Untold Arsenal: Arsenal News » Arsenal and Aston Villa: what happened after the battle for fourth

In yesterday afternoon’s article Paul Collins reminded us in passing of the battle between Arsenal and Villa for fourth a year ago.

Clearly we all know what happened on the pitch both last year and this (today Villa are 18 points behind us with three games in hand, six points off fourth with two games in hand).

But in the past year there have been other developments – developments which will affect the long term future of both Aston Villa and Arsenal – and that’s the point of this little piece.

Aston Villa, despite their long and elegant history (and we have to acknowledge that they did once win the Euro Cup) are now a much smaller club than Arsenal in terms of financial turnover – Villa having a turnover of £84m against Arsenal’s £312.3m.

But as anyone who has spent 13 seconds in business knows, turnover is nothing if you can’t turn it into profit (see Man U for example).   According to the Times (March 6 2010) Villa lost £43.7m last year, while Arsenal made a profit of £58.8m.

And this takes me to my main point.  Villa’s loss is way up – it is £13m more than the previous year – and it is hard to see how they are ever going to pay it off.

This is a vital point because (and excuse me if you are in business, as you’ll know all this) long term building work, such as developing a training ground or facilities for fans, affects profit slowly over time.  The costs of such developments are written down over anything between 3 and 20 years.

So this loss was nothing to do with a sudden development of the infrastructure, but rather to do with a massive leap in player wages.

The areas where Villa score over Arsenal are in debt (Villa have £72m, Arsenal £297) and (given that debt) interest payment (Villa spend £9m and Arsenal £16.6m).  (As pointed out in the correspondence below the Arsenal figures has reduced further – I took my figures from the previous annual report, to try and avoid arguments over what has happened in the past six months).

But immediately you’ll see the disparity here.  Arsenal have a debt of four times that of Villa (obviously due to the stadium), but have to pay interest at a rate of under twice the Villa level.

The reason for the difference in interest is that Arsenal’s debt is wholly based on the re-development of the Highbury area, and so is secured in something real and long lasting.  Villa’s debt is partly secured in that way (the training ground and the supporters hotel near the ground), but is mostly down to trying to buy their way into the top four.

Since mid-2008 the owner (Mr R Lerner) has put £82.5m into the club.  He has done this in terms of shares and loans, but the exact details of all this only show up when the accounts of the club and the holding company (Reform Acquisitions Ltd) are read together.  So if someone announces a different (and more favourable) set of Villa figures that will probably be because they are reading the club figures without the Reform figures.

Mr Lerner’s total investment is now £179m with £94m in equity, and £85m in loans on which interest is paid to him at the going rate.

Now when I pointed this out before I had a few emails telling me I didn’t know what I was talking about when I suggested that Mr Lerner was doing ok out of this deal, because he made a fair old profit out of the interest.  It was argued in several quarters that the donor has to charge interest in this way, otherwise he pays massive levels of tax.

I’m not an accountant, but I knew that was not how matters worked in my company, so I went looking, and it seems several clubs have owners who do not charge interest on their loans.  Fulham and Stoke City are two whose accounts clearly show no interest being paid on massive loans.

Anyway, back to Villa, I should add that these figures don’t include the £62m that Mr Lerner paid the previous owners for the club in the first place.

Aston Villa also has a £13m bank loan secured against the ground and a £10m overdraft.  The loans to Mr Lerner are repayable in full in December 2016.  The club pays £7.6m in interest a year to the owner, plus £1.37m to the bank and £7.7m was paid in management charges to the holding company in the US.  Which sounds a bit like… Man U maybe?  Although to be fair more money came in than went out at Villa, while at Man U it all goes out.

Villa will face a minor crisis in 2016 when the owner’s bank loan is repayable, although of course he can extend it.

So overall there is a bit of a problem. The interest level is getting higher and higher.  The owner could just decide to move out, and then the club would owe him lots of dosh.   They have debts bigger than their turnover, which is generally thought by more conservative economists to be a suicide note.

To get out of this Villa have to get more revenue, and quickly.

They could get more in the ground for ordinary league matches, and/or they could get in the Champs League, they could develop more youngsters and become a nursery club and…  Well, I don’t know.  I don’t think they have much property to sell, so I am not sure what else they do.  They can’t build a new stadium like Arsenal, because unlike Arsenal at Highbury they are not filling the existing stadium every fortnight.  (Arsenal remember got their loans for the Ems because they not only sold out Highbury every time, they also packed 75,000 into Wembley for Euro games, thus showing the support was really there.)

There’s a real problem with the top four slot, because Arsenal, Man U and Chelsea still look dominate (although Man U could go bust sometime soon).  But even then Man City, Liverpool, Tottenham and Villa all pushing for one final spot in the top four.   There is the Europa of course, but last season Villa sent a reserve team to Russia just so they could focus on coming fourth in the EPL.  Which they didn’t.  Bit of a bummer that.

There’s one final thing: The Times (which tends to caution in these matters) agreed that Villa will not be allowed to have a licence to enter the Champs League under the new deal recently announced by UEFA because of the level of borrowings.

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Financial news on all the EPL clubs (and in the near future some non-EPL as well) is carried in Untold Disaster: a regular summary of the clubs in the biggest financial mess There’s a permanent link to the column  (and to all our recent articles) on the home page: www.blog.emiratesstadium.info

Please do remember I am not an accountant, and there might be errors in the figures in various places, but I do try and correct all factual inaccuracies as we go along.