Heart of Midlothian FC have seen a remarkable resurgence in
just a couple of years. After being on the brink of a liquidation in 2014,
Hearts are now, less than two years since the crisis escalated, sitting at 3rd
place of the Scottish Premiership. Add to that the fact that the club´s
finances are finally in order, and it´s not an exaggeration to call it an
impressive comeback in all aspects. A large part of this is thanks to the
club´s owner, Ann Budge, who stepped in to save the club and has since continued
to work hard in order to improve the club´s finances, results, and status.
Hearts were in dire straits after the reign of the previous
owner, the eccentric Russian/Lithuanian businessman Vladimir Romanov. Romanov came to the
club in 2004, acquiring a 19,4 % share of the club. He consequently increased
his share to 29,9 %, which gave him control of the club. By October 2015, his
share was already 55,5 %. Romanov was very vocal about his ambitions with the
club, stating in 2005 that the club had even potential to reach the last 16 of
the Champions League. He also declared his intentions of cutting down on the
debt, and investing on a new main stand to the club´s stadium, Tynecastle. All
in all, there was a lot of talk. But very little of all that talk ever materialised.
Instead, Romanov brought several players to the club from his Lithuanian club
FBK Kaunas through controversial loan moves. Playing level of these players was
varied, to say the least.
Financially, the club sank deeper and deeper. When Romanov
took over the club, it´s debts to HBOS (currently a subsidiary of the Lloyds
Banking Group) and SMG (currently STV Group) were transferred to two of his own
companies; UKIO Bankas, a Lithuanian commercial bank, and UBIG Investments. Over the course of
Romanov´s reign, the debts continued to increase. By 2012, the situation was
severe.
The club´s equity had plummeted to £ -15,6 million. That, in
itself, would be an unbearable situation for any normal limited company. This
was achieved through continued losses the club kept making, mostly due to
lavish spending. Short term liabilities
were at £ 30,4 million. Most of this (£ 23,1 million) was owed to UAB Ukio
Banko Investicine Grupe. This amount was secured over the Tynecastle Stadium
and a floating charge against the assets of the company, and the interest for
the debt was 4,5 %. Needless to say, with the debt this high, there was never
any change the club could repay it. After the financial year 2012-2013, £ 15
million of this debt was transferred to AB Ukio Bankas, also controlled by
Romanov. This £ 15 million was due for repayment in full at 2015, making it a
long term liability. In the process, security over Tynecastle held by Ukio
Banko Investicine Grupe was moved to AB Ukio Bankas. The short term debt that remained
to UAB Ukio Banko Investicine Grupe was unsecured after this. Cash reservers were modest, and the club´s net
debt was at £ 24,7 million in 2012, and sinking to £ 26,2 million by 2013.
In 2013-2014, things went from bad to worse. Money was scarce,
and on June 2013 the club released a statement saying that the club was facing
a significant shortfall in funding. The reasons were last seasons weak league
position, low season ticket sales, and costs that were related to upkeeping of
the stadium. Some players didn´t receive their wages. On June, the club were
put on transfer embargo, due to failed wage payments. Unsuprisingly, Romanov´s status was weakening. Finally, on June 13,
the club was placed into administration.
Hearts was deducted 15 points, and combined with the results, the club
eventually finished last in the SPL. But with the finances in dismal state,
finishing position was not the club´s biggest problem. By the spring of 2014,
liquidation had become a serious threat, and time was running out for the club.
At this time Ann Budge came to the rescue. Budge, who made
her fortune by selling her IT –company, Newell’s & Budge to French group
Sopra in 2005 for a reported sum of £ 40 million, struck a deal with the
previous owners to acquire a majority share of the club. Budge established
Bidco (1874) Ltd as a special vehicle and, according to the club´s 2014 annual
report, acquired 79 % of shares from UAB Ukio Banko Investicine Grupe. As part
of the Company Voluntary Arrengement, £ 24,6 million of the club´s debt to
previous owners was written off. This was probably the single most important
part of the whole arrangement. Hearts would never have been able to pay that
kind of amount back, and it would have been hard to imagine Budge (or anyone
else) getting involved without the writeoff. Writing the debt off allowed the
finances to really heal. This is obvious
looking at how the net debt collapsed in 2014 (see figure above). It also had a
substantial effect on the club´s equity ratio thorugh profit & loss account
(we´ll get to that a bit later).
