Back from the brink

Back from the brink

FEATURE | SOCCER

Goalkeeper and captain Roman Weidenfeller (centre) lifts the Bundesliga trophy in May 2011 to complete a stunning turnaround for Borussia Dortmund

Back from the brink Two years after winning the Bundesliga in 2002, Borussia Dortmund found itself in financial ruin and on the brink of collapse. Chief financial officer Thomas Tress tells the tale of a remarkable recovery which last season saw the club crowned German champions again.

By Eoin Connolly

T

he record books are always incomplete. Anyone with a favourite runner-up will tell you as much but plenty of champions would do so too: tales of courage, brilliance and grace are elided, leaving a narrative shaped only from the most inarguable of facts. A glance at the list of Bundesliga champions will reveal that Borussia Dortmund won a sixth league title in 2002 and a seventh last year, a nine-year gap perhaps reflecting the natural cycle of a moderately successful German soccer club. What it cannot even hint at are the hugely

different circumstances in which those trophies were won or just how close one of Europe’s best-supported clubs came to oblivion in the interim.

“It was very real,” says Thomas Tress, the club’s chief financial officer, of the threat to its existence shortly before his arrival. “Borussia Dortmund was, at the end of 2004, nearly bankrupt. They had liquidity of about €700,000. That was all.

They had a risk of €28 million debts to pay within six months. They had losses in the first half-year of 2004/2005 of about €55 million.”

Surprise European champions in 1997

amidst the most successful period in its history, Borussia Dortmund, or BVB, took advantage of deregulation by the German Football Association (DFB) to float a large minority of its assets on the stock market. Under the country’s new ‘50+1’ fan ownership rule just over half of the club was retained in a supporters’ trust but the flotation still brought a considerable windfall.

Like many a happy punter or lottery winner, Dortmund went shopping.

The club was lured into a dangerously overheated transfer market and spent huge sums of money on players, breaking

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Thomas Tress is the chief financial officer at BVB

“Borussia Dortmund and all the people in the club learned that you cannot spend money which you did not earn.”

Bundesliga records on the likes of Czech Republic midfielder Tomas Rosicky and the Brazilian Evanilson. Such an approach proved short-sighted. With a stomachchurning drop in share values threatening the club’s earning potential, it only took a minor slip in on-field performance to create a serious crisis.

“Well, the former management spent more money on the team than they could related to their income,” Tress says now.

“They sold future profits and spent the money on the actual team. Then, Borussia Dortmund, in 2003/4, got the problem that they slipped out of the Champions League and they were not that flexible to press the costs down or lose items, finalised in the situation that we found in 2004.”

Dortmund’s plight was not a unique one at the time in German soccer – or across Europe, where the likes of celebrated English club Leeds United were laid waste by a similar affliction. It emerged in February of this year – and is confirmed

by Tress – that the club grew so desperate as to accept a €2 million short-term loan from Bayern Munich in September 2004 in order to cover salary costs. Tress has no difficulty in identifying what went wrong.

“Well, it’s quite easy,” he says. “Borussia Dortmund and all the people in the club learned that you cannot spend money which you did not earn. You have to focus your economic strength and not have the idea to compete with clubs like Bayern Munich or Barcelona, because these clubs have much higher revenues and more

economic strength. We learned that you have to invest in your youth, to develop your own stars, and you can add to your team with young potential players, but we are not able to compete in the European soccer market with British or Spanish clubs in respect of transfer pricing and we have to be focused on having very flexible cost structures. Those are the things we learned from the past.”

Tress is speaking to SportsPro in midFebruary at the CCD Congress Center in Düsseldorf, just a few miles from the airport complex where a month shy of seven years earlier, a meeting was held which would decide the future of Borussia Dortmund. Club officials met with representatives of Molsiris, a property investment fund which in 2002 had bought the team’s home stadium, then known as the Westfalenstadion. The club, put simply, could no longer pay its rent. A new settlement was desperately needed for Dortmund to renew its licence with the DFB and remain in existence. A solution was found and under the astute leadership of returning president Reinhard Rauball,

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FEATURE | SOCCER

Dortmund players toast chief executive Hans-Joachim Watzke (left) and coach Jürgen Klopp (right)

incoming chief executive Hans-Joachim Watzke and Tress himself, a remarkable recovery was underway.

