Leyton Orient is a small,
symphathetic club located in the East London. While the club has never reached
the glory and status of many other London based clubs, it has its own special
place in the community. Long traditions, colourful history and loyal fan base
are all characteristic to the club that has recently gone through much more
turmoil and disappointments that its fans would ever have liked to see. Losing
on penalties to Rotherham at the Championship play-off final at Wembley in May
2014 seems like a long time ago. Since then the O´s have been relegated to
League Two, and currently the team is under the relegation line.
Much of the turmoil and confusion
can be pointed to current owner and chairman, Francesco Becchetti, who took
over the club from Barry Hearn in July 2014 for £ 4 million. Becchetti has
reportedly invested £ 6 million since his arrival in loans and equity, but the
money has done the club little good, since his managerial habits have been
almost catastrophical. Managers have come and gone, he has ousted some
long-serving staff and replaced them with some bizarre names. Language barrier
has been an issue, since many of Becchetti´s appointments have spoken little or
no English. Slowly but surely the fans are losing faith, and one can only
imagine what kind of an impact the possible relegation would have on the club,
the supporters and the community.
But while Becchetti´s reign
with all its twists and turns would provide enough material for a novel let
alone a blog post, this piece is not about that. Instead, I thought it would be
interesting to take a look at Orient at the beginning of the 1990´s, when
previous owner Barry Hearn bought the club from Tony Wood. It is a story that
has been told in several sources, but let´s take a look a the finances behind
the story, and how Hearn got the struggling club back on its feet.
Tony Wood became the owner
of Leyton Orient back in 1986. Back then, Orient were in a difficult financial
position, and Wood took over the club at a critical moment. Under Wood, Orient
did enjoy some success, as the club was promoted in 1988-89 to the 3rd tier.
Attendance figures also rose, and youth system of the club was developed. Financially
it was not easy, however. The club was generating operating losses, covered by
player sales and loans provided by Wood.
By the early
1990´s things startted to escalate for Wood and, consequently, the Orient. Wood
had been a succesful coffee grower with his business located in Rwanda, Africa.
With the civil war destroying Wood´s plantation, his business was left in
ruins. This was reflected in Leyton Orient as well. Wood returned to England
and with his business in shambles, running a football club that was making
losses was not going to be a viable option anymore. In December 1994 Wood told
The Independent in a rather depressed tone; I will hand over the keys to any fan who gives me £5. Nobody knows the
horrendous year I've been through and nobody seems to care. I can't do any more.
I have lost everything and, like Micawber, I am hoping something will turn up.
Unless it does, the club wlll continue to slide and will just go down and
down”.
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| Barry Hearn, Photo: DmitryYakunin [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], source: Wikimedia Commons |
In
1995, Barry Hearn came to the rescue of the club and bought it from Wood, with
the aforementioned £ 5. This led to the documentary ”Orient: Club for a Fiver”,
which is a film focusing on this period. It can be found on YouTube, and is
well worth watching. Probably the most famous parts of the documentary are
manager John Sitton´s outbursts at the locker room, which are interesting (if
not educational) lessons on leadership and man management.
Looking
at the financial position of the club by the end of Wood´s period, the balance
sheet shows how much the club was in debt.
As Wood financed the majority of the club´s losses from his own pockets,
the ”other loans” formed the majority of the club´s debt. As can be seen on the
balance sheet, the club´s short term liabilities were actually quite minor. And
quite a lot of that amount consisted of trade and other creditors, taxation and
social security etc., which are not interest bearing debt. Some bank overdrafts
were in use, but their share of the total debt was small. The majority of the
club´s debts were long term liabilities, of which majority was these ”other loans”. These were virtually all
loans from Tony Wood. In 1993, the total amount of these loans was £ 1536,9
million. According to the accounts of that year, ”other loans include a director´s loan of £ 1 527 175 which is interest
free and will not be repaid until such a time as the company is in a financial
position to repay it without preference against other creditors”. As it
turned out, the day of repayment never came. By 1994, long term liabilities had
increased to £ 1,9 million, of which £ 1 881 523 were director´s loans. This
was an increase of £ 354 348 compared to 1993. It is easy to see how much this
must have hurt Wood, whose own businesses were going down the drain at this
point. As the club´s cash reserves were modest, net debt was close to £ 2
million at this point.
As Hearn took charge of the club, one of the first isssues for him was
obviously to come up with a plan to deal with club debts. The accounts of 1994 tell the story of how this
was done. As the auditor´s report of the accounts of 1994 states; ”Since the year end control of the company
has been transferred to a new director. As part of the agreement to acquire
control of the company, the director´s loan included in the accounts at £ 1 881
523 and additional funds advanced since the year end have been written down to
£ 200 000. The new director has also given a written assurance that he will
provide additional finance necessary to enable the company to meet its
liabilities as they fall due for a period of at least twelve months from the
approval of these accounts”. Just to be lclear, while this was mentioned in
the accounts of 1994, the arrangement was done after the end of accounting
year, so the figures of 1994 still include the director´s loans.
