Celtic - Everything's Gone Green

So Celtic duly won their fourth consecutive Scottish League title in May in their first season under young Norwegian manager Ronny Deila, who had replaced the very successful Neil Lennon the previous summer.

Despite this fine achievement, there was also disappointment, as the famous Glasgow club failed to qualify for the group stages of the Champions League, even though they had two bites at the cherry, having been reprieved after Legia Warsaw fielded an ineligible player, only to crash out against Slovenian champions Maribor.

This was in stark contrast to previous great nights in Europe. As recently as November 2012, Celtic beat Barcelona 2-1 in front of a packed Celtic Park, as they made their way to the last 16 of the Champions League. Many believed that this would be the platform for greater things, but the club has not progressed since then, as they did not make the best use of the European cash windfall. Instead, they sold three key players at the end of that season (Victor Wanyama, Gary Hooper and Kelvin Wilson) and failed to adequately replace them.

Although this might be considered a lack of ambition on behalf of the Celtic board, it also comes down to a simple lack of money. On the face of it, the club’s finances look pretty good, as they are consistently profitable and have little debt, but if you dig a little deeper, then Celtic’s financial challenges become all too apparent. As Deila beautifully put it, “Celtic is unbelievably huge, but the money here is not so huge.”

Nevertheless the most recent published accounts from the 2013/14 season featured a £1.4 million increase in profit from £9.7 million to £11.2 million, despite revenue falling by £11 million (15%) from £76 million to £65 million. The club described these results as “impressive particularly given the difficult economic climate”, but they were largely boosted by profits on the aforementioned player sales, which rose £12 million from £5 million to £17 million.

In addition, the wage bill was cut by £3 million (7%) to £38 million, though an impairment charge of £4 million was booked to reduce the value in the accounts of certain players. There was also an exceptional payment of £0.6 million for contract termination, though this was lower than the previous year’s exceptional items of £1.3 million, which were mainly for an onerous lease provision for certain loss-making retail stores.

Celtic’s 2013/14 £11.2 million profit was easily the best financial result in the Scottish Premiership – even though Hearts reported a £26.8 million profit, this was inflated by a £27.5 million credit for a write-off in respect of the Creditors Voluntary Agreement. Most other clubs reported (small) losses with only Dundee United and St Johnstone recording profits.

Of course, Rangers are no longer in the top division, which is something of a double-edged sword for Celtic. A couple of years ago, chief executive Peter Lawwell insisted that they did not need the presence of Rangers to flourish financially after their rivals’ off-pitch problems meant no definite Old Firm derbies for a few years.

He said, “We look after ourselves. We don’t rely on any other club. We are in a decent position, we’re very strong.” That’s all well and good, but it could be argued that a lack of strong domestic competition may leave Celtic ill prepared for their European campaigns – and that’s where the big money lies.

That said, Celtic have maintained a relatively strong financial position, making profits in six out of the last eight years. Even though these have not been enormous sums, the aggregate profit since 2007 is a tidy £33 million. This is a result of the club’s prudent approach, as outlined by chairman Ian Bankier: “The club, financially, has to adopt a self sustaining model. In plain words, we have to live within our means. We cannot spend money that we don’t have.”

Specifically, the club’s “core business strategy… relies upon: the youth academy; player development; player recruitment; management of the player pool; and sports science and performance analysis; to deliver long term sustainable football success.” In short, the club will stand or fall on how successful it is in buying players (relatively cheaply) and/or developing its youngsters.

Of course, these figures might provoke the question of why the club does not put more of its profits on the pitch, but these surpluses are largely driven by two factors: (a) player sales; and (b) money from competing in Europe, especially the Champions League.

As Lawwell said, “Player transfers have been an increasingly important element of our business for a number of years.” He recently confirmed the value of this activity, “Significant income was brought into the club as a consequence of transfer fees received.”

In fact, if player sales were to be excluded from Celtic’s figures, they would actually report a loss most years, e.g. the 2013/14 profit of £11.2 million would have been a loss of £5.9 million without the £17.1 million profit on player sales.

Similarly, the club would have made a loss in 2011 instead of breaking-even without the £13.2 million profit from the sales of Aidan McGeady, Artur Boruc, Marc-Antoine Fortuné and Stephen McManus. Perhaps most tellingly, Lawwell noted that the club could have eliminated the (£7.4 million) loss in 2012 by selling players – though they were retained as a deliberate policy “in order to achieve strategic objectives”, i.e. progress in Europe.

Since 2007 this player trading activity has generated £61 million of accounting profits. However, these are not the same as cash profits, as the accounts include many non-cash items, such as depreciation, player amortisation, impairment and exceptional provisions.

To get an idea of how the club’s underlying business is doing, we can look at its operating profit. This has steadily declined from £16 million in 2007 to a loss of £3 million in 2012, though the 2013 Champions League run reversed the trend pushing operating profit back up to £13 million, before once again falling in 2014 to £5 million.

The 2014/15 results will again highlight the need to sell players in more difficult seasons. Participation in the Europa League as opposed to the far more lucrative Champions League, will mean a steep reduction in revenue, but this will be partly offset by the sales of Fraser Forster and Tony Watt “for sums well in excess of book value.”

Basically Celtic are constrained by their lack of revenue growth. In 2013/14 revenue fell 15% (£11 million) from £76 million to £65 million with all three operating divisions decreasing: football and stadium operations by 14% (£4.4 million) from £32.7 million to £28.3 million; merchandising by 10% (£1.5 million) from £15.0 million to £13.5 million; and multimedia and other commercial activities by 19% (£5.2 million) from £28.2 million to £22.9 million.

In fact, Celtic’s revenue has actually fallen by 14% since 2007 with only multimedia and other commercial activities growing in this period, while the other two divisions each dropped by a hefty 26-27%.

This disappointing revenue performance highlights Celtic’s issues perfectly, as it can be considered from two very different aspects, i.e. domestically and on the international stage.

