Birmingham City Blues

The January transfer window has been a bit of a damp squib to date, with the exception of Manchester City’s big money purchase of prolific Bosnian striker Edin Dzeko, but rumours of possible signings abound. Perhaps surprisingly, one club that has featured prominently in the feverish press speculation is Birmingham City, who have been linked with a series of attacking players in an attempt to resolve their goal scoring problems, including Kenny Miller and Robbie Keane, and have signed David Bentley on loan.

The reason for Birmingham’s activity in the transfer market is clear, as they are currently languishing in 15th position in the Premier League (albeit with a game in hand), a single point ahead of the relegation places. Even though the Blues have proved their usual obdurate selves defensively, particularly at St. Andrews, they have only won four times with their points tally being damaged by an unusually high number of draws (ten).

Realistically, the fans’ hopes should not be overly high, as Birmingham have only won one major trophy, back in 1963 when they beat local rivals Aston Villa 3-1 on aggregate in the League Cup, though they have played in the top tier of English football for the majority of their history. Nevertheless, the team achieved a highly creditable ninth place finish last season, which was particularly praiseworthy, given that this came immediately after being promoted from the Championship.

Great stuff, but this was always likely to be a hard act to follow and, sure enough, Birmingham are suffering from a classic case of second season syndrome, whereby a promoted team that exceeds expectations invariably struggles the following year.

"Alex McLeish - Big Eck"

In fairness, the club’s prospects have been hurt by the long-term absence of James McFadden, exacerbated by the failure in the summer to secure manager Alex McLeish’s preferred striking targets, including Bobby Zamora, Fabrizio Miccoli and Moussa Dembele. As an alternative, he has had to make do with beanpole Serbian forward Nikola Zigic and Chilean winger Jean Beausejour, supported by loan signings Matt Derbyshire and Aleksandr Hleb, and none of these players has had a meaningful impact on the scoring charts.

So they need to do something if they want to ensure survival in the Premier League. When Carson Yeung’s investment vehicle Grandtop International Holdings Limited took over the club in October 2009, it made it very clear that this was the cornerstone of their strategy, “Our aim is to work hard to secure our position in the Premier League, not only this year, but for many years to come.” Nothing wrong with that, of course, as this is the strategy of the majority of clubs in the Premier League, because the financial implications of relegation are too hideous to consider. When Birmingham were relegated in 2006, they warned, “A prolonged absence from the Premier League will force the club to make wide-ranging economies.”

This explains the club’s apparent willingness to reinforce its squad, though there is a degree of confusion over just how much money is available for new players. Alex McLeish first claimed, “We are not in a position to spend at the moment. We are looking at the loan situation and if push comes to shove then we will see.” However, this reticence was later clarified by Peter Pannu, the club’s vice-chairman, “We will consider each request on a need to buy basis, and need to play basis and finally on a need to strengthen the team basis and not on a buy for the sake of buying basis.”

"David Bentley - dreaming of a new start"

It’s a real dilemma for Birmingham: in the immortal words of Richard Keys, do they stick or twist? If they don’t improve the squad, they run the risk of relegation and all that entails, but, on the other hand, if they do splash the cash, they will place an additional financial burden on the club’s threadbare financial resources. Last year McLeish explained his ethos, “There will be money to spend, but there has got to be prudence.” Of course, if the money spent were to result in the club maintaining its place in the Premier League, it would certainly recoup its investment, but this still represents a gamble.

This is especially so in the case of the Blues, as highlighted by the latest accounts for Birmingham City PLC, which were released last week and included the dreaded “Emphasis of Matter” warning, which stated, “These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.” Although some have under-played the significance of this statement, suggesting that it’s merely a case of accountants covering their backsides, the reality is that auditors do not make such remarks lightly, as supporters of Liverpool and Hull City would appreciate. In simple terms, there is a risk that Birmingham City will be unable to pay its bills and could even go bust.

