"The Arsenal takeover: There is a price for everything'

Although we do not think that Arsenal needs a huge investment in the team there are a lot of you out there that have been complaining that they are falling behind the other big clubs. What Arsenal certainly needs to do however is to run the club’s business efficiently so that the servicing of the loans is catered for. And it is generally accepted that the Americans know very well how to do run sports businesses. Especially with regard to marketing the brand in the home and more importantly the international markets.

As David Dein once said in a TV interview "after seeing how the Americans operated their sport, I felt we were light years behind" which probably accounts for his alleged support of Kronke’s takeover bid for Arsenal.

However if the takeover is highly leveraged (i.e a large proportion of the buying consideration is financed from borrowings rather than from own capital) then there is the danger that the club’s revenues, through the issue of dividends, will be used to pay the loan installments and starve the team of the investment in players over the coming years.

The prospective investor will argue of course that due to his expertise and know how, revenues and profits will be increased to such an extend so as to service the club’s own borrowings, invest in the team and leave enough for dividend distribution to service the personal loans raised for the purchase of the shares.

But can the club’s turnover increase so dramatically so that it would create so much available cash to service the existing debt for the stadium of about 260m as well as an additional (personal)debt of 450m?

The above figures have assumed that all 62.219 shares are bought at about 7.000 each and are financed from borrowings rather than own capital. But it will all depend, of course, on the structure of the business plan and the proportion of the debt financed from borrowings.

Remember Arsenal do not need a new stadium as some other premiership clubs. So they do not necessarily need someone to inject capital for this purpose alone. They might however need capital to ease the financial burden related to the stadium.

Although it may not appear possible at this juncture, the current Board may eventually decide to listen to Kroenke or even to other suitors as to what they have to say. There is a price for everything! And from the current shareholders’ point of view, the strictly business decision as to what price to sell their shares will have to take into account all the additional revenues that are expected to come on stream irrespective of what kroenke’s contribution to boosting revenues will be. And by this we mean the following:

- the additional 15m that will become available for each premiership club next year from the football league as part of the renegotiation of the overseas TV rights
- the 33m now frozen, as part of the Banks’ requirements, that will be released in two years time
- the profit that will be made from the Highbury redevelopment in a few years time, some say about 90m
- and most important of all, the additional net cash that is now coming on stream from the Emirates revenues especially when the financial burden of the borrowings for the creation of the stadium begins to ease.

All the above can be factored in the asking price. The methodology is as simple as that (though more difficult to estimate in money terms as it involves some uncertainty). Then it’s a matter of negotiation with the prospective buyer. Theoretically in the strictly business sense, if the shareholders get the price they value the club at then they should sell. The money of course will go into their pockets and not the club.

On the other hand the Board can take the supporters point of view and act unselfishly if you like. It can negotiate a deal with Kroenke, or any other aspiring suitor, where the takeover financing scheme and business plan for increasing revenues and profits takes into account the sensitive issue of using the cash for paying off personal debt.

They could insist that the company will not be de listed i.e made private by the investor buying all the shares himself (Man Utd was de listed after the takeover). They could sell only a proportion of their shares (so as to pass control on) but keep a seat on the Board. This will have the effect of reducing the amount of money the investor will have to borrow to buy the shares. Dein’s shares for example can stay with him if he joins Kroenke in the management of the club.

They could negotiate for an additional capital injection from the new investor in order to pay off part of the club’s debt and ease the financing burden. Now that would do very nicely!

They could agree a certain minimum amount of cash be made available for investment in the team every year. Even a dividend policy could be jointly agreed beforehand to allay any fears of cash strapping.

It could be a combination of any or all of the above or indeed a lot more other conditions. The more conditions demanded of course the more their bargaining position will be compromised and the more the selling price will be affected. Or indeed the investor may even be put off.

As we have written in other postings on the issue we are not necessarily against foreign or new ownership of the club. 95% of the coaching and playing staff are not British and it would be hypocritical to refuse selling on grounds of citizenship. But it has to be done correctly and with the future of the football team and the club at heart.