Matt Scott: Why Arsenal’s cash mountain may remain just that

‘Spend, spend, spend’, read the notice brandished by a furious-looking man behind Arsène Wenger’s dugout, as Arsenal slumped to a 3-1 defeat to Aston Villa on Saturday. 
His was the politest exhortation of the day. Echoes of the anger that filled the Emirates Stadium, where groups of Arsenal supporters came to blows in their seats, have been read and heard on social media and radio phone-ins long after the final whistle fell silent.

It is the expression of a profound frustration, despair even, among Arsenal fans who sense bad faith from their club. Ivan Gazidis had spent an evening in June with Arsenal fans and small shareholders at which he spoke of a “big summer” in their effort to “elevate the club to the top of world football”. Expectations were raised, season tickets were sold. Defeat at home to a team that had marginally escaped relegation the previous season ensued. In a way, Gazidis has been the victim of his own expansiveness, of generosity with his own time. Not all clubs’ chief executives accord that to their paying customers.

But that is not a primary consideration for the supporters whose anger, as the unknown protestor’s placard proved, grows at Arsenal’s failure so far to invest their immense resources in the transfer market. Wenger’s team began the season with only one signing, a 20-year-old, unused substitute against Villa. His lone arrival did not counteract the departures of seven first-team-squad players and a significant eight-figure reduction in the wage bill.

So was Gazidis being disingenuous with his hints of extensive investment? That is highly unlikely. But then what Arsenal’s senior management team considers a “big summer” of transfer activity might be discordant with how the fans perceive it.

In the past three years for which figures are publicly available, Arsenal made an aggregate transfer profit, in cash, of over £12.5 million. Over the same period England’s three other current Champions League participants each spent in excess of £100 million more cash on transfers than Arsenal.
Between 31 May 2009 and 31 May 2012, Arsenal used their own resources to repay about £200 million of debt. This aggressive deleveraging is a strategy that puts them at odds with almost every other club in world football.
And it is puzzling. As the club prepares to break out of the straitjacket of its Emirates Stadium-enabling commercial deals (which were forward sold at a discount to bring cash up front as collateral for the construction project), agreeing bumper contracts with Emirates and Puma, cash flow is rising fast. With central revenues from the Premier League’s broadcasting deals raising distributions to all clubs by a 1.7 multiple, the opportunity for Arsenal to invest is richer than ever.

There do remain a little under two weeks of the transfer window. But if Arsenal do not use them and the huge cash pile at their disposal (in November 2012 it stood at £123.4 million and will only have grown since) to deliver human resources then questions must be asked. Such as: what has motivated this crushing of the debts?
It is perhaps significant that Arsenal began to unload loans in the 2008-9 season. Stan Kroenke joined the board in September 2008, two-and-a-half years before he became the club’s majority shareholder in a deal giving the club an enterprise value of £829 million.

The takeover added Arsenal to the other assets in the American’s Kroenke Sports Enterprises (KSE) holding company. This comprises a range of US sports teams: Colorado Rapids (soccer), Mammoth (Lacrosse), Avalanche (ice hockey) and Crush (indoor American football), the Denver Nuggets (basketball) and the St Louis Rams (American football). This multi-billion dollar portfolio of assets has not been built without recourse to debt. How much debt, it is impossible to see. Kroenke Sports Enterprises is located in Delaware, a secrecy jurisdiction that places no obligation on corporate entities to make their accounts public.

What is known is that at the time when Kroenke was fast growing his portfolio of sports assets (he completed his Rams takeover with an acquisition of 60% of its share capital in August 2010, less than eight months before paying £250 million to take his shareholding in Arsenal beyond 60%) the global financial system was in the depths of a crisis.

It is routine for lenders to impose covenants on borrowers that dictate the maximum permitted gearing in a business. Gearing is the ratio between a business’s net debt and its assets.
This gives rise to the intriguing possibility that, by quickly reducing the overall indebtedness of Arsenal and keeping cash in the bank unspent, KSE was able to offset debts in other group companies. This would mean Arsenal’s tremendous capacity for cash generation was being used to satisfy lenders to the US sports conglomerate.

There is no way of knowing for sure that this is the case, because Delaware accounting is not transparent and a man known to US media as ‘Silent Stan’ is unlikely ever to make public sensitive details on his financing arrangements. But I once asked Gazidis about this theory and he said he “did not know”, adding he “would be surprised” if it were the case.

One thing is for sure though: Kroenke, who seldom attends matches, is not in Arsenal for the fun of it. It seems instead that making money is the motivation. For instance, although the club has never once paid a dividend since becoming a plc, there is nothing in the 2011 takeover document to restrict Kroenke from drawing cash dividends from the club in future. A close associate of his once asked me: “What is wrong with a sports owner wanting to take dividends?”

The answer, of course, is nothing – provided performances on the pitch are satisfactory. It is clear what the fans think about those, and even Gazidis admits seasons past have represented failure. “We were disappointed that we weren’t competing for trophies,” he said in the summer.

For now Kroenke is not overtly drawing dividends, unlike the Glazer family whose 2005 leveraged buyout of Manchester United has openly used the club’s own cash to pay takeover loans. But if on 3 September Arsenal’s cash sits unspent in the bank, the suspicion will grow that he is servicing a similarly debilitating LBO in another, almost-invisible way.

Contact Matt Scott at moc.l1563677516labto1563677516ofdlr1563677516owedi1563677516sni@t1563677516tocs.1563677516ttam1563677516