Even after the fall in revenue, Celtic’s £65 million is still by far the highest revenue in the Scottish Premiership with the nearest challenger being Aberdeen’s £11.2 million, more than £50 million lower. All the other clubs only generate £3-7 million a year. In fact, Celtic earn £10 million more than all the other clubs in Scotland’s top tier combined.

However, while Celtic’s revenue has stagnated, other leading clubs have seen their turnover explode in the last few years. The last time that Celtic featured in the annual Deloitte Money League was 2007 when their £75 million was the 17th highest in the world, but they are now miles behind Europe’s elite.

In the last seven years Celtic’s revenue fell £11 million, while almost all other clubs have benefited from significant growth. As an example, the top four (Real Madrid, Manchester United, Bayern Munich and Barcelona) have all seen their revenue increase by more than £200 million.

As a (slightly) more realistic comparison, Celtic’s revenue was within striking distance of Juventus in 2007, being £23 million below the Italian giants’ £98 million, but the gap has now widened to a vast £169 million (£234 million vs. £65 million).

Much of this is down to the disparity in the television deals, as seen by the rise of English clubs with 14 in the top 30 (and all 20 Premier League clubs in the top 40). If we take Everton as an example, we can see that their revenue was £24 million lower than Celtic’s in 2007, but they have surged past them following three new TV deals (in 2008, 2011 and 2014) and their revenue is now £56 million higher at £121 million.

Multimedia and Other Commercial Activities revenue has risen since 2007, but it’s been a bit of a rollercoaster ride, as it is highly dependent on TV money from European competitions. As the annual report stated, “The trading results emphasise the significant benefit from participating in the group stage of the UEFA Champions League.”

Celtic achieved this objective in the last two seasons, receiving around £35 million in prize money alone in those two seasons (£20 million in 2013 and £15 million in 2014). This is essentially the difference in revenue compared to the previous three seasons, when receipts were restricted by the much smaller amounts distributed by the Europa League. The impact would be even greater if additional match ticket sales and the impact on commercial deals were considered.

The highest payment Celtic received came in 2013 as a result of performing well in the group, which was worth €3.5 million (3 wins at €1 million, 1 draw at €500,000), and reaching the last 16 for another €3.5 million. This was added to the €8.6 million that all teams received for reaching the group stage and €8.1 million from the TV (market) pool. That gave a very nice total of €23.7 million – or £20 million.

It should be noted that the prize money is denominated in Euros, so the exchange rate is also a factor. As Sterling strengthens, the amount booked in Celtic’s accounts will decrease.

What is striking is that if European prize money is excluded, then Celtic’s other income is on an obvious downward trend, e.g. from £65 million in 2007 to £50 million in 2014. Little wonder that a few years ago Lawwell observed, “Clearly, European progression is key in enabling the club to achieve its financial objectives.”

The importance of qualifying for the Champions League has been further underlined with the new deal from the 2015/16 season that will increase the prize money by an estimated 50% with further significant growth in the TV (market) pool. Europe League payments will also rise, but it will still be very much the poor relation.

Celtic’s Achilles heel is obviously the Scottish TV deal, which is worth a paltry £15 million a year – and that is for all Scottish professional clubs. As Lawwell said, “We play in a country of five million people. We’ve got the media values that represent that.” The distribution is determined by reference to the league position, so Celtic have been receiving more money than other clubs, but this was still only worth a feeble £2.4 million in 2014/15.

To place that into context, Queens Park Rangers “earned” £65 million for finishing bottom in the Premier League the same season, while title winners Chelsea received £99 million. Championship clubs that receive parachute payments following relegation from the English top flight received nearly £27 million, while even a normal Championship club gets more than Celtic with £4 million.

This massive inequality is keenly felt by Celtic, as Bankier noted: “The harsh reality is that the total income from broadcasting rights available to the Scottish game is a tiny fraction of what is available to our neighbours in England.” He’s not kidding – the Scottish deal is worth less than 1% of the Premier League deal and that is before the estimated 50% rise in 2016. In fact, broadcasters pay more to show two English games than an entire Scottish season.

The current Scottish TV deal runs to 2017, but it is reported that Sky have an option to extend the contract for a further three years, so there is little that can be done for a while. England may be the colossus when it comes to TV rights, but other smaller countries are also doing better than Scotland: Belgium £40 million, Norway £34 million, Greece £30 million and Austria £15 million. The fact is that broadcasters do not regard Scottish football as an attractive product without the pull of guaranteed Old Firm derbies.

Football and Stadium Operations is the largest business segment at Celtic with £28.3 million in 2014, though this was 14% (£4.4 million) lower than the previous year. This is essentially match day revenue plus money generated by the Celtic Park stadium on other occasions.

The reduction in income was mainly due to less match tickets income, including corporate and premium sales, following the £100 reward to adult season ticket holders “for their continued support”, as well as lack of progression to the Champions League knockout stages and failure to make the latter stages of both domestic cup competitions.

This revenue stream has been reducing for some time, partly due to a smaller number of home matches, especially the money-spinning European ties, but also in line with lower average attendances. These have fallen from over 58,000 in 2005/06, when Celtic enjoyed the third highest crowds in the UK, to under 44,000 in 2014/15.

There is little doubt that the Celtic supporters are extremely important to the club, as former chairman John Reid noted: “They do not show up on a balance sheet. But they are an invaluable asset, the very lifeblood of a club like Celtic.” It must therefore be of concern to the club’s hierarchy that attendances are not what they once were – even with over 40,000 season ticket holders

The lack of matches against Rangers has surely had an impact on these figures, as Lawwell explained, “If you have more meaningful games, then you have more people turning up and that means more cash at the gate, more sponsorship interest and more TV interest.”

Furthermore, Celtic’s attendance is still the highest in Scotland with their 2013/14 average of 46,000 being more than 30,000 higher than Hearts in the Premiership, though Rangers attracted a notable 43,000 in League One.

Interestingly, Celtic have just announced that they have been granted permission to introduce safe standing for up to 2,600 supporters, using the rail seating system which can be found in stadiums in Germany.

