Anyone following Arsenal closely will be aware that the club has been relatively hamstrung by the front-loaded commercial deals that were necessary to finance the building of the new stadium. As the wealth of the Premier League and the power of its product has grown, we have found ourselves left behind by the sponsorship deals of our competitors, and it has had  a significant impact on our ability to compete on the playing side in terms of wages or the transfer market.

The club has repeatedly made pronouncements about the potential windfall it would receive when these existing commercial deals started to expire in 2014.

The Deal

Today Arsenal announced that they had agreed a new five-year contract with Emirates worth £150million, extending their shirt sponsorship agreement, due to end in 2014, until the end of the 2018-2019 season.

This equates to £30million a season making it one of football’s biggest ever sponsorship deals, and an increase of £20million a season over the existing sponsorship agreement.  In addition, the deal extends the existing stadium naming rights agreement from an end date of 2021 to 2028.

According to the Independent, this makes it second only to Manchester United’s forthcoming seven year £51million a season deal with Chevrolet. Considering that Forbes magazine labelled Manchester United as the most valuable sports club in the world (with a worth of £1.43 billion, compared to Arsenal’s £800 million), the relative sponsorship figure seems about right. Remarkably this is larger than Barcelona’s existing  five year deal  with the Qatar Foundation (soon to be Qatar Airways), as well as high profile existing deals for Bayern Munich, Real Madrid, Manchester City and PSG. However, many of these are up for renewal over the next two or three seasons, and it is a safe assumption that the two Spanish giants will surpass us on income generation once more.

So far so fantastic.

Did someone mention naming rights?

The deal, does however need to come under more scrutiny with regards to Stadium naming rights, particularly as that part of the deal was glossed over by Ivan Gazidis. Recent examples would suggest that as a combined sponsorship deal Arsenal have not secured best possible  value.

As part of their 2011 sponsorship deal with Abu Dhabi government-owned airline Etihad, it was estimated that Manchester City received approximately £10 million a year from the naming rights part of the deal. Forbes Magazine speculates that Old Trafford’s naming rights could be worth more than £25 million a year.

Looking at other sports, the New York Giants & New York Jets new joint stadium, now the MetLife Stadium earned them $400 million over 25 years in 2010. A more extreme example is Farmers Field NFL stadium in downtown LA, where Farmers Insurance agreed to pay $700m for 30 years of naming rights for a stadium that is as yet not built and doesn’t have a specific team designated to play there.

This suddenly looks less impressive.

So not so good after all?

However, there are important considerations to take into account. The original Oct 2004 agreement with Emirates regarding the new stadium, starting in 2006, was valued at £100 million over 15 years, which also included the eight-year shirt sponsorship worth about £6 million a year. So given that the stadium was already guaranteed to retain its current sponsorship deal until 2021, it made much more sense for the board to commit to a further agreement with the same company for shirt sponsorship, limiting the number of potential suitors.

It is also worth remembering that although stadium naming rights are the norm in the USA and becoming increasingly so in Germany, they are still fairly rare in the UK. Teams are reluctant to re-name existing stadiums, so they tend to be restricted to newer stadia. Also, several domestic rivals are looking to build new grounds, and are thus holding off naming rights in order to do a similar deal to the one Arsenal originally did with Emirates to help fund new builds. There have also been other examples where the likes of Chelsea and Newcastle have tried to go down the naming rights route, but have discovered that it is not as lucrative as first imagined, or in the latter’s case that no really reputable company is interested in sponsoring your stadium.

Given the terms of the original deal, the club effectively received  £3.5 million a year for stadium naming rights and £6 million a year for shirt sponsorship. At the same rates, the new deal would be worth  £54 million over its lifetime. This means that the new deal is worth 2.75 times the amount of the original deals, which is pretty good going despite the undervalued nature of the original contracts.

Another key element that makes this a good deal for Arsenal is term. The relatively short shirt sponsorship extension means that the club will be able to take advantage of any further increases in the market value of similar deals elsewhere rather than being tied down below market rate as they were previously. Given the likely impact on the playing side of the windfall of this deal, combined with the likely bumper increase in the next round of Premier League TV funding and any positives of Financial Fair Play, Arsenal’s market value is likely to increase during the duration of this deal.

Also on the horizon is the expiry of the equally front loaded kit manufacturer agreement with Nike, which was worth £13 million a year. Given that Liverpool recently signed a deal worth £25m-a-year with Boston-based company Warrior Sports, and that Adidas pay Real Madrid £32 million a year, it seems likely that Arsenal should double their money on this front. Certainly combined with today’s announced extension with Emirates, it should significantly improve the club’s financial position, adding almost 13% to existing turnover.

So where does this leave us?

Given that the excellent Swiss Rambler illustrated that without player sales we’d be making a loss, the immediate impact of this fairly self-evident, particularly as in his statement today Ivan Gazidis pretty much promised that Arsene Wenger would be getting access to the cash.

Gazidis said, “The deal is all about football. It is all about giving us the resources in what we believe is a responsible and well-managed way, to be able to invest in what we put onto the pitch for our fans.”

“We have been able to talk to Emirates about the payment terms and bring some of them forwards, so that we will have additional money in this financial year which will be able to invest in the summer.

“Those decisions on investment are made by our manager, and he has done an outstanding job of managing the resources of the club over time, and we expect that to continue, but he will have more resources available.”

Update: See here for Swiss Rambler’s compiled Twitter response to today’s news.