up many secondary sponsors, known as “champion partners”, and a lengthy list now includes the likes of Eurowings Aviation, Opel, Hankook Reifen, HUAWEI Technologies, Radeberger, Sparda Bank, Sprehe, Unitymedia and Wilo.

Internationalisation is a key element of Dortmund’s plans, as Watzke confirmed: “We are going to continue with our strategy and have identified two key markets. The main one at the moment is south-east Asia, but the US market is interesting as well.”

Dortmund gained additional sponsors as a result of the marketing activities in connection with the club’s Asia tour in July 2015. In light of the club’s “rapidly growing appeal” in the Region, they have opened their first representative office outside Germany in Singapore.

However, although the club has “huge commercial potential”, Watzke cautioned, “We shouldn’t kid ourselves. You can only become a big international brand by playing in the Champions League.”

According to some German press reports, Evonik, a chemical company, has increased its shirt sponsorship to €20 million a season, though this is still lower than the deals struck by Bayern (Deutsche Telekom) and Wolfsburg (Volkswagen), who both receive €30 million a season. The Evonik chairman has said that he is very pleased with Dortmund as a partner, due to their large crowds and sporting success (“in a very exciting way”).

Signal Iduna, the naming rights partner, has also increased its annual payment from €4 million to €5-6 million after the deal extension.

The payment from Dortmund’s kit supplier, Puma, has been reportedly increased after their capital injection, rising from €6-7 million a season to €15 million. Rather wonderfully, the shirt has the inscription “Echte Liebe” (true love) on the inside of the collar. That’s good news, but it is still far below Bayern’s new €60 million deal with Adidas (and, for that matter, the new kit deals at Real Madrid and Barcelona, which are worth  €120-150 million according to press reports).

Dortmund’s broadcasting income was basically flat in 2015/16 at €83 million with the increase in Bundesliga TV money, up €17 million to €61 million, offsetting the €15 million reduction in UEFA competitions to €17 million, due to playing in the Europa League compared to the Champions League the previous season, and the €2 million decrease in the German Cup to €4 million.

The increase in Bundesliga distribution was largely due to Dortmund’ successful performances in international club competitions over the previous five seasons and the resulting improvement in their UEFA coefficient ranking, as well as the increase in income from international TV rights.

TV revenue in Germany is divided among clubs via a points system, which ranks clubs proportionate to their league positions over the past five seasons. Performance is weighted in favour of the more recent years, so last season a factor of 5 was applied to 2014/15, 4 to 2013/14, 3 to 2012/13, 2 to 2011/12 and 1 to 2010/11.

However, a form of equality is then applied, as the club with most points from this algorithm only receives twice as much money as the club that has the lowest number of points. In this way, top club Bayern Munich received €40 million in 2015/16, while bottom club Darmstadt received €20 million.

Television income is not very high in Germany, as can be seen from the 2014/15 Money League, where Dortmund sat in 18th position. Their total broadcasting revenue of €82 million was only around 40% of the €200 million earned by Barcelona and Real Madrid, who benefited greatly from their individual domestic deals.

It is therefore good news that the Bundesliga recently announced a new domestic TV rights deal with Sky and Eurosport for the four years from 2017/18 to 2020/21, which will significantly increase the money by 85% from €2.5 billion to €4.6 billion, working out to €1.160 billion a season. As the league advised that total rights would be worth €1.4 billion, that means that the international rights will also rise to €240 million a season.

According to broker research, Dortmund’s share of the TV revenue should rise to around €90 million a season, but this is still a lot less than the money earned in England. The new Premier League deal is likely to deliver €150-200 million to the top four English clubs, depending on the Euro exchange rate. Watzke, for one, is unmoved: “I have no fear of the English, we must make sure our qualities are in the foreground.”

The new Bundesliga total of €1.4 billion will take it ahead of Serie A (€1.2 billion) and Ligue 1 (€0.8 billion), but they will still lag behind La Liga (€1.5 billion) and obviously be miles below the Premier League (€3.4 billion).

However, the Bundesliga’s chief executive, Christian Seifert, noted, “We are now number two behind the Premier League (in terms of domestic rights).” Although he described the TV market as challenging, Seifert did emphasise the growth prospects: “Germany is the biggest single market in Europe, but pay-TV still does not have the market position of other countries. There is a lot of potential though.”

Some believe that the relatively low amount paid for international rights can be ascribed to Bayern’s dominance, which has made the league boring, but Seifert argued that overseas interest was not purely in the title winners: “Last year we saw very competitive games to decide who will play in the Champions League, who will play in the Europa League or relegation.”

The other main element of broadcasting revenue is European competition, though Dortmund’s receipts have plummeted since 2012/13, when they earned €54 million for reaching the Champions League final. In comparison, in 2014/15 they received €33 million after being eliminated at the quarter-final stage by Juventus.

UEFA have not yet published the revenue distribution details for 2015/16, but the club stated that they received €14 million for battling through eight rounds of the Europa League (the other €3 million from UEFA competitions was a surplus payment from the previous season).

It is therefore very positive that Dortmund have returned to “the world’s premier club football competition” in 2016/17, especially as the Champions League prize money has increased in the latest TV three-year cycle.