Merchandising revenue dropped 10% (£1.5 million) from £15.0 million to £13.5 million in 2014, a long way below the peak of £18.4 million in 2007. This revenue stream is heavily dependent on the relative popularity of kit launches, though the slight rebound in 2013 was driven by Champions League success and 125th Anniversary products.

Lawwell said that the club is “committed to the development of the Celtic brand, including the improvement of the match day experience for our supporters at Celtic Park”, such as the opening of Celtic Way. This was showcased in the opening ceremony of the Glasgow 2014 Commonwealth Games. The chief executive added, “I think our story is unique, I think it is rich, it’s the best and we have a potential fan base of Scots and Irish around the world that would support that.”

"Jackie Wilson Said (I'm In Heaven When You Smile)"

That said, the club did note that “the sponsorship landscape remains extremely challenging” and the “business environment and economic difficulties continue to impact upon companies’ advertising and marketing budgets.”

It must have therefore been very pleasing for Celtic to sign a three-year shirt sponsorship deal with Magners in 2013/14 for a higher sum than the £1.5 million paid by the previous sponsors Tennent’s. That brought to an end to the joint sponsorship arrangement with Ranger, so the two sides had different shirt sponsors for the first time in 13 years.

Moreover, Celtic have recently announced a new kit supplier deal with New Balance that will start from the 2015/16 season, which is worth a sum “significantly higher” than the long-standing agreement with Nike. The club has not divulged any financial details, but the annual payment is reportedly increasing from £5 million to £5.8 million.

The wage bill was cut by 7% (£3.0 million) from £40.7 million to £37.8 million, due to “the change in player personnel” and lower bonus payments based on Champions League progress. In fact, wages have hardly grown at all in recent years, only rising by 4% (£1.3 million) since 2007.

Following the revenue decrease, the wages to turnover ratio rose from 54% to 58%, which is among the lowest in the Scottish Premiership, though a fair bit higher than Hearts’ 44%. This is in line with the majority of Premier League clubs in England, where the average has come down to 59% as a result of the higher TV money.

Given the differences in revenue, it is no surprise that Celtic’s wage bill of £38 million is by some distance the highest in Scotland’s top tier, more than six times as much as Aberdeen’s £6 million. In fact, their wage bill is more than the other 11 clubs combined.

However, this would be the lowest wage bill in the Premier League behind luminaries like Hull City £43 million, Crystal Palace £46 million, Norwich City £50 million and Cardiff City £53 million. Obviously, Manchester United are quite literally in a different league with a wage bill of £215 million, but it is also worth noting that Celtic were only just ahead of some clubs in the Championship, e.g. Leicester City £36 million, Reading £35 million and Blackburn Rovers £34 million.

As the 2014 accounts drily noted, “Player wages are subject to market forces with wage levels in some countries, particularly in those leagues with lucrative broadcasting contracts, significantly exceeding those available in others.” You can say that again.

Actually, Lawwell had said much the same thing in even starker terms a couple of years earlier: “Wage and transfer fee inflation over a number of years means that the gap between Scotland and the major European footballing nations is impossible to bridge, thus the relative cost and challenge of attracting quality players gets no easier.” Deila also now fully understands the problem: “You have to see the big picture. It is not about the (transfer) fee, it is about the salaries.”

To reinforce this point, it is worth again comparing Celtic with Everton. Their wage bills were almost exactly the same back in 2007, but Everton’s has risen by 80% to £69 million, while Celtic’s growth was only 4% to £38 million.

There is one Celtic employee that seems immune to wage restraint, namely the chief executive, who trousered just under £1 million for the second year in a row. This included a £400,000 bonus payment, even though his contractual maximum bonus payment should be 60% of his salary of £525,000, i.e. £315,000. Happily for Mr. Lawwell, the Remuneration Committee decided to make an additional bonus award on an ex gratia basis. While he is no doubt very good at his job, this does seem a bit steep, when the rest of the wage bill is under so much pressure.

Celtic have been consistent spenders in the transfer market over the years, but not that much - and net expenditure has reduced in recent times. If we divide the last 12 seasons into three periods of four years, the difference is striking: 2002-06 £14 million; 2006-10 £18 million; and 2010-14 just £1 million.

There has also been a subtle change in the chairman’s statements. In the 2012 accounts he said, “We continue to make sizeable investment in new players, so as to strengthen the squad with a view to achieve our primary objective”, which was described as to win the Scottish title and to reach the group stages of the Champions League. However, in 2014 this had been toned down to: “We do the utmost to acquire the best players we can with our financial constraints.”

According to Lawwell, the strategy has been to “scour the world for talent to develop”, which means building a world-class scouting network that can look at undervalued markets in Scandinavia, Latin America, Africa and Asia. There is nothing wrong with this plan, given Celtic’s financial challenges, and it looked to be working well for a while.

However, it is debatable whether the club has spent its money wisely in recent times, though in fairness it has been hard to find value-for-money purchases, when so many clubs are trying to do exactly the same thing. In addition, it must be difficult to attract players to what is effectively a one-team league when the wages on offer are nothing special, so Celtic often have to take a punt on comparative unknowns.

Hence, they have started to make extensive use of the loan market, bringing in the likes of John Guidetti and Jason Denayer from Manchester City and Aleksander Tonev from Aston Villa on season-long loans last year.

Celtic have gross debt of £11.0 million, which means that they have net funds of £3.7 million after taking £14.7 million of cash balances into consideration. The gross debt comprises £10.2 million of bank loans, a £0.7 million overdraft and other loans of £0.1 million. This is obviously a pretty healthy position, especially as gross debt was as high as £19.7 million in 2005, though Lawwell noted that the club has “fluctuating cash requirements” during the year, so they had a net debt position of £6.5 million during 2013/14.

There has been some confusion over Celtic’s reported debt figures, as the accounts refer to a debt facility with the Co-operative Bank of £32.4 million, made up of £20.4 million long-term loans and a £12 million overdraft.

