“Arsenal need to buy four players, they need that spine. They need a goalkeeper, they still need a centre-back, they still need a holding midfielder and, I’m afraid, they need a top, top-quality striker in order to win this league again.” Thierry Henry, Sky Sports
They have a statue of Thierry Henry outside the Emirates Stadium. For most Arsenal fans he was the champion of champions, the Achilles from Paris, whose frontline attack brought glories wherever he spearheaded a team of Invincibles. (Personally, I think Dennis Bergkamp was the better and more influential player of that generation but then football is all about opinions.)
It is now Henry’s job to dispense opinions from his pundit’s armchair at Sky Sports. To his credit, the Frenchman has not demurred from speaking plainly about his former club, of whom he now declares himself a fan, even if his utterances might be uncomfortable for his former employer.
Arsenal and Arsène Wenger, the club’s long-serving manager, have endured much pressure from fans demanding more transfer activity. To have Henry cheerleading for the vocal “Spend, spend, spend” contingent at the Emirates is unlikely to be the script they would have written. Still, he has said it now, so let us see if Arsenal have the flexibility to deliver on Henry’s demands.
It is well documented that in past seasons, with the focus on building a 60,000-seat stadium for the 21st Century, Arsenal’s approach to the transfer market has been frugal. The club’s own figures show that in the three years between 1 June 2010 and 31 May 2012, their cumulative transfer activity generated a net cash profit of £12.6 million. But that has begun to change.
In the following two seasons ending 2012-13 and 2013-14, Wenger spent a net £25.9 million and £11.1 million in cash respectively. Yet those sums are hardly enough to match Henry’s ambitions for “top, top-quality” signings and another step change in investment will be required to deliver them. There were strong signs it might have arrived last summer, with figures from the club’s interim accounts for the six months to November 2014 showing a player-trading deficit of £30.7 million against the £12.7 million in the same period the previous year.
Among the arrivals in that six-month period were Alexis Sánchez from Barcelona, Calum Chambers from Southampton, Mathieu Debuchy from Newcastle United, David Ospina from Nice and Danny Welbeck from Manchester United, internationals all. It meant that on top of the £30.7 million paid in cash, outstanding amounts owing to other clubs on transfers rose to £82.8 million. Offsetting that are the £20.2 million owed to Arsenal by other clubs for players they have sold.
So with all that money owed, can Arsenal afford to go to the well again this year? A skim reading of the half-year accounts to last November might worry Arsenal fans. In those first six months of the season just completed the Gunners spent £46.3 million more than they earned on wages, player transfers, debt interest and repayment, infrastructure and general running costs for the club. All in all it pushed the club’s net debt up from £32.6 million on 31 May 2014 to £72.0 million six months later. At a club that has for so long fought to drive down its net debts at an extremely rapid rate (for reasons unexplained, though I have had a stab as to why in the related article below) we might expect a spike to cause a renewed lurch towards frugality.
However any Arsenal fan who has read the club’s interim report in that way should rest assured. Cash balances are always higher in May on account of season-ticket renewal funds hitting the club’s bank accounts before 1 June. So comparing November to May is not like for like. However, it is possible to extrapolate from the club’s November figures what might be the financial position now. And, far from having a net-debt position of £72 million, I calculate Arsenal to be far closer to the black, with about £7 million of net debt.
Where I have been unable to draw on evidence from within the club’s own accounts, I have been deliberately conservative in my calculations. Although property-development revenues relating to potentially very lucrative sites on the Hornsey Road and Holloway Road in north London will come on stream at some point soon, I have assumed they did not in the 2014-15 season. So my estimates are as follows:
As you can see from the tables above, my expectation is that turnover rose almost £25 million year on year to £325 million, owing principally to growth in commercial income. That 7.8% rise in turnover was I believe outweighed by an 11.5% rise in wages to £185.5 million from £166.4 million, taking the wages-to-turnover ratio from 55.22% to a still-manageable 57.08%.
Assuming other costs remain flat and the depreciation and amortisation charges rise to a combined £64 million, I expect operating profits to be around £2.8 million. That said, Arsenal is nothing if not a cash cow and that slender accounting profit can be expected to generate almost £87 million in cash, even after paying up about £40 million of transfer creditors.
I have allowed for £12 million of debt-interest payments and £7.3 million of debt service, as well as £35 million of net cash outlay on transfers and another £12 million on infrastructure and other investment (which could indeed be a little high). So all in all over the course of the 12 months of the season, I conservatively expect Arsenal to have achieved a net cash inflow after financing of £19.5 million.
There is £20m-plus that must be held away from transfer budgets in the debt service reserve account, as required by their banking covenants, but I still believe Arsenal’s disposable cash balances will now be above £200 million. And given that the long-term portion of the debt on the stadium loans has fallen below £200 million for the first time, Arsenal are cash rich to say the least.
So returning to the original point – can Arsenal afford to fulfil Henry’s wishes? – well, I should say they can. Petr Cech looks like being the first to arrive, for between £10 and £12 million, on a wage bill of about £4 to £5 million a year. An international-class holding midfielder might cost double that amount in transfer fees and a similar sum in salaries and for a world-class striker you can double those amounts again. If Wenger can be anticipated to be thrifty anywhere it will be at centre-half, where he will probably expect to use his January signing Gabriel Paulista and/or Chambers as back-up to Laurent Koscielny and Per Mertesacker.
All that would come in at an additional £70 million to £85 million in transfer fees and £15 million to £20 million a year in wages. So it would entail some confident investment on the part of the board, since it would risk returning net debt to about £70 million on a year-end basis in 2016 as the club raided its enormous cash reserves. (That might be offset by savings in wages and cash income from transfer fees if fringe players like Lukas Podolski, Joel Campbell and others can find clubs but then Henry and the fans are more bothered by what can be added to than shaved from the wage bill.)
The simple fact is it makes sense to invest at the lowest point in a revenue cycle, when asset prices might also be at their lowest, and that is where top European clubs are now. With next season’s minimum guaranteed Champions League income set to swell English participants’ coffers by perhaps £30 million a year as BT Sport’s £897 million, three-year deal with UEFA for the rights begins, the wages will be taken care of.
Should the Premier League’s own broadcasting arrangements with BT Sport and Sky Sports, which are primed to net English top-division clubs £5.1 billion over three years from 2016-17, be allowed to stand by regulators, then another £50 million a year can be expected from central broadcasting awards. With the internally generated revenues from the stadium, commercial/retail and property activities thrown in further down the line, Arsenal can more than afford a spree this summer, covered from within their cash coffers.
Otherwise Arsenal fans will indeed have cause for concern. Because as Henry says, it probably will be a while before they “win this league again”.
Journalist and broadcaster Matt Scott wrote the Digger column for The Guardian newspaper for five years and is now a columnist for Insideworldfootball. Contact him at email@example.com.