The coincidence is perhaps not lost on the organisers of the SpoBis conference, who have invited Tress to address delegates on how to restore a soccer club’s profitability.

“I was working as a public accountant and I came in as an advisor at the end of 2004,” says Tress in his careful, thoughtful manner. “What we did was review the actual situation, the reasons where the crisis was coming from. We made a restructuring plan on the financial side to negotiate with all the banks. And that was the first step, what we did, to stop the petty cash burn in the company and to await that closure of the whole situation.

“As a consequence of these we had more time for the company but the problems were not really solved. There were no debts reduced and the restructuring of the company on every part – I am talking of ticketing, marketing, business processes – everything was on the point of restructuring. So that was the time, in the beginning of 2005 – February – when my colleague, Mr Watzke, stepped in as CEO and I was asked in the further months to take the position of CFO, which I have done since 2006.”

In 2005 and 2006, Tress and his team

undertook the “largest ever restructuring of the company, in organisation, in sales processes, business processes”, before seeking an investor to help restructure its heavy and complex liabilities. Then came the task of injecting more equity into the business.

“We managed to get in contact with Morgan Stanley in 2006,” Tress continues, “and we bought the stadium back – the outstanding portion of 51 per cent – where we did a €22 million equity swap. We had a capital increase from our shareholders of about €44 million, from which we paid owed loans.

“This was the target in these years, and then in 2007/8 the next target was to restructure all the operative business units and to get forward with fields like marketing, because there was no marketing. In 2008, we paid out Morgan Stanley and we prolonged our contract with Sportfive who make our sponsorships. They gave us €50 million and we loaned another €20 million from a bank and this €70 million we gave to Morgan Stanley to pay them off. And starting from 2008 we had Jürgen Klopp.”

Where Tress, Watzke and Rauball have provided the calm, rational leadership needed to steer BVB out of financial difficulty, it is Klopp’s achievements that lend the comeback its storybook feel.

Since arriving from Mainz 05 in 2008 to take over the first team, the 44-yearold has created a youthful side of real ambition on a budget that would seriously hamper some of his peers.

“He accepted and made his own strategy of how to run the sports side of the business,” recalls Tress. “Develop our own young players, invest in high potential in the market which is not that expensive.”

Initial results were promising, with Klopp lifting BVB out of mid-table to finish sixth and fifth in his first two Bundesliga seasons, but it was in 2010/11 that he redefined what was possible for the club. One of Europe’s most exciting and enterprising teams, composed of young talents like defender Mats Hummels, the metronomic Turkish midfielder Nuri Sahin, fan favourite Kevin Grosskreutz and the richly gifted teenager Mario Götze, advanced on the Bundesliga like a swarm of angry bees, building a 12-point lead by late winter and holding on to win the German championship with two games to spare.

There has been little evidence this season that Klopp’s alchemist’s touch will fail him. After a sluggish start, the team has reached the German Cup final and once again eased ahead in the title race, buoyed by a pivotal 1-0 win at the home of then-leaders Bayern Munich in November.

Still, such success could still be transitory – not least with Klopp apparently coveted by the DFB as a long-term replacement for the popular German national team manager Joachim Löw – and contingency plans are still in place.

“You can’t have financial success without sporting success but you can’t have sporting success without financial success,” argues Tress, “and our idea and strategy is to combine financial and sporting success because we believe both are necessary to survive in the Bundesliga and internationally. So what we are doing is we are planning very conservatively and we are very flexible in our cost structures.”

Responding to the lessons of a decade ago, the club aims to ensure that a fall from the European or Bundesliga elite can no longer precipitate financial calamity.

“Well, we have for example the salary of our players, 40 per cent is flexible at any one time,” reveals Tress. “We have a structure in our team that is very

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youthful, so our expenses in what we are paying for the whole team compared to other teams in Germany and Europe are relatively low. Because we generate our own talents and we invest in high potential and we do not just buy from the market very good, expensive players.

While that’s also a risky thing it gives us the possibility to have the cost structures in the level where you can manage it.”

The success of such a vibrant young side has inevitably attracted the interest of Europe’s bigger names. Sahin was spirited away by Real Madrid in the aftermath of the 2011 title success, while Götze was repeatedly linked with a move to Premier League Arsenal – a club with some similar sporting and business philosophies to Dortmund but much deeper pockets – before agreeing a contract extension until 2016 in March. Tress insists that player departures are neither a strategic necessity nor a dependable revenue stream.