The loan agreement is further split between a revolving credit facility of £6.0 million (base rate + 1%) and long-term loans of £14.4 million (LIBOR + 1.125%). These are repayable in equal quarterly instalments form October 209 to April 2019 with any balance repayable in July 2019, though there is an option to repay the loans early without penalty. These loans are secured on Celtic Park and the land adjoining the stadium and at Westhorn and Lennoxtown.

"Pass the Dutchie"

The important point is that this is a loan facility, as opposed to loans actually taken out. In fact, the accounts clearly state that £22.2 million of the available bank facilities of £32.4 million remained undrawn at the balance sheet date, which reconciles perfectly with the bank debt of £10.2 million.

In addition, the balance sheet includes £4.3 million for the debt element of Convertible Cumulative Preference Shares. These carry the right to a 6% dividend (around £0.5 million a year), which has been paid since 1997.

There are also contingent liabilities, i.e. transfer payments dependent on criteria like number of appearances, of £3.6 million, with contingent assets of £2.3 million. The accounts note that £5.0 million has been committed on player purchases and loans since the accounts closed, though there have also been sales proceeds of £8.1 million.

The board has been accused of hoarding cash, but that is not really the case if we look at the cash flow statement. Over the last eight years Celtic have generated a total of £62 million from operating activities, but have then spent a net £19 million on players and £21 million on infrastructure, such as improvements in the stadium and the Lennoxtown training facility.

They have then spent a further £4 million on debt repayment, £2 million on interest and £4 million on dividends, leaving a net £11 million increase in cash balances. Lawwell has promised that “the board will re-invest every penny received back into the club for the longer-term.” Given the fluctuations in cash levels during the year, the club is more or less living up to that promise. Whether they should be more ambitious and extend their debt is another question, though Rangers’ demise is a powerful warning against over-extravagant behaviour.

"Fanfare for the Commons man"

One approach Celtic has taken to address its issues with salary and transfer costs is investment in youth development, so that a greater number of players can be “internally generated”. A key element of that strategy is the partnership with St Ninian’s High School in Kirkintilloch, which is now in its seventh year.

Lawwell said that the club “decided to take significant funds from our first team in 2006/07 and to reinvest it in building a state-of-the-art training campus and developing a youth academy.” He added, “It is all about building a sustainable, long-term economic model which will buttress us from the effects of any sudden downturns. It is designed to ensure that we remain competitive in elite European competition.”

And that’s the key point: Celtic need to be successful in Europe (i.e. reach the Champions League group stages) to generate decent revenue. In order to give themselves the best chance of achieving that objective, they need to spend a reasonable amount of money to compete with wealthier clubs. However, they need to do that within their limited budget.

"A Forrest"

As Lawwell stated, “The funding of that success must recognise the financial constraints applicable to the organization, particularly as Celtic continues to play in the Scottish football environment and the challenges that presents.”

So, it’s a case of damned if they do, damned if they don’t.

After a mixed first season, Ronny Deila now needs to demonstrate his worth and take the club forward. As we have seen, in the modern era that’s easier said than done, given Celtic’s diminished resources, but when Celtic Park is in full voice on a European night, anything seems possible.

Romanov's Battle For Hearts And Minds

Oscar Wilde, the famous Irish playwright, was not known for his love of sport, but his warning “to expect the unexpected” could certainly apply to the world of football, not least at Heart of Midlothian, where the colourful owner Vladimir Romanov continues to resist the path of predictability. Just two games into the Scottish Premier League (SPL), the volatile Lithuanian decided to sack the club’s manager Jim Jefferies, replacing him with the former Sporting Lisbon manager Paulo Sérgio. The popular Jefferies was in his second spell as Hearts manager after a ten-year absence, retaining much goodwill for delivering the Scottish Cup in 1998, ending 36 years without a trophy.

The timing seemed quite strange, not just because the change in manager came so early in the campaign, but also because Hearts had secured third place behind the Old Firm last season. Moreover, Jefferies had been allowed to bring in four new recruits: the imposing forward John Sutton from Motherwell, Danny Grainger from St. Johnstone and two experienced midfielders from Kilmarnock, the Moroccan Mehdi Taouil and Jamie Hamill. In theory, the addition of these new players to a talented squad, including the exciting wingers Andrew Driver and David Templeton plus the commanding captain Marius Žaliūkas, should have been the catalyst for a successful season.

"The Romanov revolution"

However, if you scrape below the surface, there is some method in Romanov’s apparent madness, as Hearts’ last victory was way back in March last season. As the man himself said, “With only one competitive win in 15 games, only fools and idiots would not raise questions and suspicions.” The club’s third place in 2010/11 was also a little deceptive, as the run-in was disappointing in the extreme, so Jefferies’ dismissal was not completely unjustified.

Of course, Romanov has plenty of previous when it comes to hiring and firing with Sérgio becoming the ninth manager during his seven-year tenure. That’s not counting caretaker or interim managers, though no Hearts manager could confidently describe his position as permanent. As Scotland manager and former Jambos legend Craig Levein said, “I don’t understand what boxes need to be ticked at Hearts to keep you in a job. You would need to be insane to do this job. At times it defies logic.”

"See you, Jimmy"

The owner’s lengthy list of victims includes John Robertson, George Burley, Graham Rix, Valdas Ivanauskas, Anatoly Korobochka, Stephen Frail, Csaba László and, of course, Jefferies. Of those, Burley was perhaps the unluckiest, being given the boot with Hearts top of the SPL after nine unbeaten matches, though Ivanauskas went just a few months after winning the Scottish Cup and qualifying for the Champions League in 2006. However, the most telling image of the problems during Romanov’s reign came when three senior players (club captain Steven “Elvis” Pressley, Paul Hartley and Craig Gordon) held an impromptu press conference at the club’s training ground to inform the world of “significant unrest.”

To put it mildly, Romanov is an interesting character, who polarises opinions in the game, even among Hearts’ own supporters. Some view him as the “great dictator”, while others consider him to be the saviour of the club.

