Editors note: This blog post appears courtesy of the blog Giles Grimandi’s Right Foot. We don’t do a lot of financial posts on YAMA and this one was so good we reached out to Andrew and he has kindly allowed us to republish it here. Thanks and enjoy.
So it’s Friday, again, and I’m sat in my company’s Canary Wharf offices, musing away. Fortunately I am less hung-over than when writing last week’s blog although the gym still beckons. For me, tomorrow, and for you, yesterday, our lads visit Fulham and, whilst I am going to be watching the game in the countryside, I can only envy those arriving in style down the Thames on the boat kindly arranged by the BSM team. Whilst most of you probably didn’t end up watching re-runs of Arsenal’s defeat on Goals on Sunday in luxury as I had predicted, I hope that last week’s loss only makes your Sunday hangover semi-bearable after yesterday’s demolition of The Cottagers.
There’s so many topics being discussed this week: the loss to Villa, the win at Fenerbahce, Chesny’s insistence on short-sleeved tops, the modicum of backlash against the AST and BSM from non-affiliated fans, that interview by Chris on ArsenalFanTV, a £40m reported bid for Benzema, Wenger’s new jacket and lofa combination, the rise of Aaron Ramsey, Ox’s injury, John Cross missing his podcast commitments…
But, that aside, it leaves us with the obvious: the huge wads of cash sat in a highly protected account somewhere in deep Switzerland with a note that reads: “Arsenal’s money: do not nick, smoke or spend.”
In finance, there are two terms that Investors largely use and, perhaps, commonly over-use: ‘added-value’ and ‘risk’.
Investors fascinate over the concepts of value (simply benefits-cost) and the ratio of risk above risk-free return (added-value). Given that Arsenal Holdings PLC is listed on the iCap Securities and Derivatives exchange with a market capitalisation of ~$1.49bn, institutional investors like Stan Kroenke are, of course, concerned by such ratios associated with Arsenal’s equity.
But it isn’t just shareholders and investors concerned with shareholder ‘value’. We too, as fans, are concerned by basic value for money, tickets aren’t cheap and who wants to pay £66 for a shirt with Park on the back? I’d rather spend £66 on handcrafted poo-sticks and watch them float from one side of Richmond Bridge to the other. All the while, sponsors and corporates that plough huge amounts of money into sponsoring kits, buying up billboard space and using boxes to impress their clients are likewise concerned with the added-value Arsenal can bring to their brand equity.
For me, this poses the question: Does investing in Arsenal still represent value for money?
From Ivan Gazidis’ perspective, in order of relevance the three most important stakeholders in Arsenal are: the shareholders (namely Stan), the sponsors and corproates and then, I’m afraid, the fans. As the CEO of Arsenal, his number 1 task is to ensure that the operating strategy of the business provides stakeholder value and, in-return, generates revenue and maintains the club’s Enterprise Value.
When investing in assets, be that company equity, company debt (bonds) etc, an investor will always want to forecast an expected level of Alpha. Alpha is simply the extra return an investor would generate by investing in an asset above the return a benchmark offers (usually risk-free). This, in theory, is added-value as the investor has actively managed his portfolio, assuming risk, to generate an active return.
As I published on Twitter this week, an investor who purchased Arsenal shares when they floated in 2001 can hardly complain at the active return level given that return on shares in Arsenal is 637% higher than what it would have earned an investor had they invested in a fund that passively tracks the FTSE 100. We know that some extremely wealthy men have further increased their net asset value by investing in Arsenal. Alisher Usmanov, alone, has made an approximate £65m return on the ~9,000 shares he bought off of David Dein. Bear in mind the Russian now owns 18,665 shares, and I don’t think it is unreasonable to assume he has generated more than £100m active return in his investment in Arsenal Football Club
Not bad eh?
With these sorts of returns over the past 13 years, and the value of the shares still anticipated to be trading at a market value at least 25% below their fair value, you’d probably ask yourself why do more hedge funds, asset managers and pension funds not invest in shares of Arsenal like they do in Man United? If you look at the top 5 investors In Arsenal you have Stan Kroenke, Alisher Usmanov, Evelyn Robin, Nicolas Hadjiannou and Polys Hadjioannou; 5 individual investors. It isn’t until you get down to the 10th largest investor, an American investment advisory firm – Nelson Roberts, which has interestingly ramped up on its ownership of shares in Arsenal and now owns approximately 19, worth £285,000 – that any institutional investor owns shares in Arsenal. Compare this with Manchester United and Borussia Dortmund in which 8 out of the top 10 investors (both Club’s individual top 5) are institutional asset managers and funds with financial service companies like Morgan Stanley, BlackRock and even Landsdowne, a hedge fund which bought shares when Arsenal originally floated, all have significant investments in the two Clubs.
