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Separating Fact from Fiction In Stan Kroenke’s Takeover of Arsenal

Happy hump day Gooners. Did you know there are only 4 more sleeps until we get to watch our Arsenal kick a ball in anger? Probably, but you may have lost sight of that fact because all anyone seems to be focusing in on right now is the surprise news that Stan Kroenke has made an offer to purchase Alisher Usmanov’s Arsenal shares.

It has thrown Arsenal social media into a frenzy and it has turned every Tom, DT and Memz into an accountant. I want to go on the record as saying I stayed away from the accountant tone, I preferred being a sleuth and trying to figure out why Usmanov would sell now.

The fact is, that this changes everything for a lot of people. It solidifies the transition of Arsenal from a North London only club to what now amounts to a global conglomerate. And that’s where the emotion comes from it.

You saw many tweets, still even this morning, talking about times when all we cared about was the players on the pitch and no one knew who the CEO was. Now we’re all about the balance sheets, commercial deals, etc, and the players and performance on the pitch fall further down the line.

Stan’s move to single ownership effectively finalizes the inevitable of what was started the day we closed the doors on Highbury for good. It removes the last vestige of what made Arsenal unique. From the AGM to the Q&A with the CEO, these were things that set us aside as something different. It gave the supporters an actual voice. Whether you believe that voice was heard or not is not the case. Supporters want to have a voice and up until yesterday we had one.

That’s why I get the emotional visceral reactions and the anger that has come with it. For those, especially who’s life line to Arsenal may go back to their Grandfathers and beyond – its no longer just their club – if it’s their club at all anymore.

What it all means though no one truly knows. There have been wildly speculative tweets and articles written already that have taken the Chicken Little, sky is falling view, that this spells the end of Arsenal. That Stan intends to use Arsenal as merely an asset to strip mine and support his bigger love the Rams of Los Angeles in the cash cow NFL.

Frankly, that’s where they lose me. The simple fact is this – no one truly knows what this means for Arsenal. We’re in unchartered waters here and Stan staying true to his Silent moniker hasn’t laid out his vision – still.

Still, let’s try and work through this and see if we can separate fact from fiction and see if we can maybe identify what may really happen.

So, let’s look at the important questions of the day and some lesser ones and try and do it as dispassionately as possible:

Can Stan freely take money out of the club now?

Simply put, yes. Before he became the single owner of Arsenal, if wanted to take money out of Arsenal he would have to pay a dividend from the club up to KSE. However, before he would only get his 69% as the other share holders would be entitled to their portions of that dividend as well. Now, as single owner, he no longer needs to do that. He gets a full 100%

One thing to keep in mind though, sport has never been a true money-making venture for any of it is owners and those that get into it often talk of not getting anything out of it to enrich their pockets. In fact, if you look across KSE’s profile of US clubs the honest truth is that none of them have added much if anything at all to Stan’s savings account.

Additionally, it would be highly unlikely that any money taken out of the club would go unnoticed. The famous £3m service fee was found in Note 29, Related Party Transactions and any dividends paid would be seen in the Cash Flow Statement.

Does the move reduce transparency into Arsenal’s financial reporting?

Only slightly. KSE is a Delware (US state) incorporated company and yes, their reporting laws provide a lot of cover to US companies. However, Arsenal LLC which will become Arsenal Limited is still a UK-based company and as such must still adhere to UK financial laws.

That means that while the reporting will be slightly reduced, they will still have to file with Companies House, like every team currently has done. If you are a fan of Swiss Ramble’s writings and the detail he puts out. That comes from the reports the clubs are putting out now. As of right now that includes 18 privately held clubs and the 2 publicly traded clubs (Arsenal and MUFC.)

Some of what we could expect is that the club will likely not publish interim results and some of the color in the current report could be missing or diminished (e.g. strategic report, chairman’s report) or not provided at all.

Interestingly FSG, the owners of Liverpool privately hold that team and put some of that color into their reports. Arsenal could follow suit, but they don’t have to.

What are the Ramifications of the Bridge Loan he secured?

First you should know that Bridge Loans are part and parcel of any acquisition like this in the UK. When you make a play to takeover a UK company that transaction is governed by the UK Takeover Code.