As part of the arrangement, Bidco supplied the club a loan
of £ 2,4 million, which was used to repay the loan owed to AB Ukio Bankas (£
2,4 million). Bidco´s loan is referred to as a capital loan in some instances.
The annual report doesn´t, however, call it as such. While a capital loan is
often considered as part of equity, Budge´s loan is marked as part of creditors
in the accounts, and it is therefore not regarded as part of equity when
calculating equity ratio. The loan is secured by a standard security over the
club´s Tynecastle Stadium.
On top of all this, the Foundation of Hearts Ltd provided a
£ 1,2 million loan in order to secure sufficient working capital for the club.
This enabled the club to continue it´s operations. The deal between Budge and
the Foundation of Hearts is interesting, to say the least. The Foundation,
which is financed by ordinary fans, provided an initial cash injection worth £
1 million in 2014. In addition to this, the Foundation agreed to loan £ 1,4
million annually for the first two years after the ownership change. On top of
this, they will need to raise £ 2,5 million, that will be used to repay the
initial loan from Bidco that enabled the repayment of AB Ukio Bankas loan. The
total amount that the Foundation will need to raise is therefore £ 6,3 million. If all goes according to plan,
within 4-5 years the club will be owned by the fans through the Foundation, and
if all goes well, the club will be in a
healthy, stable condition by the time of ownership change.
Words ”healthy” and ”stable” were certainly not the words
one would have used to describe Hearts a few years ago. Looking at the
profit&loss account, the operations were a mess.
In 2012, the club´s turnover was £ 8,7 million.
Results-wise, the season was not a bad one. The club played in the group and
playoff –stages of the Europa League, and won the Scottish Cup, beating their
rivals Hibernian in the final. But behind the scenes, all was not well. The
operations were far from profitable. The club´s EBITDA( earnings before
interest, taxes, depreciations and amortisations) was badly negative (£ -3,2
million). In the annual report the board states that the club delivered a solid operating performance with reductions in
operating expenses and staff costs when based on annualised figures for the
previous period. A negative EBITDA is nothing out of the ordinary for a
football club. But an EBITDA -% of -36,4 % is a horrible one, no matter what
the comparison.
Problems didn´t end there. Hearts had a dispute with Her
Majesty´s Revenue and Custom´s relating to players loaned to Hearts from the
Lithuanin club FC Kaunas, controlled at the time by Romanov. HMRC claimed there
were unpaid tax liabilities worth £ 1,75 million. Eventually, the amount was
settled at £ 1,58 million. While reaching the settlement was good news for the
club, it was a contributing factor to the ugly figures of 2012.
Player trading provided some compensation, as the club made
a profit of £ 2 million. According to annual report, this was primarily a
result of the club´s two Academy graduates, Lee Wallace and Iceland´s Eggert
Jonsson, moving to Rangers and Wolverhampton, respectively. A curious item in the 2012 accounts is the
”compensation income (£ 2,9 million)” . According to the accounts, this amount
was invoiced from Kauno futbolo ir beisbolo klubas (FBK) in relation to the breach of a contract between the company and FBK for
the potential transfer of five of the company´s football players to FBK.
This improved the figures somewhat, but it also goes to show just what kind of
a bordello the club was at this point. Interest payments for the year were £ 1,5
million. These were obviously mostly related to loans from UAB Ukio Banko
Investicine Grupe (£ 23,1 million). Interest payments of this size for a
company whose turnover is only £ 8,7 million are substantial. After all this,
total loss for the year (-£ 1,6 million) doesn´t even seem that big.
In 2013, the situation got worse. Turnover declined to £ 7,3
million. This was because the 2012 –turnover, with the succesful Scottish Cup
campaign, was unusually high. Wages were trimmed down, and wages/turnover
–ratio of 73,3 % was notably better than in 2012. EBITDA was still negative,
but improved from 2012. The operating
result was weakened, though, by a £ 2,6 million write-down of the club´s
stadium´s value. This was a result of a
valution on the club´s assets, performed on November 2012. Because of this, the
operating result to sank to £ -4,8 million. But unlike in 2012, there was no
compensation payments , and after interest payments (£ 1,3 million), the result
for the year a depressing £ -5,0 million.