It is true that there is rarely a dull moment with “Mad Vlad”, who also owns the Lithuanian club FBK Kaunas and Belarusian club FC Partizan Minsk. Prone to numerous verbal outbursts, including accusations that Celtic and Rangers were “buying off” match officials, his club has received several fines from the Scottish football authorities. Some have attributed this to language difficulties, but his son Roman, now Hearts’ chairman, once joked, “He has all the words he needs: ‘Yes, ‘No’ and ‘You’re fired’.” Managers have complained of constant interference, including transfer choices and team selection, such as when he ordered Jefferies not to pick Žaliūkas during a contract dispute.

"One careful Driver"

On the other hand, there is little doubt that he has kept the club alive. Before his arrival, Hearts were in dire straits financially. Auditors PricewaterhouseCoopers (PwC) described the club as being technically insolvent, while the Hearts Supporters’ Trust said, “We were heading for the abyss.” Former chairman, George Foulkes, summed it up, “Most fans have mixed feelings about Romanov. If (former CEO) Chris Robinson was still there, we’d probably be in the First Division and playing in front of 5,000 people at Murrayfield.”

This was a reference to Robinson’s 2004 plans to sell Tynecastle, the club’s famous old ground, which he claimed was “not fit for purpose”, and instead rent Murrayfield from the Scottish Rugby Union. Although this deal would have reduced the club’s burgeoning debt, it was deeply unpopular with supporters, who launched a Save Our Hearts campaign to prevent the move. Despite this opposition, a deal was still signed with a housing developer for £20 million, but this was called off after Romanov purchased the club, so the initial response to the Lithuanian was very favourable.

The previous board’s willingness to go against the supporters’ wishes by selling the stadium highlighted the seriousness of the club’s financial challenges, and it was with some relief that the fans saw Romanov steadily increase his stake in the club throughout 2005 to become by far the largest shareholder. In return, Romanov got hold of a venerable football institution, part of the inaugural Scottish league in 1890, which has won the championship four times, though two of these victories came in the 19th century, while the last victory arrived back in 1960. However, history doesn’t pay the bills, so Foulkes was right to give Romanov credit for “the fact we remain a going concern.”

This can be seen by the increasing debt, which reached £36 million at the time of the last published accounts in July 2010. That is simply enormous when the turnover is only £8 million and follows a series of what the club itself described as “significant operating losses.” The debt mainly comprises £24.3 million owed to the parent company UAB Ukio Banko Investicine Grupe (UBIG) at 4.5% interest, repayable in December 2011; £8.9 million owed to another group company UAB Hearts Developments (HD) at 3.5%, where the repayment date has been extended to August 2012; and £2.5 million convertible loan stock at LIBOR.

There is a fairly confusing paper trail for this debt, as it was owed to AB Ukio Bankas at the beginning of the year, then transferred to UBIG and another company called ImpExNet. The latter balance was then again transferred to HD during the course of the year. I’m not sure why this has to be so complex, but the important point is that all of these companies are under the effective control of Romanov. As Hearts director Sergejus Fedotovas said, “The key fact, that sets Hearts apart from many other clubs, is our debt is in the form of funding from our own parent company.” That’s true, but can occasionally be a double-edged sword if the owner loses patience with his investment.

"Paulo Sérgio wonders what he's let himself in for"

That said, the debt position in 2010 would have been even worse without a £7.9 million forgiveness of debt from the parent company (effectively Romanov), which was not enough to prevent net debt from rising by £1.3 million. Actually, the debt would be horrifically high without several timely interventions from the owner, such as a £12 million debt-for-equity swap in 2007/08. Excluding these adjustments, the debt would stand at £56 million – seven times annual turnover.

After the latest accounts closed, there was yet another debt-for-equity swap to the tune of £10 million. While this “demonstrates that UBIG remain committed to providing ongoing support” and reduces the club’s interest burden, it does also further strengthen Romanov’s hold on the club. Depending on your perspective, there are two ways of looking at this situation: on the one hand, the club would almost certainly go bust without Romanov’s backing; on the other hand, he is largely responsible for the increase in debt from the £20 million or so at the time of his takeover, due to his hefty spending on players.

Either way, according to PwC’s annual review of Scottish Premier League football, Hearts have the highest net debt in the SPL, which has been the case for the last few years. In fairness, only St. Johnstone and Hamilton are operating debt-free, but the magnitude of Hearts’ debt is more worrying, accounting for a third of the SPL’s net debt of £109 million.

This, in turn, means that Hearts have the weakest balance sheet in the SPL with net liabilities of £24 million. With the exception of Dundee United and Hamilton, all other SPL clubs have net assets. Of course, like all football clubs, the value of the players on the balance sheet is under-stated, as this equals acquisition cost less cumulative amortisation. In Hearts’ case, the book value of the players is just £370,000 compared to an estimated value of £18.5 million on the respected Transfermarkt website.

The noises coming out of Tynecastle suggest that Romanov has given new manager Paulo Sérgio no less a target than winning the league this season. Although the Portuguese said that he did not feel under any additional pressure, he did emphasise that the squad needed strengthening, “Everyone knows what a team such as Hearts needs. If we get the money, we can compete with the biggest clubs in Scotland, Rangers and Celtic.”

Fedotovas claimed that the club was working on bringing two to three new players in before the transfer window closed on 31 August, potentially including former captain Michael Stewart, but Sérgio should be aware that criticism of the owner for not spending in the transfer market helped lead to the downfall of Csaba László, the longest serving manager under Romanov’s regime – at all of 19 months.

History suggests that Sérgio is unlikely to see Romanov put his hand in his pocket for new players, as there has been only one season at the club (2005/06) when Hearts have made net purchases – and that was just £2.3 million. Although there have been many arrivals, almost all of these have been on a free transfer with Hearts’ record buy being Bosnian international Mirsad Bešlija in 2006 at just £850,000. Indeed, since 2005 there have been net sales proceeds of £16 million, largely derived from the big money sales of Craig Gordon to Sunderland, Roman Bednar to West Brom, Christophe Berra to Wolves, Lee Wallace to Rangers and Paul Hartley to Celtic.