“We are very aware that we have high transfer values in our team but we are also aware that the idea and the strategy is to make Borussia Dortmund successful in sport,” he says. “And we do not plan with transfer revenues. This is coincidental, this is not plannable, so the idea is to keep such high potential players at Borussia Dortmund, to play with them internationally, to have our sporting success there and also further economic success. And the idea is not to have a player like Mario Götze to sell him, to make easy, fast money, to have a windfall profit. This is not the idea of football. We have to plan, I think, over more than one year, and losing high potentials like Mario Götze is not very healthy if you want to play successfully in the Bundesliga or internationally.”

Off the field, evidence of Borussia Dortmund’s burgeoning stability and respectability is apparent in a growing commercial portfolio. One partnership grew out of necessity when in 2006 the naming rights to the reclaimed Westfalenstadion were sold to locally based insurance group Signal Iduna. The deal was somehow fitting, given that it was the insurance industry that rose to revive the city of Dortmund’s fortunes when those of its traditional breweries began to dwindle. Though there will always be a section of the support

The 25,000-capacity Südtribüne stand at Signal Iduna Park is a core element of the club’s identity

that bristles at the idea of renaming an existing stadium, Signal Iduna’s involvement has generally been well received. Indeed, a campaign inspired by the team’s title success – in which the names of over 70,000 fans were flashed one by one across a giant BVB shirt on the outside of the stadium – was acknowledged at SpoBis as one of Germany’s best sponsorship activations of the year, finishing second in the overall category in the Marketing Awards of Sports 2012.

Like many German clubs, BVB now earns a significant portion of its revenue from its commercial activities. According to the Deloitte Money League 2012, €78.7 million – or 57 per cent – of the €138.5 million Dortmund earned from soccer in 2010/11 came from sponsorship.

Extensions have since been signed with partners such as meat company Sprehe, which renewed its seven-figure sponsorship and supply deal at Signal Iduna Park in December.

Shirt sponsor Evonik, which came on board in 2006, renewed terms with the club in February when it signed a threeyear deal worth an estimated €30 million.

The partnership, Tress says, has “had some development” in its six years so far, with BVB’s recent success proving an undeniable boon.

“Also, for them,” he adds, “it’s surely good to have a partner like Borussia Dortmund which is stable on the financial side, because having a partner with huge financial problems... this is not an image you’d like to have as a sponsor in a partnership.”

In July, German brand Puma will replace Kappa as Dortmund’s kit supplier in a deal which Tress can see having huge collateral benefits for the club beyond the €7 million a season the national media believes will change hands.

“The advantage for us is to have a huge brand name like Puma which has a huge international representation,” he says, “which helps us surely also on our awareness in Europe. This is a good partnership and they will do their marketing activities also with Borussia Dortmund and our players so we have also huge advantages from this deal and partnership – for that we have a long strategic partnership of at least eight years.”

Regardless of whether a second Bundesliga title can be delivered, Borussia Dortmund look well set to secure a second consecutive season in the Uefa Champions League. There was a hint of stage fright about the team’s first-round exit on their return to the tournament this season but, on the whole, German clubs have performed with increasing consistency

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FEATURE | SOCCER

in European competition – to the extent that a fourth Champions League place has been awarded to the Bundesliga for the 2012/13 season at the expense of Italy’s Serie A under Uefa’s league coefficient seeding system.

While Tress believes this can be a platform on which to build the BVB brand across the continent, he sees international expansion as a lengthy process.

“For this you would have to play every year, or nearly every year, in the Champions League and be very successful there,” he says, “but this is nothing we can reach in the near future. This is more my view in ten, 15 years.”

Commercial popularity is one thing but as Tress himself says, “Borussia Dortmund is nothing without its fans.”

The remarkable supporter base is admired throughout European soccer, not only for its loyalty and size – average attendances at Signal Iduna Park last year were bettered only by those at Barcelona’s Camp Nou – but also its colour and exuberance. Tress maintains that certain matters are sacrosanct: the team colours must consist of a “specific yellow” and black, while ‘safe standing’ areas on the hugely impressive 25,000-capacity Südtribüne stand will be protected as long as club officials “are not forced by Fifa or the DFB or whoever” to convert it to permanent seating.

