'Emirates has taken revenue to a new level'

Arsenal Holdings plc today (Friday 19th September 2008) announced its annual financial results for the year ending 31st May 2008.

Arsenal Chairman Peter Hill-Wood gave this exclusive interview to Arsenal.com to discuss the results and also the arrival of Stan Kroenke on to the Arsenal Board.

Firstly, Mr Hill-Wood, as well as announcing the financial results for the year, we have also welcomed Stan Kroenke onto the Arsenal Board of Directors. Can you give us your thoughts?

We are delighted to welcome Stan to the Board of Arsenal. He fully supports the approach the Board has taken in setting the direction of the Club. Stan brings with him a wealth of experience through his direct involvement in sports clubs in the US and we expect to benefit from his commercial insights and knowledge."

Stan Kroenke joins the Board as a Non-Executive Director, but does this change the state of the current lockdown agreement?

“Stan is not a party to the lockdown agreement which was signed by the other directors of Arsenal in October 2007. That agreement stays as before. All the other Board members have agreed not to dispose of any of their interests in the Club before April 2009, other than to certain permitted persons such as close family.

“After that date, for the remainder of the term of the agreement, they can only sell their shares to another person if the other parties to the agreement do not wish to buy them.

“The agreement lasts until 18 October 2012, although it can be terminated early by the parties on its third anniversary, which is 18th October 2010.”

Moving on to the financial results, what are your overall thoughts on the figures the Club has announced today?

“This Club is ambitious for success and I believe that the strong financial position which the Group has established, as confirmed by the results for the year, provides the best possible platform from which to deliver that success for the long-term.

“We are committed to operating the Club as a business which is financially self-sustaining. This is clearly demonstrated having achieved our second highest ever pre-tax profit of £36.7m.

“Over the last two seasons Emirates Stadium has taken our football revenues to a new level, but we cannot be complacent. Accordingly, we recognise the need to further develop the business commercially on a worldwide basis.

“We have reported significant growth in turnover to £223m reflecting a growth in our core football business. There are two main reasons for this. Firstly, new Premier League domestic and overseas TV deals have led to a rise in broadcasting income of £24.1m to £68.4m, and secondly, matchday income was £94.6m and remained the most important component of the Group’s income.”

These are very impressive figures, is this vindication of building Emirates Stadium in the first place?

“We moved to Emirates Stadium in order to compete with top European sides, not only on a financial footing but from a footballing perspective. The healthy financial returns from moving to the Emirates are the fruits of our labour so far, but just as important is the team’s performances at our new home.

“Given that we have only lost one match in 58 competitive matches since moving here in 2006, Emirates is certainly becoming the fortress that Highbury once was.”

Turnover is up and operational profit is up sharply. What are the factors behind that?

“The most significant factor is the new TV deal which has increased income by just over £24m. In addition, the inaugural Emirates Cup which we hosted in 2007 brought in £4m.”

Will this mean the manager has more money for transfers in January?

“In answer to your question, yes funds will always be made available to Arsène to improve the quality of the squad and we have consistently stated that adequate funds are available to him if needed.

“We maintain a constant dialogue with Arsène and whilst there is not a set figure in place we are always able to buy additional players should he choose to buy. We have every confidence in Arsène and trust in his judgment, so he decides whether he needs to strengthen his squad.

“The accounts which we have released today show that the Group had cash balances of some £93 million at 31st May 2008. This is clearly a very healthy position from which to support the manager’s spending plans. However, it must be recognised that £31.5 million of this cash is held as security for the debt service of our Bonds and its use is therefore restricted, also there is a strong degree of seasonality to our cash flow with season ticket renewals during May having a positive impact on the year- end cash figure.”

Do you expect to see a greater investment in the side given that the Club has not won a trophy since 2005?

“Just to re-iterate, we have every confidence in Arsène and trust his judgment. It is not about spending a specific amount of money, it is about investing in the right people. It’s about having the right players with the right quality and the right spirit. People easily forget that we were not too far off winning some silverware last season. The margins are so small.

“We may have a young squad but they are talented and have one more year’s experience. They are managed exceptionally well by Arsène and we have every confidence that they will have a successful season.

“We strongly believe that to compete at the highest levels of professional football the Club has to have a viable business that can pay its own way. We strongly believe this is the only way in the long-term.”

Is it particularly important that Matchday revenue still far outweighs broadcast revenue?

“Both are important revenue streams. The difference is that matchday revenue is a direct result of our active fanbase coming to watch the team play.

“By moving to Emirates Stadium it has enabled us to reduce our season ticket waiting list, thus bringing our exciting brand of football to a wider audience as well as increase our matchday revenue significantly. It is part of our overall self-sustainment strategy.”

Is self-sustainability at the heart of your financial planning?

“We have always followed a policy of re-investing profits back into the development of the team. As a Board we believe this is the best way of delivering continuing on-field success and hence future growth of the Club’s support and revenues over the long-term and we intend to continue with this policy.”

The overall debt of the Group has increased and is now at a peak level. Is this an area of concern?

“This is not an area of concern and in order to appreciate why, one needs to look at and understand the two main components of the Group’s debt finance which operate independently and are ring-fenced from each other.

“Firstly, a bank loan of £133 million, which has been used to fund the construction and redevelopment works at Highbury Square and drawings on this loan have increased by some £70 million over the last year in line with the progression of the works on the site.

“Secondly, £250 million of bonds which represent the borrowings we took on for the construction of Emirates Stadium.”

How is the Highbury Square project progressing? Is repayment of the Highbury bank loan dependent on sales of the apartments?

“The construction work is right on schedule and a large number of apartments are scheduled to be completed and released for sale in phases over the 2008/09 financial year.

“The first wave of completed apartments, which are 65 units in the South Stand, were released at the end of July and our old home already has its first new owner in residence. Legal completions from this first phase are ongoing and so far have generated sales proceeds of £18.7 million.

“As I mentioned earlier, the Highbury Square bank loan is ring-fenced from and has no recourse to the football side of the Group’s business, so it will be repaid entirely from sales proceeds from the development.

“As proceeds come in on legal completion of sales, they will be used firstly in funding the remaining balance of the construction costs at the site and then in repayment of the bank loan.”

So with a large number of sales completions scheduled to occur you would expect to see a reduction in the Highbury Square bank loan over the next year?

“Yes, absolutely.”

Can we go back to the debt in the football side of the business – you mentioned the £250 million of bonds used to fund the Emirates Stadium construction?

“Yes, that’s correct, we have £250 million of bonds in issue and as this is the financing used for the construction of Emirates Stadium, it can be looked at in a similar way to a mortgage.

“It is long-term debt which is repayable over 23 years and which is all at a fixed rate of interest of 5.3%.

“The repayments on the bonds together with the interest costs amount to £20 million per annum and this figure needs to be considered in the context of the significantly increased levels of income and profits that we are able to generate operating from Emirates Stadium as compared to Highbury.

“The football club generated an operating profit figure (EBITDA*) of approximately £60 million for the 2007/08 financial year, so you can see that the £20 million annual debt service costs are very comfortably covered.”

How is the search for a new MD progressing?

“We have been interviewing a number of candidates and an announcement will be made in due course.”

Finally Mr Hill-Wood, to summarise, how do you see the future for the Club?

“I, like my fellow directors believe that stability and self-sustainability are the key components to this Club’s future success. It must be stressed that the Board is still very much committed to the current ownership structure. We have always tried to go about things in the right way and in the best interests of the Club we all support. As I said at the start of this interview this Club is ambitious for success.”

*EBITDA = Earnings before Interest, Tax, Depreciation and Amortisation.

[Friday, September 19, 2008]

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