Given the limited budgets in Scottish football, this lack of spending is not too surprising with only the “Big Two”, Celtic and Rangers, having the resources to spend reasonably large sums. That said, over the last five years, nobody has spent less than Hearts.

Nine of the current 12 SPL clubs have net sales over that period, but Hearts lead this league table with net sales of £18 million. Of course, this could be considered as a sign of good financial management, but it does mean that Sérgio, like many managers before him, is likely to be disappointed if he expects to see any big money purchases.

This tight-fisted approach is not just down to the whims of the owner, but is also symptomatic of the financial pressures under which Hearts are operating. Only this week the club was threatened with a winding-up order by Her Majesty’s Revenue and Customs (HMRC) over an unpaid tax bill for the second time in two years. Although this was swiftly paid in full, as happened on the previous occasion that they faced administration proceedings, this is clearly not good news.

Fans have become all too accustomed to the club sailing close to the wind with many reports of wages and bonuses being paid late, but these frequent cash flow problems are not exactly an indicator of a thriving business. You only need to ask the fans of Dundee, Livingston and Gretna to appreciate that football clubs in Scotland can enter administration.

Indeed, the club itself states that it “does not have formal funding facilities in place that allow it to meet its liabilities as they fall due” and is “dependent on the continued support of UBIG.” That’s fine, so long as the money continues to be pumped in, though the auditors have regularly noted their concerns in the accounts, partly attributed to the lack of available information that might allow them to conclude that UBIG would be “able to meet its commitment.” In plain English, they don’t know whether UBIG can provide the club with enough money to pay its bills on time.

The fundamental problem is that Hearts make colossal losses, at least for a club of this size. The apparent recovery to break-even in 2010 is misleading, as this is almost entirely due to the debt forgiveness of £7.9 million. If this once-off factor were to be excluded, the club made an underlying loss of £8 million last season and completely unsustainable cumulative losses of £38 million in the last five years. The figures would be even worse without the substantial £10 million profit on player sales in 2008, largely Craig Gordon.

Although these losses might not seem that terrible compared to some made in other leagues, they need to be placed into context. A loss of £8 million on turnover of £8 million means that the club spends £2 for every £1 of revenue it generates. A similar business model would have produces losses of £62 million at Celtic and £56 million at Rangers in 2009/10.

Another problem that the club has is the large amount of interest charged. Again, this might only be £1.6 million in 2010, but this represents 20% of Hearts’ revenue of £7.9 million and is clearly too high for a business of this scale.

In fairness, there have been some slight signs of improvement with the operating losses (excluding player sales and interest payable) falling from £11.8 million to £6.9 million in the last three years, despite revenue declining in the same period. This is because the club have cut the wage bill and managed to introduce some operational efficiencies (seen in Other Expenses). They’re still a long way off their stated aim of “reaching operational break-even in the medium term”, but at least they’re heading in the right direction.

Even with the debt forgiveness, Hearts have the second highest losses in the SPL over the last two years with £8.6 million, only surpassed by Rangers. Excluding the debt forgiveness in 2010, Hearts would have comfortably held the unwanted title of least profitable club in the SPL. To be fair, only three clubs were profitable during this period, namely Hamilton, Hibernian and St. Mirren, though five other clubs restricted their losses to below £1 million.

This poor financial performance is all the more depressing when you consider that Hearts have the third highest revenue in Scotland with £7.9 million, just ahead of their local rival Hibernian and Aberdeen, who both have turnover of £7.1 million. This goes some way towards explaining Romanov’s expectations of the team, though they are still miles behind the Old Firm, who enjoy revenue around £60 million.

This revenue is obviously a lot lower than their counterparts in the Premier League, but more worryingly it is also worse than all but two teams in the English Championship. Indeed, clubs like Cardiff City, Leicester City and Ipswich Town generate twice as much revenue as Hearts, even without the benefit of parachute payments from the Premier League. Little wonder that players head south at the first opportunity.

Hearts’ plight has not been helped by the fact that their revenue has actually been declining from a peak of £10.3 million in 2006 and 2007 to last year’s £7.9 million – a fall of only £2.4 million, but that’s almost a quarter of the club’s revenue gone. Three years ago the Heart of Midlothian Shareholders’ Association warned, “The club needs to generate more revenue and that is difficult in the short-term”, and how right they were. In fact, revenue is now lower than 2005 levels.

Two other points are evident from this graph. First, the club’s revenue is to a certain extent linked to success, as the year when the club finished second in the SPL and won the Scottish Cup produced revenue of over £12 million. Second, Hearts earn half of their revenue from match day income, which is different from many other leagues, where TV money rules. As the PwC review stated, “The majority of the income for Scottish clubs is actually coming from fans coming through the turnstiles.”

Hearts’ accounts proudly refer to match day revenue increasing to over £3.9 million, but the reality is that this is 27% lower than the £5.3 million generated in 2006. The fall is partly because of shorter cup runs, but is largely due to a significant reduction in attendances from just under 17,000 (almost full capacity) to 14,484. which further declined to 14,185 in 2010/11.

Nevertheless, crowds have increased since 10 years ago and Hearts are the third best-supported team in Scotland, only behind Rangers 49,000 and Celtic 45,300, for the sixth year in succession. They are also only one of three teams in the SPL to fill more than 80% of their stadium’s capacity, which is pretty good in the current tough economic climate. This might be due to the relatively low cost of watching football at Tynecastle. According to a recent BBC survey, only four teams in the SPL are cheaper. However, the good news end there, as every single team in the Premier League and 18 teams in the English Championship had higher attendances.

One reason why gate receipts are so crucial is the incredibly small amount of television money received for the Scottish Premier League rights, which worked out last year at £1.5 million for Hearts. In the SPL 48% of the TV revenue is divided equally, while 52% is distributed to teams dependent upon their final league position, so the higher up the table that a club finishes, the more money it will receive.

