Managing Financial Resources - ARSENAL HOLDING plc

Management School - MBA Football Industry

Managing Financial Resources

ARSENAL HOLDING plc

A Report by:

INTRODUCTION

Historic Performances and position on the market

Arsenal FC is located in North of London and is one of the most successful football clubs in the world not only in football but in terms of economic performances as well. The economic situation of the club is solid. The Group turnover increased by 36% in the last five years from over 137 million British pounds registered in 2006 to almost 380 million British pounds in 2010. According to Forbes magazines, Arsenal London was evaluated to 768 million British pounds, placing the club in the third position after Real Madrid and Manchester United based on data's collected from season 2008/2009. The highest debt of 293.3 million British pounds was registered in 2006 ("which is a long-term stadium finance bond with fix rate of interest") (Arsenal holdings financial review: p17). The club decision to build and move to a brand new stadium was a brilliant idea in terms of economical performances. The new construction cost the club 470 million British pounds. The club redeveloped the old stadium into a 655 residential apartment complex. The cash obtained from selling the apartments helped the group to reduce the net debt from 297 million British pounds registered last year to 135 million British pounds in 2010. Excellent returns from player trading and properties helped the club to register an increase in profit after taxes from 7, 9 million British pounds in 2006 to 60, 9 million British pounds in 2010.

Arsenal reached the highest match day revenue (over 100 million British pounds) in the club's history in 2009/2010. European broadcast revenue increase as well by 7% from 70, 4 million British pounds to 75, 8 million British pounds due to a better performance of the team in the European competition. Arsenal's objective is to develop its international brand by targeting new markets in US and Asia. The wages with players rose to 110, 7 million British pounds which represent 49, 7% of football segment revenue.

The cost with the wages increased every year in the last six form 66.012 million British pounds in 2005/2005 to 110733 million British pounds in 2010.

RATIO ANALYSIS

Financial Ratios are used to measure a company's overall performance and to compare different businesses.

Profitability Ratios

Wage/Revenue Ratio will help the club to evaluate how much total wages as a percentage is from total revenue. The ratio registered a decrease of 4% from 33% in 2009 to 29% in 2010 due to an increase in total turnover from over 313 million British pounds in 2009 to over 379 million in 2010. The ratio was influenced by the increase in gross and net profit due to the fact that the club reduced its cost with staff employee during the match from 893 staff members in average in 2009 to 861 in 2010. Another factor which influenced the ratio was the increase in broadcasting revenue from over 73 million British pounds in 2009 to 84, 5 million British pounds in 2010 mainly because of the Champions League and the fact that the revenue with property development almost doubled in 2010.

In the last five years the Group managed to reduce the percentage with total cost of salaries by 34%. The cost with salaries increased in the last five years but the key was the increase in revenue generated from property development ( New stadium, Highburry Square project),Uefa Champions League, broadcasting, retail, new deals with commercial partners.

(The 600^th apartment sale was completed in August and we expect to have fully sold all the 655 apartments by the close of the 2010/11 financial year (Arsenal holdings Plc Chief Executive's Report 2009/10)

Gross Margin This ratio will evaluate the club's profitability. Despite of the fact that the club registered a considerable increase in 2010 revenue, the ration registered a steady increase of 0.2% from 14, 5% in 2009 to 14, and 7% in 2010. The main cause is the increase of total costs of the club during the year. The cost with total depreciation and amortization increased from 35,5 to 36,9 million, cost of property sales almost doubled from 79,9 million to 141,6 million due to the group success in selling 600 out of 655 apartments, as well as overall total expenses increased from 274,8 million to 343,2million due to an increase in player's salaries.

The Group profitability looks good but I suggest that the club must reduce the costs with player's salary because it represents 29% of total revenue while overall total expenses increased by almost 4% since 2009 to 90% of total revenue.

Return on sales

This ratio will show how much income does the club earn from each dollar of revenue and it will determine the club's overall level of profitability.

The ration increased from 11, 2% registered in 2009 to over 13% in 2010 due to an increase in revenue. Despite of the fact that the club's operating expenses increased, the club managed to improve its revenue. The main cause for increasing its revenue was that the club registered higher returns on broadcasting due to an improved contract with UEFA and Premier League better competition performances bonus, and strong returns obtained from selling players and property business. The club managed to almost double the return from property development in 2010 comparing with 2009. The rate was also influenced by the new commercial contracts which the club managed to improve. The club extended the deals with Nike (2014), Emirates Airlines (2021), signed new contracts with new sponsors and commercial partners and increased the returns from players trading from 23.2 million British pounds to 38, 1 million in 2010.

Liquidity ratios

Current ratio (CR) will show what the balance between current assets and current liabilities is. The current ratio for the club increased in 2010 from 1.03% to 1, 55% .The club managed to reduce its current liabilities in 2010 to almost half from 314 to 154, 8 million in 2010 mainly by selling 600 apartments. The stock with development properties decrease in 2010 four times comparing with 2009. Another reason for this increase in CR is that the club invested more money in working capital mainly with higher salaries paid to the players. The ratio was influenced by the increase in revenue obtained from broadcasting due to a good performance of the team in Europe

and domestic league on one hand and on the other hand due to the increase in competition performance bonus offered by UEFA and Premier League. The ratio was influenced due to an increase in cash and short term deposit in 2010 comparing with 2009 because the trade receivables rose by 26% in the last year comparing with previous year.