Dortmund’s payment will be influenced by the amount they receive from the TV (market) pool. Half depends on the progress in the current season’s Champions League, while half depends on the position that the club finished in the previous season’s domestic league (1st place 40%, 2nd place 30%, 3rd place 20% and 4th place 10%).

Although Watzke has claimed that Dortmund is no longer economically dependent on Champions League money, thanks to their long-term sponsorship contracts, it is clearly a major differentiator with other German clubs.

In the five years up to 2014/15, Dortmund received €152 million TV money, which was only exceeded by Bayern’s €224 million. However, they greatly benefited compared to others with only Schalke €21 million and Bayer Leverkusen €57 million being anywhere near them.

Dortmund’s match day revenue rose €7 million (17%) to €47 million in 2015/16, largely due to the Europa League, where the eight home matches (including two qualifying rounds) contributed to €13.4 million from UEFA competitions. In addition, there was €27 million from the Bundesliga, €3.7 million from the German cups and €2.3 million from friendlies.

Their incredible average attendance of 81,178 was the highest in Europe, ahead of Barcelona 78,250, Manchester United 75,300 and Real Madrid 67,700. Not only is Dortmund’s attendance easily the highest in Germany with the next teams being Bayern 75,000 and Schalke 61,386, but it has also been the highest for the past 18 seasons.

The Dortmund fans’ interest shows no sign of slowing down, as they have established a new Bundesliga record for season tickets at a mighty 55,000 – and that is capped to ensure an adequate supply of tickets on the day of the match.

It therefore might be a little perplexing to see that Dortmund are nowhere near the highest match day revenues in the Money League with only €54 million in 2014/15 (Deloitte definition), while the likes of Arsenal, Real Madrid, Barcelona and Manchester United all generate €115-130 million. There are two obvious reasons for this huge discrepancy: fewer matches and low ticket prices.

There are two fewer home games every season in the Bundesliga, while last season Dortmund only played four Champions League home games and one in the DFB Cup. This resulted in a total of 22 home games compared to 26-29 for the leading clubs in other major leagues.

That said, Dortmund’s average revenue per match of €2.5 million is still only around a half of the money earned by Manchester United (€5.4 million) and Arsenal (€4.9 million). It is also much lower than the amount pocketed by Bayern (€3.6 million).

Dortmund’s high attendances (and small match day revenue) can be partially attributed to the large number of standing places, including the famous Südtribüne terrace, known as the “Yellow Wall”, which is the largest standing area in European football and provides each home game with an intense, passionate atmosphere.

Watzke explained the thinking: “Terrace culture is extremely important for football. We’re demonstrating that football has to remain affordable – as opposed to, say, England. A club can show that by offering standing tickets that cost between 11 and 14 Euros. I’m not sure how many clubs in Europe offer 28,000 standing tickets, but I’d presume we are the only one. That way we can sharpen our club’s social profile. Of course BVB wants to earn money, but it’s vital that football remains a mass phenomenon.”

This was endorsed by marketing director Carsten Cramer, “We will never increase our match day revenue, because we are really concerned about (preserving) low-level pricing – that people of all social classes are able to come to the matches.”

The wage bill rose by €22 million (19%) from €118 million to €140 million in 2015/16, which means that wages have increased by 75% in just four years, comfortably outpacing revenue growth of 45% in the same period.

This means that the important wages to turnover ratio has risen to 49% (excluding transfer fees), significantly higher than the 41-42% range achieved between 2012 and 2015, but just below the 50% targeted by the Bundesliga.

Moreover, the club “expects personnel expenses to increase in the coming financial year due to the strengthening of the squad with quality players.” On the face of it, this might be concerning (at least from a financial perspective), but the club clearly links wages to revenue: “Personnel expenses are largely dependent upon the club’s sporting success, because the professional squad is compensated on the basis if its performance, meaning that only those expenditures commensurate with the club’s success are expected.”

Even after this growth, Dortmund’s wage bill is still around €100 million lower than Bayern (€227 million in 2014/15). In fairness to the Bavarians, their revenue is also substantially higher, but that does not make it any easier for Dortmund to compete.

This point is even more relevant on the European stage, where some of the leading clubs can boast wage bills far higher than any in Germany, e.g. Barcelona, Real Madrid, Chelsea, Manchester United, PSG, Manchester City and Arsenal are all above €250 million (though the Spanish figures are inflated by other sports).

In 2014/15 Dortmund’s wages were 13th highest of the top 15 clubs in the Money League, while their wages to turnover ratio was easily the lowest. Even after the 2015/16 rise to 49%, it would still be below all the others with the exception of Bayern. As Watzke observed, “We’ll always need creativity to close the gap to clubs like Paris Saint-Germain, Manchester City and Manchester United.”

The other staff cost, player amortisation, rose to €39million, though this included an unexplained €7 million write-down in player values (impairment), so the pure amortisation was only €32 million. This has sharply risen from €8 million in 2012, reflecting Dortmund’s increasing activity in the transfer market.

However, this is still not very high for a leading club, as Dortmund have a long way to go before being described as big spenders. As a comparison, player amortisation at big spending Manchester United and Real Madrid is over €100 million, while Bayern booked €61 million.

To explain this concept, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract. As an example, André Schürrle was reportedly bought from Wolfsburg for €30 million on a five-year deal, so the annual amortisation in the accounts for him will be £6 million.