While TV revenue has powered revenue growth in other leagues, this is clearly not the case in Scotland. This disparity can be seen by looking at the TV revenue earned by clubs in the “Big Five” leagues, which absolutely dwarf Hearts’ revenue: Barcelona £146 million, Milan £116 million, Manchester United £105 million, Bayern Munich £68 million and Lyon £64 million. Scottish clubs can be boosted by European revenue, but even Ranger only earned £18 million, while Celtic’s adventures in the Europa League only added £1.5 million to their domestic revenue.

In fact, the entire annual payment to all SPL clubs is only £13 million, which puts them behind TV deals in Greece, Portugal, Poland and Romania. To place that into context, it is less than a third of the £40 million that the team finishing bottom of the English Premier League can expect to receive this season. A still more amazing statistic is that the total SPL payment is worth only 1% of the Premier League rights. Actually, even a club in the English Championship now earns more than a club in the SPL with £3.5 million a season (including the solidarity payment from the Premier League).

The situation was not helped by the collapse of Setanta last year. The upstart Irish channel was replaced by a combination of Sky and ESPN, but there was a harsh price to pay, as the new deal was worth only £65 million over five years, compared to the previous £125 million over four years. Sky had offered more than twice as much the year before, but the SPL clubs got greedy and gambled on the higher Setanta bid. There is some optimism, as there is a break-clause in the current TV deal after three years, and rival broadcasters might be encouraged by an increase in viewing figures, as outlined by SPL chief executive Neal Doncaster, “Early indications this season are that TV viewer numbers for SPL matches are well up on last year, which in turn showed a huge improvement on the year before.”

Commercial income had been on a rising trend, but has been shrinking in the last couple of years, falling 44% from £3.3 million in 2008 to £1.9 million in 2010, even though the 2009 accounts confidently stated, “Hearts expect to improve commercial revenues.” In fairness, PwC’s annual review of Scottish football noted that the global downturn had impacted discretionary spending on corporate sponsorship, hospitality and merchandise.

After six years of their shirts being sponsored by Romanov’s bank Ukio Bankas for a “six-figure deal”, Hearts have a new two-year agreement from this season with short-term loans company Wonga. Financial details have not been divulged, but the club say that it is the biggest deal in Scotland outside of the Old Firm. Their shirt manufacturer Umbro has extended the original three-year deal for a further two years until 2012. According to the club, this “could be worth almost £1 million per year, depending on shirt sales.” The latest accounts also “expect improvement” from the new retail franchise agreement with SRM Hearts Limited.

One of the toughest issues for Hearts is their hefty wage bill. At £9.1 million, it is the third highest in Scotland, but to a certain extent is in “no man’s land”, as it is a lot lower than Celtic (£36.5 million) and Rangers (£28.1 million), but is twice as much as their main opposition: Hibernian £4.8 million, Aberdeen £4.6 million, Kilmarnock £4 million, Dundee United £4 million and Motherwell £3.4 million.

The dilemma is whether to try to hang on to the coat tails of the Big Two in an attempt to meet Romanov’s aspirations, when doing so leads to an unsustainable wages to turnover ratio. It looks like this was their strategy in the first part of Romanov’s reign, when the wage bill exploded from £4.5 million to £12.5 million, but since then the taps have been turned off, as the wage bill has been cut three years in a row, though it is still more than double the amount before his arrival, partly due to Hearts having one of the largest squads in the SPL.

The accounts do specifically mention the “exit of some of the club’s higher earners”, including the likes of José Gonçalves, Michael Stewart, Christian Nadé and Laryea Kingston. This trend is likely to continue in 2010/11 “as a number of players reach the natural end of their contracts”, demonstrated by the hard line taken by the board during contract negotiations with Žaliūkas.

The reduction in wages has lowered the wages to turnover ratio, but only from 126% to 115%, which is still hideously high. To place that into context, it is even more than big spending Manchester City (107%), while the next highest in Scotland is 76% from Motherwell and St. Mirren. Indeed, the average in the SPL is a respectable 61%. If Hearts wanted to lower their ratio to UEFA’s maximum recommended limit of 70%, they would either have to increase revenue by an unrealistic £5.1 million to £13 million or (more likely) cut their wage bill by a further £3.6 million to £5.5 million.

That, of course, would bring its own issues, as Hearts would then struggle to attract and retain good quality players. Recently, two prominent Scottish strikers have moved to England, rejecting offers from Rangers in the process, starkly highlighting the problem: David Goodwillie went to mid-table Premier League side Blackburn Rovers (wage bill £47 million), while veteran Kenny Miller joined Championship team Cardiff City (wage bill £17 million).

More encouragingly, Hearts have managed to cut their operating costs by over 40% from £7.7 million in 2007 to £4.5 million last year. Even though there was a slight increase in 2010, the club say that “these are expected to reduce significantly in the current financial year following a series of improvements.”

Nevertheless, the continued support of Romanov is still paramount, as can be seen from the cash flow statement. Sometimes, poor figures at a football club do not reflect reality, as the P&L is affected by non-cash items such as player amortisation and depreciation, but this is not the case here, as the cash flow from operating activities is negative every year. Even in a year when a relatively large amount of cash is received from player sales, e.g. £9.3 million in 2008, this is not enough to turn cash flow positive. The only way this has been achieved is by Romanov’s company putting in additional loans: around £38 million since the takeover.

Another note of concern regarding cash flow is the huge increase in the average creditors payment period from 36 days in 2004 to 94 days in 2010. This might just be astute commercial practice of obtaining improved payment terms, but it could also be a warning sign that the club is having difficulty in paying its bills on time.

Perhaps the most puzzling aspect of Romanov’s involvement is the fundamental question of why he would invest in Hearts at all, as Scottish football is not exactly booming. Attendance levels keep falling (most of the stadiums are half-empty), they have one of the worst TV deals in Europe and commercial opportunities are suffering from the economic downturn. Although SPL profits improved in 2009/10, the PwC survey noted that if they excluded exceptional factors such as debt forgiveness and Rangers reaching the Champions League group stages, there were still large underlying losses and warned of “more pain to come as the league strives to find a sustainable financial footing.”

