companies

Arsenal Holdings

EPIC: AFC
Mid Price: £10,000
Spread: £9,800 – £10,200
Total no. of shares: 62,219
Market Cap: £622.19 million
12 month range: £6,700 – £10,000
Website: www.arsenal.com
Sector: Leisure entertainment & hotels

Background

Arsenal Holdings is the holding company for Premier League football club Arsenal. Founded in 1886 the North London club is one of the most successful in the English league, having remained in the top division ever since the expansion of the first division after the First World War. The club has won 13 first division and Premier League titles, along with 10 FA Cups and has qualified for the UEFA Champions League for 12 consecutive seasons since 1998/1999.

Football was the main component of the business for many years but following a move down the road from old playing ground Highbury to the Emirates stadium in 2006, property development has also contributed to the financials. Highbury has been developed into a number of residential units along with commercial space, the last few of which are currently being sold.

Financials

In the six months to 30th November 2009 the company posted a pre-tax profit of £35.2 million, up 44% as the group enjoyed increased contributions from both the football and property businesses. Player trading contributed a net £20.8 million to profits. The underlying operating profit was £10.16 million.

On the football side of things revenues grew by 2% to £100.2 million, and there was a £25.8 million pre-tax profit contribution, up by 31%. While match day revenues slipped by 7% to £41.4 million this was due to one fewer home match being played against the first half of the 2009 financial year. Retail and commercial revenues slipped due to the recession but there were higher contributions from broadcasting and Champion’s League related income.

On the property side, the sale of 261 apartments at the Highbury site, known as Highbury Square, provided revenues of £96.6 million, with all proceeds being used to pay back bank debt. Following the period end a total of 524 units out of 655 had been sold at Highbury Square, contributing a total of £217 million.

Net debt at the period end was £203.6 million, down significantly on the £332.8 million just six months earlier. This has been further reduced since the period end with a loan taken out for the development of the Highbury Square site having been reduced from £35.7 million to £12.9 million. The loan is expected to be fully paid off by summer 2010. Net assets were £223.56 million at the period end.

In the 2009 Deloitte Football Money League, Arsenal was ranked sixth, having been rated as the third most valuable football team in the world in a 2008 survey by Forbes magazine.

Ownership

Arsenal has for some time been the subject of rumours of a bid by US sports mogul Stan Kroenke, who has been moving ever-closer to owning 30% of all the group’s shares. Once he reaches this point, according to takeover rules, he must bid for all of the shares in issue. By the end of March Kroenke was only nine shares short of the required objective, owning a 29.9% stake.

Other major shareholders include Uzbeki billionaire Alisher Uzmanov, who owns a 26% stake through his vehicle Red & White Holdings, which was purchased from former vice-chairman David Dein in August 2007. Other directors with significant holdings are diamond dealer Danny Fiszman, who holds 16.1% and former director Lady Nina Bracewell-Smith who has 15.9%.

On the pitch

As of 7th April 2010, Arsenal are currently in third place in the 2009-10 Premier League with 71 points. The club has been written off several times over the course of the season, only to bounce back into title contention more than once. There are five games to go for the club to catch up with leaders Chelsea, who have 74 points. The club is around 5/1 with the bookies to win the league. Importantly, given the club’s current league position, they look almost certain to grab a Champion’s League spot for next season and to enjoy the associated riches. In this season’s Champions’ League, Arsenal were knocked out in the quarter finals, losing 6-3 on aggregate to Spanish giants Barcelona.

Investment recommendation

There is no doubt that Arsenal is one of the more financially successful UK football clubs. Given a number of scandals in recent times, which have seen several clubs going into administration, the firm is unusual in that it is very well run and actually makes a profit from its operations – despite having a player wage bill of around £100 million a year. The club has a loyal fan base and relatively safe income from league games. However, income from the money spinning Champion’s League is prone to performance on the pitch to a larger extent.

Overall, considering the uncertainty as to Kroenke’s intentions, high capex requirements of bigger clubs in search of trophies (i.e. on players), and the massive £10,000 a share price, we rate the shares as “for fans and billionaires only.”