In contrast, other expenses of €121million seem fairly high, though this does include €41 million for match operations, €26 million materials, €24 million advertising, €17 million administration and €8 million retail. Note: I have excluded transfer expenses from my definition.

After their previous extravagant approach, Dortmund followed a thrifty strategy in the transfer market, balancing the books between 2005 and 2013 with a zero net spend, including average annual gross spend of just €12 million. However, in the last four years there has been a clear shift in policy. Although the net spend still averages only €10 million, the gross spend has dramatically increased to €62 million.

As Dortmund put it, “In order to successfully compete on the international stage and in the Champions League, we rebuilt our squad this year. The club invested nearly €100 million to sign a mix of experienced, top quality players and young talent.”

"Schürrle as I am"

This summer they signed German internationals Mario Götze, returning after three years with Bayern, and André Schürrle, plus two players who shone at the Euros, Raphael Guerreiro (Portugal) and Emre Mor (Turkey).

They have also maintained their focus on “value development”, such that “transfers should create substantial earnings potential”, as well as “sustainable sporting competitiveness”, by signing Marc Bartra from Barcelona, Sebastian Rode from Bayern and the exciting Ousmane Dembélé from Rennes.

That said, Dortmund are still something of a selling club, as CFO Thomas Treß admitted, “We are not able to compete in the European soccer market with British or Spanish clubs in respect of transfer pricing.”

In addition, the lure of Bayern has proved too strong for three of Dortmund’s stars in the last four years: Götze, Robert Lewandowski and key defender Mats Hummels. As you might imagine, Watzke takes a dim view of this: “Bayern Munich want to destroy us. They have helped themselves to our players, so we wouldn’t be a danger.”

Even though Dortmund have started to spend reasonable sums in the last four years, totaling €42 million net, Bayern have still spent more than twice as much with €95 million. That is to be expected, but of more concern is the fact that new boys RB Leipzig have actually spent most in the Bundesliga with a cool €100 million.

There is further strong evidence of Dortmund’s financial recovery with the elimination of debt in the last two years (excluding finance leases). In 2006 gross debt was as high as €191 million, but Dortmund now have net funds of €52 million.

Watzke was rightly proud of this achievement, “We don’t have to pay any more interest, no more repayments. That will mean that we can increase the budget.” In fact, the club can reduce its payments on interest and principal by €5-6 million a year.

Dortmund had to commit 9.1% of its revenue to interest payable in 2008, but this has been slashed to just 0.7% in 2016, mainly for expenses from finance leases.

Dortmund have generated positive net cash flow for five of the last six years, though 2015 was only achieved due to the club raising €141 million of new share capital. Moreover, there was a small negative cash outflow of €2 million in 2016, even though player registrations and loan/interest repayments were reduced.

In the last eleven years Dortmund have had €491 million of available cash: €306 million from operating activities plus €185 million from share issues. Over half of this has been spent on financing: €170 million of debt repayments, €61 million on interest payments and €23 million on dividends (paid since 2013).

Just €107 million (22%) has been spent on player purchases with €59 million (12%) on capital expenditure, while €23 million (5%) has gone to the tax man. The other notable “use” of cash over that period has been to increase the cash balance, which has risen by €48 million.

Perhaps the biggest threat to Dortmund’s position in Germany is the way clubs have started to get round the  “50+1” rule, which dictates that members must own a minimum of 50% of the shares plus a deciding vote, theoretically preventing a club from being subject to the whims of an individual owner and taking on excessive debt.

However, RB Leipzig, owned by Austrian energy drink manufacturer Red Bull, have implemented a scheme whereby a member must pay €800 a year (compared to Bayern’s €60) and they reserve the right to reject any application without justification. This may not break the letter of the rule, but it is clearly against the spirit.

"Greece is the word"

Watzke’s views on the nouveaux riches are pretty strong: “It is a scandal that a pure marketing branch office of an Austrian beverage producer can compete in the highest division in Germany.”

In addition, there are other “company clubs” such as Leverkusen (Bayer), Wolfsburg (Volkswagen), though they were set up many years ago by the workers at both plants. Then there’s Hoffenheim, whose rise through the leagues was bankrolled by the software billionaire Dietmar Hopp.

For the time being, we should simply enjoy the fabulous spectacle at Dortmund, where they have proved that a football club can succeed without just throwing money at the problem. First-class management, astute scouting and a belief in youth development have delivered trophies to some of the best fans around, while the team’s dazzling displays have gained admirers throughout Europe.

"Return of the Marco"

Nevertheless, Dortmund are not immune to today’s financial pressures, so even they have started to spend more to remain competitive, with both their transfer spend and wage bill rising – though still nowhere near the levels of Europe’s elite.

Let’s leave the last word to Watzke: “We need to be the second major force in German football in the long-term. We’ve come a long way to achieving that and we want to be among the top clubs in Europe as well. That’s not unrealistic, even though it is an ambitious target for a club from a town of only 600,000 people up against teams from the biggest cities in Europe. But we are ambitious!”

Monday, October 3, 2016

Arsenal - New Sensation

In many ways Arsenal enjoyed a very good 2015/16, as they finished second in the Premier League, thus clinching qualification for the Champions League for the 19th successive season. Not only was this a place higher than the previous year, but this was also achieved by overtaking Tottenham Hotspur on the last day of the season (“and it’s 5-1 to Newcastle”).