"Stevenson's rocket"

This has resulted in countless proposals to reform the game in Scotland, usually revolving around the number of teams in the league. The current momentum seems to be behind a reduction to a 10-team league, though the majority of fans would prefer a return to a larger division with 14, 16 or even 18 teams. The problem is finding a formula that somehow manages to eliminate the tedium of teams playing each other four times a season without reducing the number of games (with its consequent impact on revenue) and/or imposing an artificial structure, such as the mid-season split. Other possibilities include a winter break, a move to summer football and an earlier start to the season.

Some insight into Romanov’s strategy was provided by the 2007 annual report, “Future revenues will be generated through increased participation in European competitions, larger attendance in a redeveloped Tynecastle stadium and an associated greater sponsorship and retail income.”

However, the European dream seems further away then ever after the drop in the UEFA coefficient, which means that Scotland now only has one place available for the Champions League (and that is only for the qualifying rounds, no direct entry). Furthermore, it will be a long time before Scotland gets back up to two places, as the calculation takes into consideration the last five years, so next year will drop the very successful 2007/08 season, which featured Celtic reaching the last 16 of the Champions League and Rangers being UEFA Cup finalists.

"John Sutton heads for the heights"

Paradoxically, this might actually work in Hearts favour, as the Old Firm’s revenue has been badly impacted by reduced involvement in the Champions League, which means that they can no longer attract the calibre of player that they could in the past, theoretically making the title race more competitive.

If Hearts were to reach the Champions League group stages, it would make a massive difference to their revenue. In the last two seasons, Rangers received an average of £15 million from UEFA, excluding additional gate receipts. The Europa League is nowhere near so lucrative with Celtic only receiving £1.5 million from their 2009/10 participation. That said, the speed with which Hearts sold out their glamour tie in the Europa League against Tottenham Hotspur demonstrates that the appetite in Scotland for watching top players remains undiminished, as did the astonishing 58,000 crowd that watched Hearts play Barcelona in a pre-season friendly at Murrayfield in 2007.

Romanov has wanted to redevelop Tynecastle for some time with a planning application submitted in 2008 for a £51 million development that would include a new 10,000-seat main stand and other facilities such as a hotel, restaurant, offices and corporate hospitality. At the time, the deputy chief executive said, “The project will enable the club to be self-sufficient in the future and naturally to reduce the debt to zero.”

"Home is where I want to be"

However, the club’s statements in this area have often appeared overly ambitious, as the plans have been scaled back pretty much every year. The 2006 accounts spoke of turning Tynecastle into “a truly top class European football venue” by increasing the capacity to 26,000, which had been lowered to 23,000 in the 2007 accounts and 20,000+ the following year – which also said that the new main stand would be fully operational for the 2011/12 season…

Although the 2010 accounts continued to focus on “revenue generating opportunities through a redeveloped Tynecastle”, they did also note that the planning application had been unable to progress because of restrictions placed on the stadium zone, so it was perhaps no surprise when the club announced in May that it was going to formally revisit the possibility of selling Tynecastle and moving to a new, purpose-built stadium in Edinburgh, though the reviled Murrayfield is apparently no longer an option.

Frankly, the financial projections around this project have never been entirely convincing. Even though the club would be able to reduce its debt by selling their stadium, it would have to raise much more to build a new stadium, which might prove difficult in the current credit crunch. The club would hope that a significant chunk of the funding would come from other companies who would want to avail themselves of some of the commercial opportunities, but the only realistic source of financing might prove to be a certain Lithuanian bank.

"David Templeton - example of Project Youth"

The club would also have to write-off £1.4 million of costs so far incurred in the plans to redevelop Tynecastle, which are currently sitting on the balance sheet, booked as “assets in the course of construction.”

It looks increasingly likely that Hearts will have to rely on profitable player trading to balance their books, so they have invested in their academy, as any money received for players developed in-house is a pure gain in the books. The success of this strategy can be seen through the emergence of Lee Wallace, Andrew Driver, Eggert Jonsson, Calum Elliot, David Templeton and Scott Robinson.

Some have put forward more scurrilous suggestions to explain Romanov’s investment, such as Hearts being used as a vehicle to launder money, especially after Ukio Bankas was involved in such an investigation in Belgium last year. If this is the case, then it is a particularly ingenious scheme, as little money appears to be going back to Romanov or his companies. Interest charged on his loans is not paid, rather it is accumulated as additional debt. In fact, much of it has been written-off, including £2 million in 2010 alone. Admittedly, there is a raft of related party transactions, but the money involved is small beer.

"A message to you, Rudi"

There has also been conjecture that Romanov’s involvement in Hearts is an elaborate way to curry favour with the natives, so that they would look favourably upon his application to open at branch of Ukio Bankas in the UK, but no licence has been granted to date with Romanov complaining, “This is another example where the contribution to the economy is not wanted.”

Maybe he considers Hearts as a good place to showcase the talents of Lithuanian footballers, as many have been transferred or loaned from FBK Kaunas to the Scottish capital. Or is it just a plaything, where he can give his family and friends good jobs in the world of football?

Whatever his motives, Romanov’s actions resemble more those of a traditional benefactor, rather than a hard-headed businessman. That’s fine, while he is around and his other companies provide enough funds to support the football club, but the concern is that the club would collapse (in the same way that Gretna did) if he left for any reason.

"Eggert Jonsson - value for money at Iceland"

There seems little chance of Romanov ever getting his money back, as it is difficult to imagine that he would find someone to take the club off his hands, unless he substantially reduced the price. Even then it would hardly be a fait accompli, as the club’s business model in its current form is unworkable. As a pertinent comparison, it took Rangers an eternity to find a buyer.

In fairness to the owner, he has been at the club for nearly seven years now, so he cannot be accused of being “here today, gone tomorrow.” Under new manager Paulo Sérgio, the club has had a couple of encouraging results, but the most important man at the club remains Vladimir Romanov, a man maybe best summed up by Winston Churchill’s famous quote, “a riddle wrapped in a mystery inside an enigma.”