In 2014, the turnover declined still, to £ 6,6 million,
mostly due to unsuccesful cup campaign. Operating charges were once again
reduced, and wages/turnover –ratio of 44,1 % was already uncharasteristically
low for a football club. EBITDA was actually positive because of this. To be
honest, improvement in profitability was mostly due to the club being placed
into administration on June 2013. As a result, the club was deducted 15 points,
which effectively made sure the club was relegated to the Championship.
Operating result was positive, but interest payments still high. The notable item
in the 2014 –figures is £ 26,7 million write-off of loans, as mentioned earlier. The
whole write-off sum was £ 27,5 million, and after costs of administration
process and costs of deal, £ 26,7 million. Because of this, the profit for the
year on paper was huge, £ 26,8 million. This profit improved the club´s equity ratio substantially, to 10,8
%. While that kind of an equity ratio is still far from great, it was obviously
much better than the previous year´s -293 %. As mentioned earlier, the season
ended in a bittersweet way, with the club reaching an agreement with Ann Budge,
but being relegated to the Championship.
After beig relegated, Hearts spent the season 2014-15 in the
Championship. But after getting their finances back on solid ground, the
season turned out to be a success in all fronts. Turnover increased to £ 7
million. According to the annual report, this was due to increase in ticketing income and commercial activity resulting fron
on-pitch success. That is really a significant achievement, and just goes
to show how well the fans responded to the changes being made, and really got
behind the team. How often do you see a relegated team being able to increase
it´s turnover like that? If we look at Hearts´ attendance figures, it indeed
shows clearly a rise in the last two seasons.
Wages rose as the
club invested in the squad, but the wages/turnover ratio remained modest. EBITDA and operating income were slightly
negative, but now that the club was on solid financial ground, interest
payments declined by £ 0,9 million. While the total result was negative (£ -0,9
million), it wasn´t really that bad for a football club. More importantly, the
club dominated the Championship, finishing first with a 21 point gap to
Hibernian, earning themselves a promotion back to the Premier League. It´s hard to imagine a stronger comeback.
Looking at the club´s a wage bill in a more detailed way, we
can see a clear change in the club´s policy.
In 2012, the wages accounted for ~93 % of turnover. While
it´s not really unusual to see a football club with a ratio this high, it is
still a very, very high figure. In 2013 financial difficulties forced the club to cut
back on wages, and the ratio declined to ~73 %. In 2014 the wage bill had
declined all the way to £ 2,9 million, facilitating a positive operating
income. But what is significant with Hearts´ player policy is the fact that in
2015 the wage bill increased to no higher than to 54,1 %. In other words, while
(succesfully) aiming for promotion, the club still managed to keep the wage
bill very modest. Cash flow was supported by the payments made by the
Foundation of Hearts, ensuring the operations remaied healthy. All this was a sign of a very succesful
recruitment policy and a very reasonable, down to earth –approach to chasing
promotion. This kind of approach is something that Rangers (who fininished 3rd,
24 points behind Hearts), for example, might take a few lessons from. Overall
the 2014-15 season was a strong display from the club, on and off the pitch.
As already stated,
currently Hearts FC are a successful club, in 3rd position of the Premiership,
and the future looks bright again. But is doesn´t end there. There seems to be
a positive atmosphere that goes deeper than just league tables or finances. In
December 2014 Hearts became an
official living-wage employer, meaning that all staff are paid at least the
living wage of £7.85 - £1.35 per hour more than the national minimum wage. Hearts was the first football club in Scotland to do so. Budge
also ended the kit sponsorship with the payday loan firm Wonga, as she felt
that the sponsorship wasn´t the kind of message the club wished to send out.
Currenly Hearts are sponsored by Save the Children, sending a much more
positive and socially responsible message. All this has made Hearts not only a succesful
club once again, but also a positive, meaningful part of a society. This in
turn makes it easier for the fans to really get behind the team, which in turn
helps the finances, and consequently, add to the club´s success. It´s a win-win
situation. As Budge herself told the Daily Mail in April 2015: ”We should be
giving back to the community and helping them address some of the bigger issues
that face all of us in society. In my view, that’s why football clubs started
and that’s where they should still be.” Well said. Heart of Midlothian seems to be in good hands again.
