Arsènal

How does an organisation with a turnover of £91 million, posting pre-tax losses of more than £22 million, raise £357 million? Answer: with three men – Danny Fiszman, Ken Friar and Keith Edelman – working like dogs, putting in some very long days and nights, to convince a group of banks to share the risk. When tools were downed and the Ashburton Grove site closed in 2003, Danny Fiszman (as he later revealed to a group of concerned fans) would wake up in the mornings with his bedsheets soaked in sweat. And if in 2008 chairman Peter Hill-Wood admitted “If we had our time again we would not have been so ambitious,” (implying that he felt the club could have spent less extrava gantly on fixtures and fittings), how low must everyone have felt in the dark ages of the cash-flow crisis of five years before? Showing remarkable fortitude, for the oppressed trio it was back to the drawing board to try to negotiate the obstacles that had halted their plans.

At the time, Leeds United were giving Premier League clubs a bad name as they vaingloriously chased the dream of becoming a European superpower. The heady taste of a run to a Champions League semi-final in 2001was so coercive that they went on a spending spree on players’ wages and transfers which eventually took them out of the Premiership and into administration. Without their own continued Champions League involvement Arsenal might have been tempted to go down the same road, putting themselves even further in hock whilst attempting to build a new home. “Many banks wouldn’t look at funding because Leeds had just got into financial trouble,” Edelman confirmed. “The banking market wasn’t very excited at the prospect of building a new stadium.”

At least, though, the club were able to raise some funds on their own. In 2000, a new share issue brought media group Granada (now ITV) into the fold with a 9.99% stake and as equal partners in Arsenal Broadband, a joint venture formed to exploit new media rights. In return, the club received £77 million in two stages: £47 million when the deal was struck, and a further £30 million due when planning approval for the new stadium was granted. “Organisationally, we’ve moved from a club to a business,” Edelman later observed, an unwitting indictment on the ancien régime when Dein was pulling the strings. “When I joined in 2000, we had no money at all. Arsenal had put in over £150 million of equity [into the new stadium budget], so we had to do some very large transactions. The Granada deal was the cornerstone [facilitating other long-term agreements].” True, but did the club have to cede so much decision-making to another company who now controlled a large measure of their broadcasting and merchandising rights?

In 2004, a kit deal worth £55 million over seven years was struck with Nike. Crucially, the entire amount was paid upfront. Two years earlier, Nike had handed over five times as much for a 13-year agreement with Manchester United. Further, the existing shirt sponsorship deal with mobile phone operator O2 was markedly inferior to the sums both Manchester United and Chelsea received from their sponsors. In the intervening period, the football industry had not only expanded substantially, but Arsenal had shown that they were capable of matching United on the field. Yet the need for a cash injection not only forced them to sell themselves short, they undermined the long-term value of their business and handed an immediate significant competitive advantage to their chief rivals. Unlike Arsenal, Manchester United were able to invest their Nike income on the team.

Some time later Keith Edelman reflected, “We started to change our culture four to five years ago, to make people think forward and with a bit more entrepreneurialism. We wanted them to think more commercially, and be more customer-focused.” A laudible sentiment, but there was still some way to go before the club could give Procter & Gamble a run for their money. To rub salt into their self-inflicted wounds, just a few miles away a serious contender had emerged to threaten the North/South duopoly.

With Chelsea in dire financial straits, in July 2003 the club’s owner Ken Bates had sold out lock, stock and empty barrel to Russian billionaire Roman Abramovich. At great expense, Stamford Bridge had been metamorphosed into Chelsea Village, with a hotel and residential apartments as part of the development. Anticipating new revenue streams, money was spent in the transfer market and on wages, bringing the club success for the first time since Osgood and company were kings of the King’s Road in the 1970s, but also taking it well into the red.

Arsenal had two pivotal fixtures against Chelsea in 2004. In February, they defeated them 2–1 in the league at Stamford Bridge. As their opponents that day eventually finished as runners-up to them, it was a vital result. However, in April at Highbury, the men Abramovich’s fortune had assembled turned the tables in the Champions League. There had always been rich men in football but no one had ever spent so much money so quickly and to such effect as Roman Abramovich. It was a financial blue tidal wave that the Arsenal board could not have foreseen as they made their bid to keep up with Manchester United. How could anyone compete with a business model, or to be more accurate the lack of one, which allows trading losses of tens of millions of pounds on an annual basis? After the belle époque of the Invincibles, Arsenal quickly found the task beyond them. Only by also throwing money around did once profitable Manchester United, now debt-ridden as consequence of the Glazer takeover, manage to eventually prevent the title going to the nouveau riche of West London for a third consecutive occasion in 2007.