However, given that Arsenal outperformed of all the big boys (as disgraced former England Manager Sam Allardyce used to affectionately describe them), it was still something of a disappointment to finish well behind surprise package Leicester City.

As chief executive Ivan Gazidis observed, “We have to be disappointed, certainly not satisfied, to end up second. We wanted more than that and I think that there were chances during the season. You can’t say second place is a disaster, but it’s not what we are about.”

It was a classic Arsenal case of “so near and yet so far”, so perhaps should not have been that surprising to their supporters, especially as they did not purchase a single outfield player the preceding summer.

However, it has been a different story this summer, as Arsène Wenger has addressed some of the shortcomings in his squad, splashing out £93 million to recruit Granit Xhaka, Shkodran Mustafi and Lucas Perez, who have all made contributions to a promising start.

In fact, Arsenal have quietly ramped up their spending in the last four years, averaging net spend of £49 million a season, compared to net sales of £6 million over the previous seven years. As Gazidis explained, “We are in a position that we were not in four or five years ago where we don’t have to sell our best players. We can go and sign world-class players if and when the manager identifies them.”

The chief executive pointed out that since Stan Kroenke became Arsenal’s majority shareholder, the club had actually invested around £350 million in transfer fees, including the likes of Mesut Özil and Alexis Sánchez. This is true, though fails to mention that around £160 million was recouped in the same period from player sales – and that all this expenditure was funded by the football club and not the owner.

That said, the question is whether they could have done even more. The frequent criticism of the club’s innate conservatism in the transfer market has evidently touched a nerve, as there have been a series of justifications from senior executives as to why the famous, hefty cash pile has not been fully utilised.

"Mustafi Me"

Gazidis patiently explained, “What is clear is that big spending is not the solution to all problems”, adding, “it’s not just about spending money, but about how you spend your money and doing it wisely.”

Arsenal chairman Sir Chips Keswick has clearly been given the same playbook: “We are not afraid to spend substantial sums, but it is important that the money is used wisely.”

Nobody would argue with that, but even after the increased spending it does feel as if the club is not as ambitious as it could be and it does rather bring to mind the old Hamlet quote, “the lady doth protest too much.”

Three years ago Gazidis had raised the fans’ hopes when he boasted, “We should be able to compete at a level like a club such as Bayern Munich. We can do some things which would excite you. I say that this is an extraordinarily ambitious club.”

Contrast that to this summer’s lecture: “We can't afford to outgun competitors that have far more money – we have to be very careful, very selective. That means we can’t afford to make huge mistakes in the transfer market.”

This seeming desire to play the poor relation appears strange, not least because Arsenal have actually become one of the biggest spenders in recent seasons. Since 2013 Arsenal’s net spend of £197 million is the third highest in the Premier League, only surpassed by the “unprecedented” expenditure of the two Manchester clubs, City £389 million and United £342 million, though they did splash out nearly twice as much as the Gunners.

Wenger himself has always insisted that he would have no problems spending if the right players to strengthen the squad were available, “I would spend £300 million if I find the right player – and if I have £300 million”, though he has also described the current spending levels as “quite scary”.

“Le Professeur” has further explained that English clubs suffer from having to pay a premium, as everyone knows that they are awash with money from the new TV deal, though this does make it even more perplexing that Arsenal did not spend their riches before when prices were much lower.

A couple of years ago £50 million would have bought two world-class players, while it is now barely enough for one. When Wenger was asked about the rise in transfer fees, he said, “We knew that would happen, it was not difficult to anticipate.” Well, precisely, so why keep the powder dry?

In the latest accounts for the year ended 31 May 2016, Arsenal’s cash balance has very slightly fallen by £2 million to £226 million, but the upward trend remains intact despite the higher spending. In the decade since Arsenal moved to the Emirates Stadium, cash has risen by more than 500% from £36 million to nearly a quarter of a billion.

In 2015/16 Arsenal’s cash balance has been overtaken by the cash machine that is Manchester United with £229 million, but the Gunners are far higher than the rest of the Premier League with the closest challengers in 2014/15 being Manchester City £75 million, Newcastle United £48 million and Crystal Palace £29 million.

To further place this into perspective, Arsenal’s cash balance is more than Real Madrid, Barcelona and Bayern Munich combined.

The club is very sensitive on this issue with Sir Chips Keswick even noting that it was his “duty to point out that after excluding debt service reserves (£35 million) and amounts owed to other clubs on past transfers (£42 million), the balance reduces to £149 million.”

It is also true that this figure is inflated by the seasonality of cash flows, e.g. season ticket receipts for the new season and advance sponsorship, so Arsenal’s cash balance will always be at its highest when its annual accounts are prepared. The club has to pay a good proportion of its annual running expenses out of this cash, though it is equally valid that other money will flow into the club during the course of the season, such as TV distributions, including the huge new contract, and merchandise sales.

In other words, there is still substantial money available to spend. It’s clearly not as much as the £226 million in the books, but there would be enough available in the January transfer window to further boost the squad if necessary.

Looking at Arsenal’s cash flow statement, we can clearly see evidence of a change in approach: in the six seasons between 2007 and 2012 Arsenal spent just a net £4 million on player purchases, while they have spent a net £138 million in the last four seasons.