The same accounts make it crystal clear that the club “is reliant on continued funding from Carson Yeung.” Of course, Birmingham are by no means the only club that is dependent on the support of a wealthy benefactor, but the comments on future trading and liquidity emphasise the hand-to-mouth nature of the club’s existence, as “the forecasts show that the Group needs funding of around £7.5 million from its parent company in the short term in order … to continue to operate within its agreed bank facilities.” Even that hinges on finishing in an unspecified position in the Premier League with a further £3 million required if the club avoids going down. There is no mention of what happens in the worst-case scenario of relegation, but we can make a pretty good guess, as the club posted a £19 million loss the last time this happened.

"Hleb - known to Arsenal fans as Dribbly McNoscore"

Even more worrying is the fact that the parent company, Birmingham International Holdings Limited (BIH), does not appear to have this funding readily available, but needs to organise a placing of shares on the Hong Kong Stock Exchange “to provide general working capital and financial support.” Only £7.5 million is fully underwritten (i.e. guaranteed), leaving a further £17.5 million to be raised on a “best efforts” basis. That’s not particularly comforting, especially as the accounts state that the net proceeds “are expected to be transferred by the end of November 2010”, but there has been no further press release from BIH regarding the results of the placing. Instead, the company’s shares were suspended on 5 January, “pending the release of an announcement regarding proposed very substantial acquisition.”

To a certain extent, the warning in the football club accounts is old news for Blues fans, as the BIH accounts published last October contained exactly the same “going concern” statement, while also noting that the Group’s current liabilities exceeded its current assets by around £28 million (depending on exchange rate with Hong Kong Dollar), after incurring a loss of £35 million, though much of this was due to a paper loss from writing-off goodwill arising on the acquisition of the football club. Clearly, the funds from the proposed share placing will be used to shore up the balance sheet, but that means that only limited funds will be available for transfers or stadium development.

At the time, Peter Pannu eased the fans’ fears, “The accounts are those of the holding company and has nothing to do with BCFC, which in the last year had shown profits”, but this is palpable nonsense. Birmingham City Football Club PLC is the only trading subsidiary of Birmingham City PLC, which is in turn wholly owned by Birmingham International Holdings Limited (formerly Grandtop International Holdings Limited). If the chain of ownership is not enough to convince, try this for size: 99.6% of BIH’s turnover comes from the football club.

All of this has cast significant doubt over the viability of the club’s holding company, which is crucial, as the football club is reliant on its support. Birmingham City’s June 2010 balance sheet has net current liabilities of £27 million, while net debt is £14 million. Almost all of this has arisen in the last year, very largely comprising a £12 million loan (bearing 5% interest) from Carson Yeung, though he has promised not to seek repayment in less than 12 months. Since the books were closed, he has advanced a further £2.8 million, so the total owed now stands at £14.8 million. The club also has £2 million of bank loans and a £2 million overdraft, both of which are secured on the club’s land and buildings, offset by £1 million of cash.

So, the club is no longer debt-free, as it had been during the reign of previous owners David Sullivan and David Gold, thanks to their frugal approach. Of course, Birmingham’s debts are not huge compared to other clubs, something that Pannu was keen to announce, boasting that they were “nowhere near the level of some major Premier League clubs and some of the powerhouses in Spain and Europe.” That’s true, even though his grasp of European geography seems rather loose, but the revenue generated by those clubs is considerably higher.

In fact, Birmingham’s debt is effectively higher, as they also owe £13 million to other football clubs for transfer fees, of which £8 million is due in the next financial year. Stage payments of transfers is a fairly common practice, but this is quite a high sum for a club of Birmingham’s size and it has been increasing over the past few years.

They also potentially owe the taxman £5 million on image rights if Her Majesty’s Revenue and Customs win a court case against a number of football clubs. Similarly, the club has provided around £1 million for a VAT dispute.

However, the majority of the debt has come from Birmingham’s recent largesse in the transfer market. People might be taken aback by the fact that Birmingham’s net spend of £36 million over the last two seasons is the third highest in the Premier League, only behind Manchester City and Chelsea. In a way, this is perfectly understandable, as a team promoted from the Championship has to improve their squad to be competitive in a higher division, but it’s still a surprising statistic.