At Highbury on the other hand, so much depended on one man to keep producing the goods. He was only an employee and there was no guarantee that he would stay around indefinitely. The contract Arsène Wenger signed in 2001 only ran until the end of the 2004/05 season. When renewal time came around in the autumn of 2004 he was probably the hottest managerial property in world football and could have named his price at any of several choice destinations if he had decided to depart the following summer. “We said we would like him to extend his contract with us till we got to the stadium,” said Peter Hill-Wood. “Of course we would like him to stay longer. We made no secret of the fact that he was seen by everybody as very important to the development of the new stadium.” It was probably no coincidence that Arsène Wenger signed his contract in 2001 shortly after planning permission for the new home was granted. And it was signed in the full knowledge that the days of big spending were over, at least in the short term, unless he could fund purchases by sales, a procedure that had served him well up to that point.

Fortunately Wenger himself, all too aware of how the hardship of Highbury was adversely affecting his plans, was as keen as anyone to move to a bigger place. “The heart wants to stay at Highbury,” he admitted, “but the brain wants to go somewhere else.” The board may have felt confident in his loyalty, but what if results took a serious downturn and eventually his position became untenable? Worse, what if ill health struck? It was a huge leap of faith, but one that appeared to pay immediate dividends. Who is to say that the euphoria enveloping the club as Wenger’s wonders were posting their unbeaten run did not play a part in convincing the sceptics that maybe Arsenal were an atypical business in a fickle industry and worth a calculated flier by the banks?

In February 2004, the Premiership pacesetters proudly announced that they had borrowed £260 million from a consortium of banks (registered in Scotland, Ireland, Portugal, Germany and Belgium, their multinational grouping reflecting the cosmopolitan make-up of the club). McAlpine got back to work with the objective of ensuring their task would be completed by 2006. “The important thing about this deal,” Managing Director Keith Edelman explained, “is that the risk of filling the stadium has been taken by the banks, not by Arsenal Football Club. The stadium is owned by Ashburton Properties Ltd and the banks are taking the risk around that, so if the stadium does not fill out it is down to the stadium company and not Arsenal. However, I don’t think anyone would go into this deal thinking that is a possibility.” “The risk is taken by the stadium company,” Peter Hill-Wood added, “so that if something went wrong the bank would end up owning the land [but not the football club]. But it is not going to go wrong.”

The loan was structured for repayments to be completed by 2018, with millions shelled out in interest in the meantime. Hill-Wood was sanguine despite the financial commitment. “It’s OK to get into debt to build a new stadium if you think that the financial models you’ve worked on give you the opportunity to repay those debts over a given period,” he asserted. “We’ve worked it out and the banks have agreed with the financial model that we will be able to repay the loan over the long term.”

The board had by a process of osmosis become property experts, an unintended vocation described as “much more profitable than running a football club” by Peter Hill-Wood, not entirely tongue in cheek. “There’s a lot more residential potential that we can develop, including of course the existing stadium [Highbury Square] which will be turned into flats”. There would be 700 apartments (the pitch would be transformed into a communal garden for the estate) at a starting price of £250,000-plus for a one-bedroom flat. Anticipating the potential profit, the board decided they would control the development themselves, rather than sell the area with planning permission as they would eventually do with parcels of land they owned on the other two sites that were part of the regeneration. So it was that Arsenal Holdings plc’s “principal activities” were described as “professional football club and property development”. The board’s seamless transition into property experts begged the question of why they couldn’t learn more about how to maximise revenue from their core business, such as the naming rights for the new stadium.