Efficiency ratio

Asset Turnover will analyze how much revenue the Group generated from its investment in assets. The ratio increased significantly from 37.5% in 2009 to 51.5% in 2010 mainly because of the increase in the total revenue and the reduction of investment in assets. The group managed to increase its revenue due to a good strategy by investing in long term assets (new stadium, Highbury square project) and extending the present deals with the commercial partners. The group also managed to increase the cash and bank balance in hand from 99,6 million to 127,6 million due to an increase in revenue from selling season tickets ( 14 million more) and the fact that the property business is debt free and the cash from property sales is accumulated rather used to pay bank loans. (Arsenal Holdings PLC Financial review 2010:16).

Value drivers

The club experienced difficult situation in the past but due to an advanced management and a very good long-term strategy today Arsenal Football Club is one of the most successful club in terms of financial and economical performance.

Arsenal CF managed to increase its profit and total revenue every year in the last five mainly because the club understood how to update its position on the market by offering today a wide range of goods and services to its fans.

The club counts today a number of nine official sponsors which contributes significantly to its revenue. The club incomes comes from Broadcasting 22,2%, Commercial 8,2%, gate and other day match revenue 24,7%, property development 41,3% and retail 3,3%.

The Group key goals are: (to enhance the fan experience; to support and fund on field success; to develop significant additional revenue). (Arsenal Holdings PLC, Chief Executive's Report). A very important value driver is Arsenalisation project. The motto of this project is the club exists for the fans. The club objective is to create and offer the best condition for the supporters and to make them feel like they are part of club or to fell like home. The objective is to invest more in the new stadium not just because the club wants to offer the best experience to the fans but it is a very good opportunity to increase its revenue generated by the stadium. The project was a total success; The Group registered an increase in its turnover of 34, 5% in the last 5 years mainly because the of

Match day revenue generated by the new stadium increased every year in the last five from 44 million Sterling to over 100 million in 2009.

Another value driver is revenues generated from commercial and retail. The group managed to increase its revenue from these activities due to a very good long term strategy. The club succeeds in its attempt to extend most of the existing deals with

Commercial partners like Nike (new deal until 2014), Emirates airlines (until 2021), Lucozade Sport (3 more years) and welcomed new partners like Thomson Sport, MP&Silva.

Broadcasting revenue is another value driver. Arsenal's revenue generated from broadcasting improved, increasing from 54, 5 million in 2006 to 84, 5 million in 2010. Despite of the fact that Arsenal played less games in Europe its revenue from Champions League rose from 23,8 in 2009 to 31,1 million in 2010 due to a better distribution of money by UEFA.

The key value driver is Property development. During the previous financial years the group registered a huge debt of 293 mill pounds. The revenue generated by the Highbury Square project (sold 600 apartments for 133, 6 million pounds 2010 versus 88 million 2009) helped the club to reduce its debt to only 135, 6 million pounds in 2010.

The property business in debt free and generated a surplus in cash of 5 million pounds. The cash and bank balance increased in 2010 to 127, 6 million comparative to 99, 6 million in 2009.

The group's goal is to continue investing in the Emirates Stadium so that the fans will enjoy their experience and the football team will play its home games with a full stadium, and to invest in a world class management team who can build strong international image as a one of the most successful brand.

Conclusion

Despite of the fact that the impact of the recession was strong in all the economical sectors, 2010 was an excellent financial year for Arsenal Group. Total revenue increased because of the ability of the management team to improve the current deals with commercial partners and to attract new sponsors. As well the football club managed to generate more money from all the competition in which it was involved. Total debt decreased due to a good strategy with property development. Overall total expenses of the group increased but due to a good management 2010 was an excellent year in terms of efficiency, liquidity and profitability. The cost with salary is very high but comparing with its main competitors (Manchester United, Chelsea London and Liverpool FC), Arsenal London maintain a better rate than the last two clubs and similar one with first football club mentioned in the brackets above. Internationally comparing with other football clubs (Manchester United, Real Madrid, FC Barcelona), Arsenal London must target new markets (Asia and US) in order to become one of the most successful brands in the world.

Bibliography

Annual Reports

Arsenal Holdings plc Statement of Account and Annual Report 2005/2006 [online] available from https://www.arsenal.com/the-club/corporate-info/arsenal-holdings-financial-results

Arsenal Holdings plc Statement of Account and Annual Report 2006/2007 [online] available from https://www.arsenal.com/the-club/corporate-info/arsenal-holdings-financial-results

Arsenal Holdings plc Statement of Account and Annual Report 2007/2008 [online] available from https://www.arsenal.com/the-club/corporate-info/arsenal-holdings-financial-results

Arsenal Holdings plc Statement of Account and Annual Report 2008/2009 [online] available from https://www.arsenal.com/the-club/corporate-info/arsenal-holdings-financial-results

Arsenal Holdings plc Statement of Account and Annual Report 2009/2010 [online] available from https://www.arsenal.com/the-club/corporate-info/arsenal-holdings-financial-results

Delloitte Annual Review of Football Finance June 2010

Websites

www.arsenal.com (accessed 27 October 2010)

www.uefa.com (accessed 29 October 2010)

www.forbes.com (accessed 4^th November 2010)