Although Carson Yeung has not quite delivered on his initial pledge to spend £80 million on new players (“£40 million in the January transfer window is my commitment to the Birmingham fans. And next season we put another £40 million into the team.”), this still represents a significant outlay. Of course, boasting about such spending power did not appear to be a wise move from a negotiating perspective and Yeung has since admitted, “In hindsight, I can see that wasn’t the best thing to do. We learned one lesson – that suddenly prices shot up.” Well, they would do, if you show your hand so blatantly, e.g. the price of Roman Pavlyuchenko jumped 50% overnight.

Looking at Birmingham City’s profit trend, we can see why Yeung’s loan was so important in funding the transfer spend. Even though the club was one of a select few to make a profit last season, it was extremely small at £0.1 million, necessitating cash injections. Let’s be very clear about this: Birmingham City have been run very well from a financial point of view, reporting profits in six of the last eight years, but they simply don’t produce enough cash to justify their recent activity in the transfer market.

At its simplest, Birmingham are profitable in those seasons when they play in the Premier League, but make a loss if they drop down to the Championship. In 2008/09, the club took the calculated gamble of retaining most of its players, which paid off in the sense that Birmingham came back up at the first time of asking, but this did produce a hefty £19 million loss. This was in contrast to the approach they took after relegation a couple of seasons before, when they “took immediate action to alleviate the financial implications” by releasing 13 first team squad players in order to cut the wage bill and realise some profit on player sales (mainly Emile Heskey and Jermaine Pennant to Liverpool), though they still had the “highest investment in the division.”

I should note at this stage that the last accounts only cover ten months, as the accounting close was changed from 31 August to 30 June, in order to be in line with the parent company BIH. This probably has limited impact on the revenue figures, as the TV money from the Premier League is distributed during the football season, while matches are not played in July and August. However, costs are booked evenly throughout the year, so a full year’s costs would have been higher than reported.

Despite turnover more than doubling on Birmingham’s return to the top tier from £28 million to £56 million, this is still relatively low for clubs in the Premier League. Even though it’s a different year, if we take the Money League for 2008/09 as a comparison, Birmingham would have been in 15th position or about the same level as Stoke City. To place that into context, Manchester United’s revenue is nearly five times as much, while Aston Villa earn 50% more.

The graph of the revenue mix vividly highlights Birmingham’s challenge with almost all of their income (£42 million) being derived from television, leaving relatively little from the other revenue streams with £7 million coming from each of match day and commercial. The difference between TV revenue in the Premier League and the Championship is by far the biggest swing factor in each year’s revenue. In fact, it has become increasingly important over the years. Note that match day revenue in the earlier years was over-stated in the accounts, as it included “FA and League distributions.”

In fact, 74% of Birmingham’s total income comes from TV, which is only behind Wigan in terms of Premier League clubs’ dependency on the small screen, even though their £42 million is nowhere near as much as the leading clubs earn, mainly due to the money those teams earn from the Champions League. Like others, Birmingham have enormously benefited from the Sky revolution with £41 million of their £42 million broadcasting income emanating from Murdoch’s empire.

The distribution of the Premier League TV revenue is therefore of particular interest to a club like Birmingham. Much of it is shared out equally, namely 50% of the domestic rights and 100% of the overseas rights, but not all of the money is allocated in this manner. Merit payments account for 25% of the domestic rights with each place in the final league table being worth around £800,000, which we have already seen is important for Birmingham’s cash flow. In addition, the remaining 25% of the domestic TV rights comes from the facility fee, which is based on how many times Sky broadcast a club’s matches live. Last season Birmingham were shown eleven times, while the viewing public was treated to Manchester United the maximum 24 times.

As such, Birmingham’s turnover is heavily influenced by the timing of broadcasting deals, with the significant increase in 2008 revenue being partly due to promotion and partly due to the new Sky agreement. Happily for the Blues, they can anticipate a similar boost to revenue in next year’s accounts, as the central payments from the latest three-year deal, which kicked off in the 2010/11 season, will climb by around £7-10 million, largely thanks to the steep increase in overseas rights.