With work back on course, in 2004 the temptation to accept an offer from Emirates Airline proved irresistible: a sum of £100 million was initially announced (later revised down to £90 million) for the stadium naming rights for 15 years and the shirt sponsorship for eight years from 2006. However, the new stadium already had an identity before Emirates arrived on the scene. The club themselves had referred to their new home as Ashburton Grove, the name of a street ultimately removed from the map due to the changes in the landscape forced by the council’s compulsory purchase orders on the club’s behalf. Once it was realised that the use of Ashburton Grove might actually threaten to undermine the value of the stadium’s naming rights they had sold, the club abruptly refrained from any mention of it in their public pronouncements. Yet the cat was already out of the bag, and there were many purists who felt that, after years of playing at Highbury, ‘the home of football’ as the sign above the North Bank gates in Gillespie Road proclaimed, Arsenal had sold their soul. Further, they objected to having to call their new home after an airline and continued using Ashburton Grove, some ultimately shortening it to either Ashburton or the Grove when talking about the place. The Gooner fanzine, the club’s best-selling independent supporters’ magazine, operated a policy of not referring to the stadium by what they described as ‘the E word’. “Clearly we fans were correct about the stadium name,” said season-ticket holder Brian Dawes, who signs off his emails with the inscription ‘One life, one game, one team, three doubles, an unbeaten season and 1,000+ games at Highbury’. “One would suspect the club will be begging us to lead the way when it comes round to renaming the stadium in 2021. We had to plead for the club insignia to go up on the outside, never mind the inside, and Edelman’s excuse that the word ‘Arsenal’ was not picked out in the seats because it would have been unfair to the sponsors still pisses me off.” The fans were fighting a losing battle, however, as all and sundry in the mainstream media adopted the sponsor’s nomenclature as soon as the deal was done.

In David Dein’s view, the Arsenal supporters’ reluctance to accept the fait accompli was a misplaced reaction. Experienced in the American ways of sports marketing, he is at pains to point out that naming rights are the norm. But what prevails in the States is the concept of ‘league think’. There the leagues created the teams, unlike in Europe where the teams created the leagues. In the USA, the drivers, the big brands, are the NFL, the NBA, MLB and the NHL. The teams are secondary. In fact they are not clubs at all but franchises with the facility to move from one part of the country to another, thousands of miles away at the drop of a financial incentive to the owner. Leagues even create franchises from scratch and sell them to the highest bidder. However important and wealthy the Premier League believes it is, what matters in England is ‘club think’. Arsenal, Manchester United and Liverpool will always be more important entities than the league they happen to play in and as such they must work to protect their core business values, namely football. In that sense, selling off naming rights is equivalent to selling a crown jewel to another party with no football connections and makes no sense at all. Most fans would have preferred to see no sponsorship involved. Undoubtedly they felt they were better custodians of the club’s heritage and tradition than the board and therefore possibly even better businessmen too.

The stadium represented a fundamental component of the physical and emotional attributes that went together to make up, in marketing parlance, the Arsenal brand. Brands build business. And they are endemic in football: from Arsenal to Aston Villa to Accrington Stanley, there are international brands, national brands and local brands. On every level they are the purest and most powerful form of consumer loyalty because a football fan is different from a customer. Of course customers have strong preferences for a particular product or service but it doesn’t preclude for example a Sainsbury’s shopper using Tesco to take advantage of the week’s special offers. Similarly, a good value-for-money offer might well persuade a staunch user of a particular product to switch sides at least for a trial run. The lower the price, the more likely the switch, football excepted. A customer can and will exercise choice, a football fan can’t. He or she is stuck with their club for life. For a true fan not a day passes without thinking of the object of their affection, its past, present and future. At times fans may hate the board and hurl abuse at the team but there is an umbilical cord that joins them to the club for life. And an integral part of the club is its ground.

As a precious asset, the optimum value to be derived from a stadium goes beyond its role in producing match day income. Would Marks & Spencer allow British Airways to advertise on its shop facia and encroach on its brand values? And what about the sponsor’s own and sometimes extraneous values that they bring with them? Over the years, Arsenal to their credit rejected substantial inducements from gaming and alcohol companies to put their names on the shirts. But Emirates had theirs on Chelsea’s as recently as 2005. Within a year ‘Fly Emirates’ had gone out of the blue and into the red. At least it is a highly rated worldwide airline. Further, it offers tie-ups with in-flight entertainment and in its business stronghold of Dubai, an affluent following with the potential to increase merchandising opportunities for its new partner.

Arsène Wenger once stated that he would make Arsenal a bigger club than Manchester United. It is arguable that even if they become more habitual winners of the Premier League than Alex Ferguson’s team, because of the omnipotence of the Manchester United brand Arsenal are unlikely ever to overtake them. Whilst Arsenal look like tenants in their own new home – huge Emirates logos and slogans in Arabic fighting with the Arsenal paraphernalia for attention – United can proudly claim that Old Trafford is the ‘theatre of dreams’ and as such contributes a pure and powerful message to the United experience.