So why do scores of highly educated, usually Oxbridge educated, financial boffs throw their company’s money at Dortmund and Man Utd, despite knowing of the huge returns available at Arsenal, whilst our Club is predominantly owned by billionaire megalomaniacs and fans?
The answer: Value, risk and reward.
Whilst funds want to obviously make more money for their clients than if they were to invest in the FTSE (or chosen benchmark) by assuming risk, there’s a limit. As I said last week, standard deviation in shares in Arsenal is above 5.5%. That means, with any one stock trade, Stan Kroenke can readily accept to lose $49,788,350 in his wealth because of the illiquidity (i.e. the liquidity risk) of the shares. The big problem for Stan Kroenke, and for Arsenal, however is that people in finance genuinely only tend to calculate Alpha over the last 12 months.
The last 12 months eh?
The last 12 months during which period, the American owner has lost just shy of £105m of his net asset value in Arsenal and the value of Arsenal football club has fallen by £155,542,500.
Stan’s lost £103,957,500 in Arsenal, just over 2% of his overall personal net asset value in the last 12 months, to be more precise. But, hey, who is counting?
Now, if Stan were to pile the same amount of money into, let’s stay 12 month LIBOR (the exchange rate at which the biggest banks in London lend to one another and therefore “risk-free”) he would have made a return of about £4.8m. But instead, he has lost nearly £100m more than what he could have earned? As Robbie, of @ArsenalFanTV, said to me “I aint no money man”, but, yet Robbie doesn’t have to be a money-man to know that simply isn’t good business.
So why is shareholder value dropping when equity analysts are clearly indicating the value of the share price should be going up, not down? Why is someone willing to sell a share now for £2,500 less than what they would have received 12 months ago and why is someone looking to buy demanding a 14.2% discount?
Don’t get Stan wrong, he’s a shrewd investor and a ruthless businessman. Worth $5bn and the 248th richest man in the World, he once famously bought the famous Screaming Eagle vineyard and then poured away 550 cases of fine wine (Napa Valley cabernet sauvignon), worth $3.3m because he didn’t feel it was up to standard.
Bendtner, you’ve been warned, my son.
There has been an excellent article published this week by Matt Scott, formerly of The Guardian, suggesting that the American is happy for Arsenal to maintain cash reserve assets high in order to bring down the overall gearing of his KSE empire. Gearing is a simple ratio of calculating assets divided by debt (leveraged bonds, for example). If you have a low gearing, such as Arsenal which has a debt to equity ratio of 0.79, it makes it cheaper to raise debt with investment banks. This, in simple terms, is just like how it is cheaper to borrow for a mortgage if you have a higher deposit, for example, as it is less risky for investors to buy your debt so they ask for less compensation.
The thing is, and if this is true, then there has to be a limit. There is always a limit. Stan must have ambitions of an extremely large capital project or leveraged buy-out of an asset if he’s willing to assume an annual equity asset loss of ~£105m just so that he can finance cheaper coupon payments on debt.
There is also a popular theory by Arsenal fans that Stan Kroenke wants to start taking dividend payments from Arsenal so is happy to see cash piles increase. We must remember, however, that dividends payable come from profit and not revenue. Given that Arsenal Holdings PLC reported profit of £29.6m last year, if we were to take a reasonable figure for a dividend payment, say 25% that means Stan Kroenke would have received a dividend of £4,945,420 (relative to his 66.83% ownership) – hardly worth losing the best part of £105m over, then?
So, leaving the theories behind, at what point does Stan Kroenke say enough is enough, I want my value back, because, frankly, he is not currently receiving it like he used to at Arsenal. Something, clearly, is not right here.
Brand Equity Value
And then, what do the sponsors think? What do the large international sell-side investment banks which pay through the nose for a box think? I’ll tell you what they think as I took the below picture on Saturday against Villa where you can see at least 40-50% of boxes in the sample photo are empty and the expensive Club level season ticket seats are only at about 65-75% capacity.
I also wonder what Alisher Usmanov, the world’s 34th richest man, with a value of $17.6bn thinks of it all?
As the parody video of Stan Kroenke singing Eminem’s ‘Stan’ to Arsene Wenger goes: I’m just like you, I don’t like losing money either, but sometimes you’ve got to the speculate to become the market leader.