Although the parachute payments paid to clubs dropping out of the Premier league have been increased to £48 million (£16 million in each of the first two years, £8 million in each of years three and four), this would still represent a drastic reduction for Birmingham. They can expect around £48 million revenue from the Premier League this season, so they would have to manage a £32 million reduction in their revenue, which is a big ask to say the least.

The accounts proudly announce that match day revenue increased by £2 million from £5 million to £7 million, though this is partly due to promotion. In a way, this was still impressive, as season ticket prices were reduced by 10%, but this amount is still insignificant compared to most other clubs. If you consider that clubs like Manchester United and Arsenal collect over £100 million of match day revenue, it’s hardly a level playing field. In fact, only three clubs have lower gate receipts: Blackburn Rovers, Bolton Wanderers and WBA.

This is pretty much in line with crowd levels, as Birmingham’s average attendances rising of 25,000 (up from 19,000) were the 16th highest in England last season, partly because only 84% of St. Andrews’ 30,000 capacity is being filled. In fairness, the West Midlands has been stricken by severe unemployment, with many manufacturing plants (notably Longbridge) being closed down and other workers having their hours reduced.

"Big Ben Foster"

The club has invested some money into the stadium in the past, with the accounts specifically mentioning £1 million on refurbishing the main stand in 2008 and £2 million on the ground and training facilities in 2007, but the 2004 proposal to build a 55,000 capacity City of Birmingham Stadium has been put on hold, after the government refused to issue a licence for a super casino.

If the Blues are adversely impacted by low match day revenue, the picture is even worse when it comes to commercial income with only WBA earning less than Birmingham’s £7 million. Again, the “big boys” generate substantially more revenue here with Manchester United and Liverpool receiving ten times as much at around £70 million. Note that the £10 million commercial revenue reported in 2008 was artificially inflated by the £2.5 million compensation received for former manager Steve Bruce joining Wigan.

The shirt sponsorship deal with F&C Investments is worth just £650,000 a season, which compares very unfavourably with the £20 million that Standard Chartered pay Liverpool. In fact, only Blackpool’s deal with the inappropriately named Wonga is lower in the Premier League.

As of this season, the club has signed a five-year deal worth £7 million with Chinese sportswear manufacture Xtep to provide kit, replacing the three-year deal with Umbro. Peter Pannu was proud of this off-pitch signing, “Not only is it a superb deal commercially, being the biggest sponsorship the club has acquired, but also on a brand level, as it promotes the club internationally.”

"Karren Brady - the first lady of football"

This is part of the owners’ long-term strategy, which was outlined after the acquisition, “We believe that there is a major opportunity to build BCFC’s fan base in China and to generate new sources of revenue for the club.” Former chief executive Karren Brady gushed, “I can foresee links with the powerhouse Chinese economy”; while one BIH’s legal advisors went even further, “With a population of 1.3 billion in China, the prospects are unlimited.”

Stirring stuff, but is it really credible? Sure, football is widely followed in China with Premier league matches broadcast on free-to-air state channel Guandong TV, but even franchises like Manchester United have struggled to make any tangible impact there. Indeed, only a tiny percentage of United’s revenue comes from outside the UK. Of course, Yeung has many more local connections, which he believes will lead to Birmingham being “more popular than Manchester United and Chelsea”, but there’s been little evidence of that so far, beyond a pre-season tour. It’s obviously early days in the relationship, but to break through in a major market like China is likely to require the kind of funds that Birmingham do not appear to possess.

Where Birmingham can be justifiably lauded is their cost control. In five years, total expenses have only grown from £45 million in 2005 to £55 million last year, though we should probably pro-rate 2010, as those accounts only cover ten months. If we do that, we get £65 million, which gives a growth of 44%, which is not too bad. As a comparison, Bolton, a club with similar revenue (£56 million), has seen cost growth of 95% in the same period.

