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Arsenal: Arsene & Ivan, The Real Competitors and Transfers.

18/8/2013

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A blog by @PR_WhoRu 

As I’m sat here penning this musing on a Friday evening in my company’s office in Canary Wharf with a cup of Earl Gray and still sweating out last night’s beer having just been to the gym, I am dismayed by Arsenal’s lack of transfer activity and am anxious ahead of tomorrow’s opening encounter with Aston Villa. I envisage, and hope, that for the most of you waking up on Sunday morning you’ll be dissecting my ramblings in luxury. Perhaps you’re reading it on an iPad, under the covers with a loved one whilst proudly watching repeats of Arsenal’s rip-roaring destruction of Aston Villa on Goals on Sunday. I hope.

At the start of the summer, being a member of the Arsenal Supports Trust (AST), I was fortunate enough to receive an invitation to a Question & Answers session with Ivan Gazidis in the club lounge of the North Bank. I came out of the session nearly as fired up as a coked up gorilla that had just pulled off a cunning escape from the confinements of London zoo. The superlatives and promises used by Ivan had utterly reduced my scepticism of his operating strategy and I began to pen a blog on this being the end of an austerity era and the beginning of the champagne years for Arsenal Football Club.

Sometimes, in life, a momentum grips a collective of people and it feels as though a new era is rising. Recently in Britain alone; think the Labour election campaign of 1997, think the financial crisis of 2008, think the creation of champagne-flavoured marmite ... errh.

After about a page of writing, I decided to stop and wait to see how the summer panned out before gushing out too much.  I think it’s quite telling that the last sentence I wrote before my experience got the better of me was:  “This is why it is so critical that this summer Arsene Wenger and his band of merry men in Ivan, Dick and Tom ensure that the transfer strategy meets the success of the operating strategy which has recently seen Arsenal sign major deals with Puma and Fly Emirates as well as expanding into the Asian markets with pre-season tours and African credit-card market.”


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We are beginning to see the escalation in our financial firepower
I still do firmly believe that this summer isn’t about Arsene Wenger, it is about Ivan Gazidis. Whilst many may scoff at my assumption, I believe Ivan is the most important man at Arsenal Holdings PLC. As the Chief Executive Officer of a publicly listed company, a man whose £2.15m annual salary has increased by 322% over the last 4 years, the buck firmly stops with him.  And with a market capitalisation value of $1,490,000,000, that’s a whole lot of bucks.

There are many fans who believe that Ivan Gazidis doesn’t have the authority or power to sack Arsene Wenger; I disagree. There are many fans who feel Ivan Gazidis doesn’t have the spine to sack Arsene Wenger; I’m agnostic.

As any of the economists or strategists whom maybe reading this will know, many great businesses have failed not because of their inability to ensure a competitive product or service but because the people at the very the top were unable to truly identify its competitors.  If I asked you who Arsenal Football Club’s three main competitors are, I imagine the majority of people would chose from Tottenham, Chelsea, Man United, Man City and Liverpool. And, I imagine, from a football perspective – i.e. the division of the business Arsene Wenger is paid to run, Le Prof himself would pick three of the aforementioned clubs. But, and here’s the thing, Ivan Gazidis is in charge of much more than the football division. As CEO of a PLC, he in employed and paid very handsomely for one sole purpose: to ensure shareholder value.

If you were to ask Ivan Gazidis who Arsenal’s three main competitors are, my guess is he’d suggest companies such as Cineworld, Thomas Cook and the Arcadia Group.  Before you hit the X button in the top right hand corner now, think: (a) how do young families seek entertainment on the weekend with their disposable income? (b) In the summer, you have a spare £1,000, what do you do with it? (c) You’re running low on clothes and want something comfortable to wear around the house, what do you buy? Here are your choices: A: Go to the Emirates or the cinema. B: Renew your season ticket or go on a family holiday. C: An Arsenal shirt or, at worst, a hooded jumper from TopMan that even one of the One Direction lads wouldn’t be seen dead in despite your partner telling you it makes you look good.

Don’t believe me? Take a look at this. Below is the benchmark group by which equity analysts at Sadif, an Investment Management research company, rank the risk and reward of Arsenal PLC shares.

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Sure, Arsenal could be doing poorly and a large section of the support would turn up to The Emirates, just like 17,000 still routinely turned up in the early 80s. But what do you think is going to happen to shirt sales, sponsorship deals, TV revenue money, Champions League money, the ability to attract Corporates to pay through the nose for boxes which aren’t even that comfortable (believe me) ... and the rest if Arsenal no longer competes at the top level.

I calculated the other day that the standard deviation on a single Arsenal stock is just shy of £900, not far above 5.5%. In simple terms, that means, despite any volatility or movement in the markets, Stan Kroenke can reasonably accept that his holding in Arsenal, worth $995,767,000 – that is one 1/5th of his entire wealth by the way – could fall by $49,788,350 with one simple stock trade. That is a risk to reward ratio he is willing to accept as an Investor in Arsenal Holdings PLC. I strongly doubt, however, that he is going accept that the value of his stock holding could fall due to the, and I stress this word, *perceived* stubbornness of Arsene Wenger, an employee.

There are three things that put bums on seats and sell football shirts at football clubs: World Class players, trophy success and, to a slightly lesser extent, attractive football. Over the last 8 years, all three of these have dried up for Arsenal. These were the austerity years.

It is, therefore, critical that the transfer strategy this summer delivers huge success in its landing of at least three World Class players to strengthen the team and make it competitive again. Fans don’t expect to win trophies every season but, given Arsenal’s pedigree and history, the fans, i.e. those that create a significant amount revenue and shareholder value, expect nothing less than a serious title challenge. Can you imagine the stadium, which was rarely at 100% capacity last season, next season if Arsene Wenger doesn’t strengthen significantly? I can and it’s not pretty.

Whilst Arsenal is in a very healthy financial situation, a credit rating of BBB and is praised for its adherence to Financial Fair Play, as a business, and from a commercial perspective, it has underperformed for far too long. Arsenal isn’t just a football club, although football is of course its core competency. It is also a property company, a financial services company, a food and drink company, a corporate entertainment company and, most importantly, a brand.

Here is what the markets think of Arsenal:

Arsenal Holdings PLC is an average quality company with a negative outlook. Arsenal Holdings PLC has weak business growth and is run by passable management (Sadif Investment Management, 2013).

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If you think for one minute, that Stan Kroenke, a self-made billionaire, is going to stand by and let Ivan Gazidis allow anyone at Arsenal to affect the value of 1/5th of his entire gross wealth, you’ve got another thing coming. I love Arsene Wenger to bits; he truly is my hero, a gentleman of the highest order, an avant-garde thinker in his approach to the game and a revolutionary of his time. My worry is, if the lack of transfer activity this summer, that will no doubt affect Arsenal’s value, genuinely is down to his *perceived* stubbornness, then he won’t have to worry about a stadium of angry Arsenal fans questioning his prudency, as he’ll be spending Saturday afternoons in Totteridge Job Centre.

I hope and pray, by this time next week, he will have proven us all wrong and order will have been restored at the greatest club in World Football.

Anyway, you can get back to your beautiful partner now and Giroud’s hatrick on Goals and Sunday and I’ll finish off my cold cup of Earl Gray. Until next time, I’ve been @PR_WhoRu – agree with me, disagree with me? Feel free to let me know in the comments below. Keep it clean and don’t be mean.


*All figures quoted are either from Thomson Reuters, Bloomberg or are from my own proprietary equations.

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