In 2015/16 Arsenal generated an impressive £94 million from operating activities, spending a net £54 million on transfers (a new record) and £41 million on other things: £20 million on financing the Emirates Stadium (£12 million interest plus £8 million debt repayments), £13 million on capital expenditure (e.g. investment in London Colney training facilities and redevelopment of Hale End Academy) and £8 million on tax.

This is nothing new. Since 2007 Arsenal have produced a very healthy £722 million operating cash flow, though a draining £251 million has had to be used for stadium financing (£159 million on loan interest and £92 million on debt repayments) with a further £117 million on infrastructure (“hugely important investments which, whilst not grabbing headlines, will help underpin our long-term future” per Keswick) and £22 million on tax.

Only 20% (£141 million) of the available cash flow has been spent in the transfer market, though virtually all of that (£137 million) has been in the last four seasons. The other notable “use” of cash in that period is to increase the cash balance, which has risen by a cool £191 million.

Major shareholder Alisher Usmanov has noted that Wenger had been put in a very difficult position, as the shareholders did not put any money in to finance the new stadium, which meant that the quarter of a billion incurred to date on stadium financing was not available to improve the squad. That’s obviously correct, but it is equally true that Arsenal have left a lot of available money in the bank to attract one of the lowest interest rates in history, while transfer inflation has been running amok.

While on the subject of Arsenal’s cash, a recent report by CSS Investments Limited stated that Arsenal only had £4 million to spend in the transfer market (£54 million if the club made use of an overdraft facility).

This embarrassing “analysis” simply deducted all of Arsenal’s short-term net payables/receivables from Arsenal’s cash balance to produce their £4 million figure, thus assuming that the club would have zero creditors and debtors, while generating nothing from their operations during the year.

This is patently absurd, which can be easily demonstrated by applying the same approach to the other Premier League clubs. If we do that, all but four of the clubs in the top flight would have nothing to spend, as their available cash would be negative. In any case, it’s a relief that Arsenal haven’t actually gone bust, even though they spent £86 million this summer.

Arsenal duly delivered another set of solid financial results in 2015/16 with the chairman commenting, “we’ve enjoyed a season of progress both on an off the pitch”, though profit before tax fell by £15 million from £18 million to £3 million. The decrease was smaller after tax, as the tax charge was £2 million lower, but this still declined by £13 million to £2 million.

The fall in profit was despite revenue growing by £21 million (6%) from £329 million to £351 million (excluding £3 million from property development that brought total revenue to £354 million), mainly due to strong growth in broadcasting income, which rose by £16 million (13%) to £141 million. This was due to the new Champions League deal and record Premier League distributions.

This was supported by commercial income rising by £4 million (4%) to £107 million and  player loans being £2 million higher at £3 million, though match day revenue dipped slightly to just under £100 million.

"The Leader"

On the other hand, profit from player sales was £27 million lower at just £2 million, while a “quiet year” for property development reduced profit from this segment by £11 million to just £2 million.

Continued investment in the squad resulted in the wage bill climbing £3 million to £195 million and player amortisation rising by £5 million to £59 million. Against that, depreciation and other expenses were £3 million lower.

Interest payable was down £6 million, though this was partly due to the implementation of accounting standard FRS 102, which meant that the prior year comparative was increased by £6 million (to reflect the change in fair value of the interest rate swap used to fix the interest rate on the floating rate stadium bonds).

Traditionally Arsenal have been one of the few profitable football clubs, but the impact of  the last TV deal has helped change this with only six Premier League clubs reporting a loss in the 2014/15 season. In fact, Arsenal’s £25 million profit (before restatement) was only the 5th highest that season, behind Liverpool £60 million, Newcastle United £36 million, Burnley £35 million and Leicester City £26 million.

Only three Premier League club have so far published their 2015/16 accounts with Arsenal’s £3 million pre-tax profit being just ahead of Stoke City £2 million, but a long way behind Manchester United’s impressive £49 million.

Profit from player sales can have a major influence on a football club’s bottom line, as best shown in 2014/15 by Liverpool, whose numbers were boosted by £56 million from this activity, largely due to the sale of Luis Suarez to Barcelona. Similar large sums were made that season by Southampton £44 million, Chelsea £42 million and Tottenham £21 million.

In this way, the lack of major sales adversely impacted Arsenal’s bottom line in 2015/16. The main element in their £2 million profit was a sell-on fee for former youth player Benik Afobe’s transfer to Bournemouth.

Despite the improving profits at other clubs, Arsenal’s financial record is still one of the most consistent around with the club reporting profits 14 seasons in a row. You have to go back as far as 2002 to find the last time that they made a loss. Since then, they have made total combined profits of £278 million.

This is an astonishing achievement in the cutthroat world of football where success is very largely bought, though it is worth noting that profits have been much lower as of late. Indeed, the 2015/16 £3 million profit is the lowest in the Emirates Stadium era.

However, Arsenal’s 2014/15 profit was boosted by £29 million of player sales and £13 million from property development. In fact, over the years much of the club’s excellent financial performance has been down to profits from player sales (e.g. £65 million in 2011/12, £47 million in 2012/13) and property development (e.g. £13 million in 2010/11, £11 million in 2009/10).

These are likely be lower in future, as Arsenal no longer have to make “forced” player sales, while the property development is largely coming to an end, which means that Arsenal will be more reliant on their core business.