A requirement of that code is the providing a Funds Certain Statement supported by a reputable investment house that is regulated by the financial conduct authority. Essentially, you are showing proof that you have funds to make this transaction.

To do that you need a bridge loan. The Bridge Loan is what allows a Funds Certain letter to be provided, And typically a Bridge Loan will have to be refinanced within 364 days of the deal either with permanent debt or own funds.

Could Stan stick Arsenal with Debt?

First, let’s clarify – we know that the Bridge Loan that KSE secured was not done so using Arsenal or any of Arsenal’s assets or cash flow. This is spelled out in section 10 of the 2.7 Statement (offer statement.)

If Stan were the evil prick that everyone makes him out to be yes, he could for all intents and purposes borrow against Arsenal as to secure more funds for any of his projects and one of the downsides of his sole ownership is, it wouldn’t have to be reported.

But keep this in mind, when you borrow against an asset, the bank wants to be able to cash flow coming out of the asset. So, it’s ability to produce is paramount to you being able to secure debt against it.

Let’s also remember, Stan’s fortune is his own and built on his real estate development – aka a US favorite – strip malls (not with strippers, well actually strippers could, oh never mind.) Real estate. Real estate is a lot easier to borrow against, it has a durable value and will always be there. A football club isn’t that durable, its value could be gone in an instant.

Borrowing against his real estate holdings is cheaper, easier and more efficient and isn’t likely to have any FSB consequences.  Borrowing against Arsenal will impact the club’s ability to perform.

Finally let’s remember, Stan and his Walton heir wife are worth a combined $15 billion. In all honesty, he doesn’t need to leverage Arsenal for funds.

What’s the Impact on the Pitch

Keeping in mind that in order to maintain the value of Arsenal as high as possible – why else would Stan want to buy it – it is paramount that the Arsenal compete. And therefore, he has an interest in insuring things don’t really change on that front.

I don’t think we’ll see much change in how Arsenal is run on this front and it will continue to live off its own means and the revenue it generates.

When he moved the Los Angeles Rams from St. Louis he did so to take advantage of the market and money that was there. The TV rights in LA alone are worth $2 billion. But he won’t see a lot of that if he has a crap product and all indications he is insuring that the value for the Rams stays high.

He has moved on from a stable, older coach to a younger one and he is investing in players for his NFL team in a way that is almost Manchester United-like.

Comparing that to Arsenal, he has already approved Ivan’s restructure of the front office and how the club will be run moving forward. He’s also sanctioned the leaving of the stability of Arsene Wenger and moving towards a younger manager more in touch with modern football. Sound familiar?

I don’t think we’ll see him throw insane cash at Arsenal. He might and there are rumors (more like hopes and dreams) that he will try and make a big splash in the market by signing someone like Dembele for positive press. I doubt it but you never know in this environment of change.

Long-term I don’t think we’ll see much change. For all the stated reasons. He needs Arsenal to be like a good Arsenal. Not one pilfered over and plundered for its riches.

So, What Does it All Mean?

As we’ve been saying all along what it all really means is that Arsenal as many, especially those who grow up around it in North London is forever gone. Now, aligned to the more modern way the game is played and viewed stands Arsenal Limited.

Arsenal Ltd will still provide us a club to go to and hopefully have a lovely day at. It may hold on to some of the trappings of its former self but the emotional connection will be gone and it will likely seem a hollow shell of itself at least to those whom know of its former times and look back on them with fondness.

Everything else, well, it’s just a big unknown and we’ll all react (or overreact depending on your view) to it as it occurs. The biggest regret about yesterday’s news is that it took away from the excitement many were feeling about the new start we’ll experience on Sunday when Unai Emery manages his first competitive match for Arsenal.

I’m done being an accountant or even a sleuth. I’ll leave that into other people’s capable hands. Like those I was fortunate enough to get permission to use information for this piece.

The information I used to answer the questions was taken primarily from @YankeeGunner’s interview of @GiantGunner for the Arsenal Vision Podcast. @GiantGunner is a M&A Specialist working in UK-based transactions. You can listen to the full interview and remainder of the podcast here.

I’d like to thank both Elliott and Matt for allowing me to use that interview to answer these questions.


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