Of course it could be argued that when you are running a business the extra income generated by the selling of your naming rights could be used in the way the fans want most: to improve the quality of the team and the chances of success on the pitch. What could Arsène Wenger do with an extra £42 million in his transfer war chest? If only! But the Emirates payments for the ground’s name will be used to reduce Arsenal’s swingeing debt, or rather the interest on it. However, if Arsenal had not been so ambitious they would not have built such a magnificent stadium. They could still have had a 60,000-capacity home without incurring the crippling costs, capping the manager’s transfer funds and possibly inhibiting their future through the naming rights deal restricting the commercial potential of their brand.

Alternatively a compromise might have been to include ‘Highbury’ in the new stadium’s name. After all, Highbury was not the official name of the old place (whose address was The Arsenal Stadium, Avenell Road, N5) and this would strengthen the links with a glorious history. Thus any sponsor who joined the party would have had to accept their role as a junior partner, gaining a prefix rather than the name itself: ‘The Emirates Highbury Stadium’ would perhaps bring in less cash but would certainly be a brand attribute with greater vigour and integrity. The Oval cricket ground used to be the Foster’s Oval. It is now the Brit Oval (the sponsor being Brit Insurance) but it is still The Oval and is referred to as such by Surrey members and other cricket fans alike. To use a football metaphor, form is temporary but class is permanent: sponsors may come and go – Emirates airlines are only signed up for 15 years – but Highbury could have been for ever.

To have such an asset as Highbury – the brand not the stadium – and willingly discard it indicates just how important the need to secure the loan was. Either that or even someone like Ken Friar, who started as a post boy and ended up 40 years later as managing director steeped in the history and tradition of his place of work, did not fully appreciate what the club might be foregoing. It is therefore ironic that Friar, even after the Emirates had opened its doors, is fond of recalling that “Highbury was always known as the home of football.” Friar explained that this status bestowed on Highbury by the club itself coloured the club’s attitude and behaviour. “We believed that we were all one big family and as such we treated our opponents as honoured guests and welcomed them into our home. We even used to go so far as to paint flowers in our opponents’ colours if we couldn’t actually buy them, in order to welcome them into the boardroom.” It was actions like this that set the club apart from their peers. ‘Arsenal are alright’ is the general view of directors at other Premier League clubs, a sharp contrast to the widely held view of some of their London rivals. The pre-Abramovich Chelsea was dismissed by a northern club as “fur coat and no knickers”, while Tottenham were warned by one southern club that “they would not be pushed around by a bunch of north London yobbos”. Unfortunately, though, at the modern Arsenal some of the tradition and standards have seemingly been left behind, to the dismay of many.

Emirates paid £42 million for 15 years’ worth of naming rights, equating to £2.8 million a year. Sponsorship of the shirts accounted for the remaining £48 million. In securing the £260 million loan, the board had to guarantee the banks that they would achieve an income of £2.5 million per annum for these rights. Actually achieving just an extra £300,000 on top of that figure exposed the limit of their ambitions. To sell part of your soul is bad enough, but to a company totally unrelated to your industry, history and tradition compounds the error. And then to cap it all, failing to get value for money could leave the board open to the charge that they lack marketing expertise. Moreover, £48 million for eight years of shirt sponsorship compares poorly with the sum Manchester United obtained from American insurance group AIG in 2006: £56 million over four years leaving Arsenal trailing in their wake to the tune of £8 million a season. And the difference will bite harder with each passing year (compared to the deals of other top clubs, the cost of signing a long-term contract might eventually be as much as £10 million per annum) until 2015 when Arsenal will finally be able to strike a fresh arrangement. By that time United will have enjoyed a further five years of even greater revenues on the assumption that their price goes up once AIG have had their turn adorning the chests of Wayne Rooney and company. Of course there is an irrefutable argument that United have many more supporters, but Ajax Amsterdam are getting more money in 2008/09 from their shirt deal than Arsenal with no guarantee that their sponsor AEGON, a pensions and life assurance company, will get Champions League exposure or very much television coverage outside the club’s native Holland. Not to mention Chelsea, Tottenham and Liverpool, all of whom receive more money per year from the companies whose names are on their shirts.

Managing Director Keith Edelman’s explanation for signing the Emirates and Nike deals was simply that “the money was an important revenue stream for us to be able to plug into our financial model, and it will assist us in refinancing the current debt we’ve got.” He admitted, “We are taking on a large financial debt but the extra revenue we are generating from the stadium will more than cover that outlay. It is improper for football clubs to take on debt to run their businesses. But we are taking on a debt to build a new fixed asset. If you are getting into debt to do that then it is perfectly OK but if you are getting into debt to buy players and pay wages then it is not OK” (unless of course you are Roman Abramovich). But the debt didn’t stop with the stadium. Another £125 million had to be borrowed to fund property developments, chiefly Highbury Square, which unlike the stadium would not generate any revenue till 2009 when, if all goes to plan, the club envisage they may net £100 million profit. Chairman Peter Hill-Wood admitted, “The gamble we are taking is that Arsène continues to work the miracles that he’s worked for the past seven years or so. The team has got to try and get into the Champions League. We budget for that.”