The chief financial officer Stuart Wiseley confirmed this view, “Improved player retention is a direct consequence of the club’s improved financial position over the last five years with a clear trend away from transfer profits as an essential component of the profit and loss account.”

There was limited activity in the property business profit in 2015/16 with profit of just £2 million. There should be money coming from the sale of the development sites at Holloway Road and Hornsey Road, though various complex agreements still need to be concluded.

To get an idea of underlying profitability, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this strips out player trading and non-cash items. On this basis, Arsenal’s profitability has improved considerably in the last three seasons after many years of decline, with EBITDA rising from £25 million in 2013 to £82 million in 2016.

That’s one of the best in the Premier League (around the same level as Manchester City), but it is still over £100 million below Manchester United’s astonishing £192 million. Now that United have reduced their financing costs to a more manageable level, they basically have at least £100 million more than any other English club to spend on players – every season.

Arsenal’s revenue hardly moved at all between 2009 and 2011, but has grown by an impressive 44% (£108 million) since 2013. Most of the growth (£55 million) is down to improved TV deals, which have driven a 63% increase in broadcasting revenue, though the previously under-performing commercial division has risen by £44 million (71%), mostly due to new deals with Emirates and Puma. Match day income has also increased in that period, but only by £7 million (8%).

Despite Arsenal’s revenue rising by £21 million (6%) to £351 million, the gap to Manchester United has significantly widened to £164 million, as the Red Devils’ grew their revenue by £120 million (30%) to £515 million.

In fairness, United are in a class of their own in the Premier League, while Arsenal are now almost the same level as Manchester City (£352 million) and ahead of Chelsea (£314 million) and Liverpool (£298 million), though all these clubs are likely to increase when their 2015/16 figures are announced.

It should also be emphasised that Arsenal’s revenue is well ahead of the other English clubs: £150 million more than Tottenham (£196 million) and at least £200 million more than everybody else, including champions Leicester City, who only earned £104 million.

Clearly having more revenue is important, with Wenger stating that budget is closely correlated with success on the pitch, “The clubs who have better financial resources have the better teams”,

However, the Frenchman has also argued that it is not the be all and end all, “Manchester United is the richest club in the world, so not many teams can compete on a financial amount, but I feel that it doesn’t make any difference, because on the pitch we can compete and that is most important. Football is not a financial competition: Leicester has shown that last year.”

Arsenal stood at seventh place in the Deloitte 2015 Money League, only behind Real Madrid, Barcelona, Manchester United, Paris Saint-Germain, Bayern Munich and Manchester City, which is obviously excellent. However, there are three major challenges for Arsenal here.

(1) The leading clubs continue to grow their revenue at a faster rate, e.g. in 2015/16 Real Madrid and Barcelona increased revenue by £25 million and £31 million respectively, compared to Arsenal’s £21 million, even before their massive new kit supplier deals commence.

(2) The weakening of the Pound since the Brexit vote means that continental clubs will earn much more in Sterling terms, e.g. the 2015 Money League was converted at €1.31, while the current rate is around €1.15.

(3) The Money League highlights the increasingly competitive nature of England’s top flight with no fewer than 17 Premier League clubs in the top 30 – even before the lucrative new TV deal.

The growth in broadcasting income in 2015/16 means that this now accounts for 40% of Arsenal’s total revenue, ahead of commercial income 30%. The importance of match day income, even though it is around £100 million, has consequently diminished from 44% to 28% since 2009.

Nevertheless, Gazidis noted, “Whilst our match day revenue is now ranked behind both broadcasting and commercial as a source of income, it remains vitally important to the club and is a key differentiator to competitor clubs with smaller, less modern venues.”

This can be seen by looking at the importance of match day revenue to Premier League clubs in the 2014/15 season, where Arsenal were the only one above 30% with the nearest being Manchester United and Chelsea at 23%. In fact, no club in the Money League top 30 generates a larger proportion of its revenue from match day.

However, match day income did dip slightly by £0.5 million to £99.9 million in 2015/16. Even though Arsenal staged the same number of home games (27), the mix was different with one Champions League game less plus no involvement in the FA Cup semi-final.

This meant that Manchester United overtook Arsenal’s match day income with £107 million following their return to the Champions League. This was boosted by their average attendance of 75,000, though Arsenal’s is the second highest in England at just under 60,000.

Of course, Arsenal do have very high ticket prices, arguably the highest in the land depending on how you view the number of games included in the season ticket package.

The good news is that the club has frozen ticket prices for the 2016/17 and 2017/18 seasons, which means that ticket prices will have been held flat for nine of the 12 seasons at the Emirates Stadium with inflation-only increases in the other three years. Arsenal are also providing a further £4 discount for their away supporters attending Premier League matches in addition to the £30 cap announced by the Premier League.

Arguably, Arsenal could still do more here in light of the massive new TV deal and there is no doubt that the fans are not delighted to contribute so much money to effectively grow the club’s bank balance. As a comparison, Everton reduced season ticket prices by more than 5% this season.

Gazidis said that the board wished to “strike a balance between the expense of coming to games for our supporters and the club’s ever-increasing costs and expenditure as it develops on and off the pitch”, but he slightly ruined the effect by adding, “demand for tickets continues to far exceed supply”, reducing it to an issue of basic economics.