Tim Payton, spokesman of the Arsenal Supporters Trust (AST), Tweeted an interesting stat the other day that he had heard the Club are losing roughly £5m in revenue on last year from the sale of boxes and Club level seats, alone. ALONE!
As I said last in last week’s blog, things that put bums on seats are World Class players, trophies and attractive football. The same applies to very rich bums in boxes and in the most expensive seats, too. The events teams at the huge international companies occupying boxes are given annual budgets to spend on corporate entertainment. Clients start to moan that they don’t particularly want to go to watch Arsenal or are becoming less likely to want to develop business relations in a box whilst watching Giroud and Theo upfront, with all due respects, than what they were when Fabregas was playing inch perfect balls to Van Persie, guess what? That budget gets re-allocated to tickets at Centre Court, the Royal Albert Hall and Stamford Bridge.
That’s just how it is.
These companies do not support Arsenal. They’re there to make profit and, if having a box at Arsenal no longer represents value, i.e. the cost outweighs the benefit, they’ll scrap it.
It is as simple as that.
And what of your Nikes and Fly Emirates?
As a certain famous podcaster now living in Poland, @LordHillwood, said to me, they’re of course going to be seeing Arsenal fans like Chris on Arsenal TV calling for management and boardroom changes worrying that their brands are being linked to a sports club on the down. And what do they do when they see this? They immediately phone a certain Portsmouth-supporting South African businessman who is the CEO of Arsenal and lobby him to ensure he protects their brand equity value.
I should, in the balance of fairness, point out that Arsenal’s most recent deals with Fly Emirates and Puma are, on paper, extremely well constructed by Ivan and Tom Fox, but we are yet to see what will happen to their value if Arsenal were to miss out on Champions League for a season, for example.
Value for Money
Last, and sometimes it feels like the least, we fans. Are we seeing value for money? £1,000+ season tickets, £7 hot dogs, £66 for a football shirt with a name on the back? Is that really value for money?
We, of course, pay a London premium, as 5 out of the 6 most expensive season tickets, are for London Clubs. The most expensive season ticket at Arsenal is £1,955 for 26 matches. According to City AM, this is £10 per game more than Chelsea, 50% more expensive than at all but 2 other league Clubs and more than triple the most expensive season ticket at 2 Premier League Clubs.
The most expensive season ticket at Arsenal is more than £1,000 more than the most expensive season ticket at Manchester United, the Champions! The Champions!
The plus side? Spurs’ most expensive season ticket works out even more expensive at a whopping £90.24 per match. Imagine how annoyed they’re going to be when Bale leaves, eh?
I guess this is where it boils down to you and whether you feel that you receive value. As I said, benefits – cost = value, but sometimes the benefits are not always monetary, especially with football. If you’re willing to pay £60 a week to cheer on the team you love, roar your heart out and lose yourself for 90 minutes, as I hope you did yesterday a Fulham, you perhaps feel you receive value for money.
As one Arsenal fan said on @ArsenalFanTV last week: “You get what you pay for in life, unless you’re an Arsenal fan.”
I can emphasie with him. We have an incredible sum of money in the bank, we have shareholders assuming large risk whilst losing asset value, boxes not being bought, fans storming Twitter calling for the manager’s head and yet, as a Club, we have spent all but nothing this Summer. Are Ivan, Chips, Ken, the Lord Harris of Peckham and Arsene giving value back to the people that gave such value to Arsenal?
As Chris said to Arsene and Ivan: “You better f**king shape up or get out, because you’re letting down the fans.” It isn’t just the fans you’re letting down Arsene and Ivan, but the sponsors and shareholders, too. And, if they go, so does your handsome pile of money in that salubrious Swiss account.
I can’t help but feel the introduction of two to three World Class players would put value back into the business for the three main stakeholders. My fingers are firmly crossed.
Anyway, you can get back to nursing your hangover now as I appreciate figures and stats aren’t always the best cure. Let’s hope the week ahead brings us some exciting transfer news, a comfortable win against Fenerbahce and a decent 3rd round in draw in the league cup that will present our younger lads with a challenge. Until next time, I’ve been @PR_WhoRu – agree with me, disagree with me? Feel free to let me know in the comments below. Keep it clean and don’t be mean.
*All figures quoted are either from Thomson Reuters, City AM, Bloomberg or are from my own proprietary equations.
NB: Figures do not account for time value of money and do not take into account the exchange rate for Sterling/Dollar.