Nutmeg Radio

It is no secret that Arsenal Football Club (AFC) is run under a self-sustainable business model.  The club takes great pride in touting this fact, sometimes to the detriment of some of its own fans who want greater on field success in the form of silverware (AFC has gone five long, arduous years without a major trophy – cue the violin).  According to Arsenal manager, Arsene Wenger, it is imperative that football teams live within their means, by which he means that clubs should only spend what they make.  That is why a few years ago, after the club decided to build Emirates Stadium, Arsene embarked on an odyssey of sorts  to revolutionize how the squad was constructed.

Arsene and the AFC board put in place a plan that focused more on player development at a young age as opposed to high-priced acquisitions of older, established players.  The thought was that in order to finance a new stadium, the club would have to reign in its spending.  Thus, it made more sense to acquire young, talented players early in their development cycle.  After all, there stood a good chance that these new recruits would end up blossoming into world-class players under the structured tutelage of the Arsene Wenger and the Arsenal coaching staff.  This brazen choice lead to the departure of some of Arsenal’s older heroes such as Patrick Vieira and Thierry Henry and ushered in the era of younger players like Cesc Fabregas and Robin Van Persie.

Over the subsequent years of transition, Arsenal has been enormously successful by many standards with the exception of one.  They have finished in the top four of the English Premier League with regularity, been regular participants in the UEFA Champions League group stages and beyond, and have progressed to the late stages of several domestic cup competitions, albeit with young, inexperienced teams. One would think that most, if not all AFC fans would be pleased with such substantive results, but alas, that isn’t quite the case.  In today’s world of instant gratification and exorbitant spending, it appears that there is a growing faction of Arsenal fans who no longer subscribe to the “Arsene Knows” mantra and are increasingly frustrated by the five-year run without silverware.

Prior to the win last week against Liverpool, the squad suffered devastating back-to-back defeats at the hands of Manchester United and Chelsea, the two leading contenders for the Premiership crown.  Due to the lopsided nature of these loses, the detractors have once again been clamoring for the need for squad reinforcements if Arsenal is to truly challenge for honors this term.  To the casual observer, it may appear that these fans perhaps don’t understand or want to understand what the club is trying to do.  In fairness to these fans, the club has been pulling a bit of double speak by advocating its fiscally responsible approach, while at the same time suggesting that funds to acquire world-class players is available.  Well, which one is it?  What gives?  As if on cue, the Arsenal manager, after speaking from both sides of his mouth on this issue in the past (understandably due to negotiation constraints) came out and said that he “cannot afford to bring in big-name players” and that “football lives in an artificial world.”  Considering that the world is in the midst of a financial crisis that many compare to the Great Depression, truer words may not have been spoken.  Looking at the finances of the top four clubs in the Premiership in the 2007-08 season, an interesting picture begins to emerge.

The first thing that may strike you is the enormous amounts of debt that these clubs have amounted, particularly Chelsea and Manchester United.  The stories of massive spending binges for both clubs are well documented.  Chelsea’s billionaire Russian oligarch, I mean owner, Roman Abromovich, has hit the footballing world by storm.  Upon buying the club, he has invested over £700 M, all reportedly in the form of interest-free loans to the club.  Manchester United on the other hand, has been the victim (I use the word loosely) of an American-style corporate leveraged buy-out.  Malcolm Glazer & Co. borrowed immense sums of money to finance the purchase of the club, saddling United with an enormous £699 M debt burden.  Luckily for both clubs, they are able to finance the debt, at least for the time being. Questions have been raised as to how long they can afford to do so (especially in the case of Manchester United, since they have actual interest payments to service), but as the saying goes, “only time will tell”.  As long as United keep making the dosh, they can pay off the interest and keep the banks at bay.  As a matter of fact, United’s spending appears to have abated this year. Their only major move of the summer was the record sale of Cristiano Ronaldo for £80 M  to Real Madrid, which resulted in a modest reinvestment of approximately £20 M. Chelsea, on the other hand, don’t have a care in the world due to the vast wealth of Uncle Roman.  As long as he is in the mood to foot the bill, he can single handedly keep the party going.

AFC and Liverpool on the other hand, live a couple of stratospheres below their neighbors to the north in the Premiership table.  With the new stadium, Arsenal is able to play with the big boys a bit, however Arsenal’s situation is in stark contrast to the state of affairs at Anfield.  Think about this, Arsenal have a new stadium and a total debt load of £416 M (which is much lower than Chelsea’s and United’s debt), while Liverpool have an old stadium that needs replacing, a reduced revenue stream of £159 M to Arsenal’s £223 M, and a debt burden of £280 M.  With such a low revenue stream, Liverpool is unable to self-finance a stadium, and with such a high debt burden prior to building a stadium, it is virtually impossible for them to find financing to build one.  The recent purchase of Liverpool, much like the purchase of United, was debt-financed.  However Liverpool, unlike United, do not have the financial wherewithal to comfortably compete at the highest level.  After all, United has a much larger revenue stream, has a 70,000 plus capacity stadium, and is in better financial footing to obtain help from the finance markets, as their £500 M bond offering proves.

How then does one compete?

Luckily for Arsenal, the brain-trust was fiscally prudent and struck when the iron was hot a few year ago by figuring out the financing for Emirates Stadium.   Had they not made the decision to forgo the immediate return of instant gratification like many clubs that are saddled with massive amounts of debt with nothing to show for it, AFC would be faced with Liverpool’s problems, too much debt and not enough revenue to grow the club.

Although AFC’s plan has not born the fruits of a trophy yet, it has clearly put AFC on better financial footing for the future.  Remember Arsenal fans, Rome wasn’t built in a day.  Admire him or not, one cannot deny Arsene Wenger his due.  Since his time in London, the man has transformed the game of football and has had enormous success doing so. Only time will tell if he has lost his touch.