Investors can learn a lot from examining the business of football -- particularly the perils of failing to control your costs by paying excessive salaries to mediocre players, and having overly optimistic business plans.
Football suffers from some very peculiar economics. At a time of record revenues and public interest, most premier league clubs manage to lose money, thanks to reckless spending on transfer fees, players' wages, excessively optimistic views on where they should finish in the table, and newly minted clubs pushing up salaries and transfer fees.
One club that stands out, in a financial sense, is Arsenal. Manchester United may have just knocked them off the top spot in the Premier League, but as a business, Arsenal leads the way. Unlike its main rivals, Arsenal actually makes a profit!
Run like a business
Arsenal Holdings' results for the year to May 2010 show a pre-tax operating profit of 57 million pounds, on a turnover of just less than 380 million pounds. That's a good result for any business, but nothing short of revolutionary for a football club!
Consider that over the same period, Manchester City lost 121 million pounds, on only 125 million pounds of sales, while paying 135 million pounds in wages!
Investors should know that some firms like to draw attention to their operating profits in order to divert attention from actual losses. Earlier this year, Manchester United trumpeted an operating profit of 101 million pounds; when you ignored the spin and looked at the accounts, this became a loss of 84 million pounds.
But after everything is included, Arsenal still made 56 million pounds before tax.
A property empire
A quick look at Arsenal's balance sheet shows 136 million pounds of net debt, most of which relates to the construction of the Emirates stadium. Tangible assets (property), in contrast, were valued at 425 million pounds. This is what I call "good debt" -- borrowings incurred to generate a valuable and productive asset, which is now worth more than the debt.
Arsenal has a fairly substantial property business, most of which relates to the redevelopment of its old stadium, Highbury, and the surrounding area. The income provided by the property business helps to support the football side, though I'd expect that this will fall dramatically once the remaining properties on the Highbury site have been sold.
Furthermore, Arsenal doesn't engage in reckless spending on wages and transfer fees, unlike many other clubs. Credit for this goes to the manager, Arsene Wenger, and his policy of developing players.
But as fans will tell you, financial success isn't what counts. They want success on the pitch, so Arsenal needs to start winning titles.
Arsenal's fiercest rivals, Tottenham Hotspur, have been getting the sort of praise this season that Arsenal used to get, in particular after their 3-1 demolition of Inter Milan, the current European champions, in the Champions League. It might help if the Gunners could emulate Spurs in this respect.
© 2010 UCLICK L.L.C.