Arsenal’s was a business plan involving hundreds of millions of pounds reliant on the miracles of a middle-aged man, contractually committed to the club for a mere 15 further months. And the primary miracle required was annual qualification for the UEFA’s blue riband competition on comparatively modest expenditure on player transfers for a leading Premier League outfit. Alex Ferguson, on the other hand, had no such restrictions. But in another way the two rivals shared the same burden. To gain possession of United, the Glazers took the most profitable football club in the world and plunged it into debt. And the operation can only be sustained by continued success on the field. Arsenal had gone into debt to secure its future, United as a consequence of a change of ownership. The long-term advantage of Arsenal’s position is already apparent as the stadium has enabled it to challenge United in terms of net assets. However, the anticipated enormous growth in Arsenal’s matchday income would only start to eat away at the debili tating interest charges if, as an American might put it, the fans got ‘more bang for their buck’ in terms of entertainment. The board banked on the manager to ensure ‘house full’ notices irrespective of trophies won, a far cry from the days of ‘One-nil to the Arsenal’ and an indication of the dramatic change in image brought about by Wenger.

Edelman’s statement about financial models and revenue streams was not the terminology of a fan, but the new managing director was not employed to curry favour amidst the rank and file, despite personal protestations to the contrary. He never connected with the supporters in the natural way that David Dein did, because he simply could not relate to their own experiences as long-time followers of the team. The introduction of a new club crest in 2002 (devised primarily to sidestep an ongoing legal case concerned with copyright infringement of previous versions) said it all to the fans. The way the design was conceived displayed a lack of appreciation of the history and tradition such symbols and logos conveyed. When it was first presented to the fans, paraded around Highbury, it was roundly booed by all four sides of the ground. So the fact that their new stadium would be known by the name of an airline was seen by the fans as just the most salient example of the board failing to take into account their views.

The Arsenal supporters’ disquiet would have been more pronounced if they had realised that Arsène Wenger was receiving inadequate funds to keep his team at the same competitive level, and that lean times – in terms of trophies – were unavoidable. The manager had his budget, but a substantial portion of his transfer spending would have to be funded by his own aptitude to get good prices for the players going out the door. And on this level, the income raised from the sale of the academy-developed youngsters who failed to hold down a first-team spot became almost as important as the higher sums picked up for the likes of Patrick Vieira and Thierry Henry when the manager con sidered they were expendable. Wenger’s skill in the transfer market had become a necessity rather than the agreeable bonus of his earlier days. Together with unearthing talent – the “diamonds in the dust” as David Dein fondly calls the manager’s best discoveries – this was now the only way Wenger could keep up with his peers. His judgment on new prospects – and who he could afford to dispense with – assumed an unnatural importance, and begged the question of what would have happened if the great talent scout had decided to go before the new stadium was built. Certainly, the board proceeded and still do on the assumption that the manager will be around for the foreseeable future. “We certainly don’t have a plan B,” said Peter Hill-Wood. “So I don’t think about it [Wenger leaving]. The only thing I do think about from time to time is who on earth we would have if we didn’t have him. Then I put it out of my mind because I can’t think of an alternative.”

One of the reasons that Wenger chose to dispense with experience and gamble on youth as the club moved closer to a new life at the new stadium can now be seen as the art of the possible. The practice of only awarding one year contracts to those who had passed their 30th birthday was as much to do with their high wages and dwindling sell-on value as the conviction that their performance would inevitably decline. Far better in every way to put most of your eggs in a young basket. Despite the constraints, as the Ashburton Grove plans fell into place Wenger was upbeat. “I tell you there are half a dozen who have a chance [to establish themselves in the first team]. Really promising players. It thrills me, for one simple reason. It’s that I feel that I came here and I’ve helped this club to . . . not only to win. I would like to [think that I have taken it] through an era where we have put the club at a different level. For the training ground, for the new stadium, for the youth set-up which has become international and of course if we can win everything with the top team it’s fantastic. But to think that nothing major can happen to this club now gives me an easier sleep. If the club gets into financial trouble, I can guarantee you it will not be relegated with the players we have.”