In the balance sheet the effect this arrangement had can be seen by looking
at the numbers of 1995. Now the long term liabilities had declined to £ 206
803, of which £ 200 000 is the aforementioned director´s loan. In addition to
this Hearn´s company, Matchroom Limited , provided an interest free short term
loan of £ 100 000. The next year, the situation was further improved, as Hearn
injected equity worth £ 400 000 to the club. This can be seen as the increase
in share capital (£ 100 000 à £ 500 000).
Part of this was used to pay back the long term directors´loan (£ 200 000).
After this restructuring, the loans from Hearn were down to £ 67 775, included
in the short term liabilities. In less than two years since taking over the
club, Hearn had lowered Orient´s debt siginificantly. While the amount of bank
overdraft did jump to £ 196 125 by 1996,
the club´s net debt was still much healthier than a few years earlier, as the
amount was now down to slightly under £ 200 000.
If we look at Orient´s
profit & loss account of this time, we can see why the club was in such
debt towards the end of Wood´s period.
The club´s total revenue by
the early 90´s was a little over £ 1 million, a little less in 1992. The way in
which transfer fees were registered back then was slightly different from what it is today. Received
transfer fees were registered as turnover, and fees paid as operating costs.
For example, in Orient´s accounts of 1996 total turnover was £ 1 727 366, of
which £ 1 238 116 was ”gate receipts and related income” and £ 489 250 was
”transfer fees receivable”. This kind of turnover breakdown is performed only
in the accounts of 1996, but it is safe to assume the same applies for years
1992-95 as well. In order to get a better picture of the club´s finances and to
present them in a way closer to the way the transfer fees are recorded
nowadays, I have deducted the transfer fees received from turnover, and
presented them under the EBITDA (earnings before interest, taxes, depreciations
and amortisations).
Looking at the figures, it
is easy to see where the problem was for Orient in the early 1990´s. The wage
bill was monumental, around £ 1 million in 1992, and £ 1,1 since then. This was
more than the turnover (if we exclude the transfer fees received). Adding other
operating costs to the equation, and Orient´s EBITDA was firmly negative. A particularly
difficult year was 1994, where EBITDA was £ -0,93 million.
It´s easy too understand why
Orient were selling so many players at this time. After recording such weak
figures at the operating –level, the losses had to be compensated somehow.
Orient´s net transfer fees during this time were constantly negative,
meaning the club received more transfer fees than they paid. This way, the club
managed to cover some of the losses they were making, but rarely all of
them. In 1992 the club´s net transfer
fees received were £ 631 300, enabling Orient to record a positive operating
income, but in 1993 and particularly in 1994, the money made from player sales
was far from enough to cover the losses. This was the reason Wood had to
increase the amount of his loans to the club up to £ 1,9 million by the end of
1993-1994 season. A more accurate breakdown of the club´s transfer fees is presented
in the figure below:
Every year the club was
receiving more fees than paying. Some of
the most notable transfer of this time were Kevin Nugent´s transfer to Plymouth
(1991-92, transfer fee £ 213 000), Greg Berry to Wimbledon (1992-93, transfer
fee £ 266 000) and Adrian Whitbread to Swindon Town (1993-94, £ 529 000). All
figures are from Transfermarkt.
This kind of business model
is not totally unlike that of Peterborough United in recent times. I wrote a
piece on that last spring, you can find a link to it from the right side of the page. It
is a risky strategy, because it is very hard to do any kind of budgeting related to player sales. It is hard
to say what a player´s value will be,
when is the right time to sell etc. And if your strategy is based on selling
players at a high value, you are often forced to sell them when they are
playing well, scoring goals etc. Then selling them may lead to some bad result
on the pitch. So it is not an easy strategy by any means. Orient left
themselves very little choice when setting the wage level above the turnover (again,
excluding transfer revenue) level.
Going back to profit &
loss account, the result for 1995 was actually a very good one, £ 1,4 million. This was because of the
exceptional item worth £ 1,9 million, which was the amount of a loan from Tony
Wood being written down to £ 200 000 and assigned to Hearn. This reduction in
liabilities was credited to the profit & loss acount as an exceptional
item. So while this made the profit & loss accout look good, and
consequently improved the club´s total equity, it was not a cash flow item,
meaning no actual cash came into the club as a result of the arrangement.
In 1996 Hearn obviously got the clubs finances
in better order, as the wages/turnover –ratio declined to 71 %, which is a lot
closer to any football club´s ”normal” level. After transfer fees, operating
income was slightly positive.
Hearn went on to
own Leyton Orient until 2014, when he sold it to Francesco Becchetti. Over this time, Hearn invested millions to the
club and as he told the Inpedendent in 2014, ” I came in as a fan and I´m leaving as a fan”. At the time, Hearn was optimistic about his successor, saying, ”I like the man, I like what I hear and I
believe in the next few months Orient fans are going to like what they see”.
Sadly for the fans of Orient, it hasn´t gone as Hearn thought at the time. The
club has been in turmoil since Becchetti arrived, and recently the Italian has
even told he will consider offers for the club. Times are certainly tough for the club at the
moment, and one can only hope that the traditional club can regain their form
and retain their place in the Football League. For that to happen, perhaps yet
another owner is what the club needs.
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| Matchroom Stadium, Photo: Spudgun67 [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], source: Wikimedia Commons |