Arsenal’s share of the Premier League television money rose £4 million to £101 million in 2015/16, as they received a higher merit payment for finishing one place higher and received more facility fees for being broadcast live more often. This represented the highest distribution in the top flight, even ahead of champions Leicester City, as the smaller merit payment for finishing one place lower was more than offset by higher facility fees for having 12 more games broadcast live.

This is even before the increases from the mega Premier League TV deal in 2016/17. Based on the contracted 70% increase in the domestic deal and estimated 40% increase in the overseas deals, the top four clubs will receive around £150 million, i.e. around £50 million more a season.

"Beautiful Vision"

Although this is clearly great news for the clubs, it is somewhat of a double-edged sword for the elite, as it makes it more difficult (or at the very least more expensive) to persuade the mid-tier clubs to sell their talent.

As Gazidis put it, “In the past the big clubs could financially bully the smaller clubs. It would be unthinkable that a smaller club would be able to hold on to its best player if Manchester United or Arsenal came knocking at the door.” Wenger validated the new paradigm: “The clubs don’t need the money in England and maybe that’s why they only weaken if the price is high.”

Sir Chips confirmed that this was one of the reasons why Arsenal had spent more this summer: “The new broadcast revenue has provided a further competitive stimulus to the Premier League. We know that competition will be even tougher this season. Accordingly, we have made further significant investment into what was already a very competitive squad.”

Arsenal did not announce how much they received from the Champions League, but my estimate is  €51 million, up from €36 million in 2014/15, based on the increases in the 2016 to 2018 cycle, namely higher prize money plus significant growth in the TV (market) pool, thanks to BT Sports paying more than Sky/ITV for live games.

The Champions League payment is partly influenced by a club’s progress in the tournament, but it is also dependent on where it finishes in the previous season’s Premier League. In this way, Arsenal’s 2016/17 revenue will be boosted by finishing second in the 2015/16 Premier League, compared to third the year before, exacerbated by the stronger Euro exchange rate.

Wenger has played down the value of Champions League qualification to Arsenal, “What has changed over the years is that the impact of the finances in the Champions League is not as big any more. For a period in the past the money was vital to us.” That said, it is clear that it is still financially beneficial, especially if it is compared to the Europa League, where Tottenham, for example, only earned €6 million in 2014/15.

Even though Arsenal have not done that well recently, i.e. the last time that they got past the last 16 was 2010, it is still a major revenue differentiator to their domestic rivals. For example, in the five years up to 2014/15 they received €153 million, over €100 million more than Tottenham and Liverpool.

Commercial revenue increased by £4 million (4%) from £103 million to £107 million, comprising £82 million from commercial deals and £25 million from retail and licensing, largely due to new secondary partnerships.

This was a much lower growth rate than the previous two years, but the club had called this out, when announcing that both the primary partnership deals, with Emirates and Puma, are in place for the medium-term. It also pales into insignificance compared to Manchester United, whose commercial income shot up by 36% in 2015/16 to £268 million, which is an astonishing £161 million more than Arsenal.

United may be out of sight in England, but it is disappointing that Arsenal’s commercial income is still lower than Manchester City £173 million, Liverpool £116 million and Chelsea £108 million. Of course, Arsenal are in turn miles above other Premier League clubs, e.g. Tottenham £60 million, Aston Villa £28 million and Everton £26 million.

Arsenal’s commercial shortcomings can be clearly seen if we compare their revenue with the other nine clubs in the 2014/15 Money League top ten. OK, the £123 million shortfall against PSG is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority, but there are still major gaps to other clubs in commercial terms, e.g. Bayern Munich £108 million, Real Madrid £85 million and Barcelona £82 million.

Arsenal’s £150 million Emirates deal covers a 5-year extension in shirt sponsorship from 2014 to 2019 plus a 7-year extension in stadium naming rights from 2021 to 2028. The club has not divulged how much of the deal is for naming rights, so I have used the straightforward £30 million annual figure, though my own estimate would put the pure shirt sponsorship at around £26 million.

That’s pretty good, but it has since been overtaken by new sponsorship deals at Manchester United with Chevrolet (around £56 million a year at the latest USD exchange rate) and Chelsea with Yokohama Rubber (£40 million).

It’s a similar story with the Puma kit supplier deal, which is worth £30 million a year. This is one of the best kit deals around, but is still dwarfed by Manchester United’s extraordinary £75 million deal with Adidas, while Chelsea will switch to Nike for £60 million from the 2017/18 season.

At the time it was signed, United described theirs as the “largest kit manufacture sponsorship deal in sport”, though it has since been reportedly overtaken by new agreements signed by Barcelona (Nike) and Real Madrid (Adidas), which would be worth £125 million and £115 million respectively (at the current exchange rate).

Despite an increase in the number of partnerships, the concern is that Arsenal’s commercial performance will continue to place them at a competitive disadvantage relative to other leading clubs, even though owner Stan Kroenke believes that the Arsenal brand is a “big opportunity” for the club.

However, further substantial increases are only likely to come as a result of success on the pitch, which again makes you wonder why the available cash has not been spent on strengthening the squad.

Arsenal’s wage bill increased by 2% (£3 million) to £195 million in 2015/16, though the underlying growth was higher, as the prior year comparative was inflated by a double charge for Champions league qualification bonuses (August 2014 via a play-off).

