Arsenal directors buying umbrellas in Hiroshima (3/10)

[gooner.ed]

http://www.onlinegooner.com/editorial/index.php?id=77

usual thread starter… It’s coming. It’s only a matter of time. By all accounts things are about to get messy. They say everything has a price. Do you believe the directors will remain strong? Do you think they are doing anything more than making statements? Or maybe you don’t give two figs who owns the club. So how might you feel if the profits made as a result of the football are paid out to shareholders in the form of dividends then? I suggest if Usmanov gets over 50% of the shares that is exactly what will be happening. I also can’t see Wenger getting on with him either, despite the buffer of the orange-skinned one.

[LB]

Let's be clear. Usmanov is not interested in owning Arsenal because he loves the club. He's doing it to make money. Now picture this scenario because if I were him, this is what I would do once I have control. At a valuation of around GBP700m, I would pay dividends of about GBP28m a year (4% of the equity value of the club). If he owned 100%, every penny would go to his pocket. Now add the current interest costs of around GBP20m and a total of GBP48m which would otherwise be available for transfers would be "lost" in year 1. But do that every year for 5 years and he has a total of GBP140 in cash from dividends and still has shares which at that time are probably worth something around GBP1bn. That's profit of GBP440m odd in 5 years and a return of 65%. That's good business. But that assumes that the club does not carry the debt, which is possible but unrealistic because whether he buys in cash or through debt, he has interest or opportunity cost (what he would have made had the money been available for an alternative investment). He is clearly an astute investor so he will take that into account and figure that it is best that the club carry the debt. Then he can use his own cash to make another investment. More sensible.

The problems are: No expansion to 100 000 seats at Emirates, conflict with Wenger because while the initial 25% was bought in cash (assuming he does not transfer it to the club's books after acquiring control) the other 75% will DEFINITELY sit on the company's books. That's an additional GBP500m in debt and an increase in interest and capital repayment costs to around GBP80m a year or more because while the stadium debt can be repaid in 25 years because that's the life of the asset, the borrowings to buy the shares have to be paid in 10 years or less, meaning higher annual interest charges and debt repayment. With these kind of numbers, we are in Man U territory except much riskier because we have less merchandising potential. Then after 5 years his profit is more around GBP200m (29% return in 5 yrs) and the club's profits are completely wiped out.

He of course believes that the share price will do better than my assumption of 8% annual growth, which must mean he believes the revenue/profits will grow faster as well, because 5% return a year is poor. For that to happen, the merchandising must grow much quicker, we must continue with the current transfer policy but this time with no room for error and no plan B superstar acquisition,ticket prices must rise, etc. The only other alternative is that he loves Arsenal so much he sacrifices his clearly refined instincts to make money quickly and takes a 20 year view. What would you bet on this one?

If you are confused about all this, just take away this message from my posting: Usmanov has to know something that the rest of us do not know (including the current board) or the club sinks. I would love someone to give me another view of how we can possibly have ANY upside from this man taking over the club. Remember, investment bankers do NOT discourage even deals they do not believe in because either way they make money, on the initial sale, and on the subsequent failure. So do the lawyers. I do not live in England so I can be objective, perhaps wrong, but with good intentions.

[gunners-need-steel]

LB, thanks for the analysis .. it does give one greater insight into thje considerations at usmanov's level. And even at that level of dissecting his financial logic, he does not look attractive for the arsenal ...