Tress fully accepts the importance of a grounded relationship with supporters and, given the club’s recent history, the need for honesty when it comes to financial matters.

“We have people working all day with the fan groups that have communications,” he says. “There are half-yearly invitations to fans. There’s a very narrow communication with fan groups. It’s important in modern football – also in respect of security.”

Supporting Borussia Dortmund is not as expensive a pastime as it may be elsewhere in Europe. Close to 80,000 supporters pack out Signal Iduna Park every week but with spaces on the Südtribüne available for less than €20 and seats elsewhere much more reasonably priced than at some top clubs, stadium income does not hit the heights reached by continental rivals.

“If you are talking about ticketing,” explains Tress, “in the Bundesliga we

made about €24 million from our total revenue of €151 million, so it’s not that great a portion, but it is the stadium, this is our home. So on that part it’s very important.”

Away from soccer, the functionality of the stadium is somewhat limited in comparison to modern multi-purpose venues like Schalke 04’s Veltins Arena in Gelsenkirchen. “We can’t change it and we won’t change it,” says Tress.

Events and conferences are regularly held in hospitality areas on non-matchdays and Tress says that there are “lots of activities which could be increased on a certain level”. Yet while there may be room to increase the cost of going to games, Tress is adamant that it is an option that will not be explored “We will not increase, like you have in Britain, our ticket pricing,” he insists.

“Our ticket pricing will be slowly higher for inflationary reasons, cost increases, but we will not exploit our fans on ticket prices excessively like we have seen in Great Britain.”

Such comments should provide something for some of Dortmund’s European opponents to consider as it continues its participation in the Champions League, as will Tress’ thoughts on the reckless spending policies prevalent in other leagues. He describes the effect of abundantly wealthy owners of clubs in England and Spain, as well as Paris Saint-Germain in France, as “not healthy for European football” and “unfair on the competition side”.

Uefa’s much-vaunted Financial Fair Play regulations, which will eventually require clubs to break even in their sporting activities in order to participate in its competitions, should provide some measure of correction. Tress is confident that there is “no problem with respect to financial fair play” for his club following the completion of a trial period with the European governing body and admits to being “very happy” about the concept.

He is hopeful that the rule changes will stimulate “more economic understanding” and rationality in the leadership of European clubs. Ironically, he is speaking on a day when news will emerge that two British soccer clubs – Portsmouth in England’s second-tier Championship and, alarmingly, Scottish Premier League giants

Rangers – face not only administration but the looming threat of liquidation.

Borussia Dortmund will hope to have left such turmoil behind but Tress concedes that Bundesliga clubs can learn from their rivals overseas in some areas, citing the modern stadium facilities and marketing practices in England, and the television revenues earned by top clubs in the Premier League and La Liga.

These developments are things that Tress says “we cannot afford all at once” but whatever comes to pass, Dortmund are in an immeasurably better state than seemed possible seven years ago. A sensible, disciplined response to the worst crisis in its history has left the club with a very positive set of financial results.

“Well, we are very healthy,” Tress reports, “if you see what health problems other clubs have. We have more than €150 million turnover. We made last year about €10 million profit. We will have a profit this year, also, higher than last year. The financial debts we had a couple of years ago were about €200 million. Now we are talking about €52 million at the end of the year 2011. So we are very healthy.”

For that to continue, there can be no deviation from the path that has been set out in recent times – no return to the kind of speculation that wreaked such havoc in the past – with expenditure on sporting objectives and other projects closely tied to financial performance. Tress came into his job at Borussia Dortmund with a history at PricewaterhouseCoopers and at RölfsPartner, handling restructuring processes, mergers and acquisitions at the latter. He had no background in sports administration. Today, he has seen enough to recognise the pitfalls that lie ahead.

“The business administration does not change from a production company to a football club,” he says. “But you have more emotions, you have a huge attendance in public, and sport has a big portion of insecure probabilities when you’re going on the sporting side.

“Everything depends on the sporting success, all your sales and TV rights and sponsorship and ticketing and merchandising, so you have a very insecure situation in respect of planning processes.

If you plan, you plan very conservatively to be sure that your liquidity is always in your hands. It’s a very rough business.”

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