However, as a result of the revenue growth, the wages to turnover ratio was cut from 58% to 56%. This is higher than the 46-50% achieved between 2008 and 2010, but is still very reasonable and is at the lower end of the Premier League.

Arsenal’s wage bill has risen by 57% (£71 million) since 2011, one of the fastest growth rates. This was justified by the CFO thus: “In light of the strong correlation between player wage expenditure and on-field success, a progressive wage bill, where growth is rational and responsible, should be regarded as a positive outcome.”

Manchester United’s high growth in 2015/16 means that their wage bill of £232 million is once again the highest in England, at least until Manchester City and Chelsea publish their accounts. Their gap to Arsenal has thus increased from £11 million to £37 million.

Of course, Arsenal’s wages are way ahead of most other Premier League clubs with the nearest challengers (in 2014/15) being Liverpool £166 million, Tottenham £101 million and Aston Villa £84 million.

Arsenal need to consider the Premier League’s Short Term Cost controls, which  restrict the annual player wage cost increases to £7 million a year for the three years up to 2018/19 – except if funded by increases in revenue from sources other than Premier League broadcasting contracts.

This will be a challenge, as Arsenal soon need to extend the contracts of Özil and Sánchez. Given the limited opportunity to raise ticket prices, this again places pressure on Arsenal to grow commercial revenue.

It also helps explain Arsenal’s caution in the transfer market, as Wenger explained, “If clubs are wrong, they will have these players with high wages who cannot move anywhere else.”

What is more difficult to explain is the 15% increase in Ivan Gazidis’ remuneration from £2.299 million to £2.648 million. Nice work if you can get it.

Although there is a natural focus on wages, other expenses also account for a sizeable part of the budget at leading clubs, though Arsenal’s decreased by £2 million to £70 million in 2015/16. These cover the costs of running the stadium, staging home games, supporting the commercial partnerships, travel, medical expenses, insurance, retail costs, etc.

The good news is that Stan Kroenke’s company has waived its “entitlement” to any fee for “strategic and advisory services”, which were apparently worth £3 million the previous year.

Another cost that has had a major impact on Arsenal’s profit and loss account is player amortisation, reflecting the recent increased investment in transfers. This expense has shot up from £22 million in 2011 to £59 million in 2016.

As a reminder of how this works, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract. As an example, Özil was reportedly bought for £42.5 million on a five-year deal, so the annual amortisation in the accounts for him is £8.5million.

However, Arsenal's player amortisation is still by no means the largest in the Premier League. Those clubs that are regarded as big spenders logically have the highest amortisation charges, e.g. Manchester City £70 million and Chelsea £69 million in 2014/15, while Manchester United’s cheque-book strategy since Sir Alex left has driven their annual amortisation up to an incredible £88 million in 2015/16.

There have been a few misguided reports in the media that Arsenal have paid off their stadium debt, but the reality is that the debt incurred for the Emirates development continues to have an influence over Arsenal’s strategy.

Although this has come down significantly from the £411 million peak in 2008 to £233 million, it is still a heavy burden, requiring an annual payment of around £20 million, covering interest and repayment of the principal. Arsenal’s debt comprises long-term bonds that represent the “mortgage” on the stadium £194 million, derivatives £24 million and debentures held by supporters £14 million.

The interest payable of £13 million is more than twice as much as any other Premier League club (£5-6 million at Sunderland, West Ham, Manchester City and Tottenham) – with the notable exception of Manchester United, even though they reduced this to £20 million in 2015/16.

Although the net debt stands at only £6 million, thanks to those large cash balances, the gross debt of £233 million remains the second highest in the Premier League, only behind Manchester United, whose borrowings rose to £490 million, largely due to the impact of unfavourable exchange rate movements on the USD denominated debt.

Apart from financial debt, it is worth noting that Arsenal also owe a net £42 million to other football clubs for transfers, though this is down from £66 million the previous year, and have spent more than £90 million on new players since the financial year-end.

"The patience of a Santi"

Even though some other clubs are still well ahead financially, Arsenal are still better placed than most. Gazidis, for one, is bullish: “We are in a strong position to continue moving forward at every level of the club. Our ultimate ambition is clear: to win major trophies and make Arsenal fans at home and around the world proud of this great club.”

That sounds a lot better than Stan Kroenke’s throwaway comment that “If you want to win championships, then you would never get involved”, which hardly inspires confidence that the board is committed to maximising the club’s chances of competing at the top level.

"Come on, Alex, there's nothing to it"

It would be a fitting tribute to Wenger’s 20-year anniversary at Arsenal to go one step better than last season by winning the Premier League again, but the competition this year looks stronger with City resurgent under Guardiola, and United, Liverpool, Chelsea and Tottenham all looking to bounce back from their various misfortunes.

Unfortunately, Arsenal failed to invest their available cash when this would have gone a lot further, which very much feels like a missed opportunity. Obviously, spending big is in itself no guarantee of winning trophies, but it does tend to give a club its best chance of success.

However, this summer Arsenal did start to act like a big club, finally recognising the new realities of the transfer market. Allied to exciting Academy products like Alex Iwobi and Hector Bellerin, this gives cause for quiet optimism for the future, though it’s still too early to say whether this team will deliver.
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