Half-time at Arsenal
I have in the past made the appropriate conflict-of-interest disclosure: I am a lifelong Arsenal supporter. But what follows, I hope, will not be tainted by the emotional investment I’ve made in the club over many years.
Over the past few weeks, I’ve been talking to Arsenal investors, former investors and executives to obtain a sense of what’s likely to happen at the historic club in the aftermath of the US billionaire Stan Kroenke buying a 12.2 per cent stake and David Dein resigning from the board.
Here is what I’ve learned:
1) According to sources at ITV, David Dein was intimately involved in ITV’s sale for £42m of a 9.99 per cent stake in Arsenal to Kroenke.
2) The same sources say that at one stage that deal was conditional on Dein also selling his 14.4 per cent holding to Kroenke, though that condition was ultimately dropped.
3) It’s unclear whether Dein’s role in the ITV sale prompted the “irreconcilable differences” between him and fellow Arsenal directors which led him to leave the Arsenal board in April.
4) The close relationship between Dein and fellow Arsenal director, Danny Fiszman, ended some while ago, before the recent turbulence – but the cause of the original estrangement is a mystery.
5) The widely held belief that the development of Arsenal’s new stadium has put it into a financial straitjacket appears to be wrong – following a £260m refinancing of the stadium-related debt last July, which significantly reduced interest costs, net cash-flows have been enhanced and the club’s financial muscle is now probably greater than it’s ever been (or at least since the glory days of the 1930s, when star players worked for peanuts rather than gold bricks).
6) Annual turnover is running at around £170m excluding property sales, £200m including a contribution from the residential development at the redundant Highbury stadium, and a bit more if catering sales are imputed from profits shared with outside catering firms – which represents a tripling of turnover over seven years and means the club is narrowing the gap with Manchester United.
7) Arsenal’s expenditure on players (transfers and wages) is approximately 91 per cent of Manchester United’s.
8) However the Arsenal board does not believe that even a top-flight club can combine on-the-field success over the long term with a highly-leveraged financial structure of the sort the Glazers put in place at Manchester United or even with the payment of dividends to shareholders.
9) Or to put it another way, the Arsenal board view the club almost as a mutual or a co-op, and they feel their primary responsibility is to pass it to the next generation of directors, shareholders and supporters in robust shape – and it is an article of faith for the board that net cash flows should always be positive in any given year, unless the club is making an investment that will significantly increase long-term cash flows.
10) That explains their wariness about selling out to Kroenke.
11) The absence of a dividend on the shares for many years, and the refusal of the directors to contemplate paying a dividend, means that it would be irrational for Dein to retain his 14.4 per cent stake – how can he simply sit on an asset worth perhaps £90m which is yielding zilch for him (and, note too, that he is no longer drawing salary or bonus from Arsenal which in 2006 was £500,000)?
What do I make of all this? First that Dein will probably sell his stake sooner rather than later. Second if Kroenke is genuinely committed to buying Arsenal, he will find it immensely difficult, since the board control roughly half the stock and seem committed to their way of doing things.
But then there is a Wenger factor. Everyone I’ve spoken to says that the sine qua non of future footballing and financial success is that the Arsenal manager stays at the club. Which is why there is widespread anxiety that his contract ends at the end of the next season.
It’s probably not sinister that he hasn’t signed a new contract yet. Arsenal’s directors are confident that they are providing him with the wherewithal to do the job and that his decision to stay or go will ultimately depend on how his team perform for him next season. Which isn’t altogether reassuring…