Using the same pro-rata technique, the annual wage bill is £44 million, which is one of the lowest in the Premier League at 15th. This means that Birmingham significantly outperformed their expected league position based on wages when they finished 9th. To place their wage bill into context, teams like Aston Villa and West Ham pay 50% more.

This is an area that the board takes very seriously, indeed it is listed as the club’s principal risk in the accounts, “The acquisition of players and their related payroll costs are deemed the core activity risk and, whilst assisting the manager in improving the playing squad, the Board is mindful of the pitfalls that are inherent in this area of the business. The aim is therefore to manage these costs whilst being as competitive as possible within the club’s financial constraints.”

In 2007 wages were cut following relegation, but this was not repeated in 2009 when the club was again demoted, leading to an unsustainable wages to turnover ratio of 100%. This was lowered to 78% last season, due the rise in turnover following the return to the Premier League, but this is still a little on the high side. To be fair, this could fall to UEFA’s recommended maximum limit of 70% with a £7 million increase in revenue, which is entirely possible following the new Sky contract.

The question is what would happen if Birmingham were to be relegated? Yeung has spoken in the past of maintaining a “magic formula of 60-70%” and “a fall-back option in case you are not in the Premiership”, which implies that there would be a sale of players in this eventuality, unless the players’ contracts include clauses reducing salaries in the Championship.

Similar to wages, player amortisation of £12 million is far behind most of Birmingham’s Premier League rivals, who are still “paying” for the transfer excesses of previous years. Amortisation is an “accounting” expense, which occurs as the result of transfer purchases. When a player is bought, the cost is capitalised as an intangible fixed asset and amortised (written-off) over the length of his contract. This means that the costs of buying a player are not fully reflected in the books in the year of purchase, but over time the amortisation costs can have a real impact on the profit and loss account, e.g. Manchester City’s annual amortisation is an astonishing £71 million. Again, for Birmingham, this expense tends to rise and fall, depending on whether the club is in the Premier League or Championship.

The impact that the new owners have had on the club’s transfer policy can be seen by looking at the net spend over the last decade. During the last eight years of the Sullivan and Gold era, this amounted to £41 million, but this has almost been matched with £36 million in the two years under Yeung. OK, a couple of the buys in 2009 took place when the “two Davids” still had their hands on the tiller, but the point largely remains valid.

Many of the purchases, such as defenders Roger Johnson, Scott Dann and Craig Gardner have proved quite astute, while the club has also made good use of the loan system over the years, most notably with goalkeeper Joe Hart from Manchester City last season, but also the likes of Sebastian Larsson, Fabrice Muamba and Nicklas Bendtner from Arsenal.

This is an example of the thrifty stance adopted by the previous owners, Sullivan and Gold, who appear to have provoked contrary reactions in most supporters. On the one hand, they rescued the club from receivership in 1993 when they bought it for £700,000 and they ran the finances in a sensible manner, generating profits in many years, which is a rare feat in the pressurised world of football. On the other hand, they were criticised for milking the fans and not investing more of their own money, leading to two relegations in four years, which many felt could have been avoided.

Indeed, the former regime’s reputation for financial competence has taken a few hits in recent years. In March 2010, Sullivan himself declared, “Last summer we knew the club had a financial problem, as we publicly stated we loaned it £5 million to pay the deposits on two new players, because there was no money to do that.” In the same interview, when confronted with Birmingham’s £19 million loss in 2009, he admitted, “I can’t see where this loss has come from”, even though he had sanctioned the policy of retaining the Premier League squad in the Championship – which, admittedly, was vindicated when promotion was secured.

"Gold and Sullivan - the dynamic duo"

Then, there’s the small matter of a few legal difficulties, including a tribunal finding against the club in 2007 over the issue of reclaiming VAT on agents’ fees, and Sullivan and Karren Brady being arrested the following year on suspicion of conspiracy to defraud and false accounting (though no charges ensued).

While these incidents may have raised supporters’ eyebrows, they were more angered about the size of Brady’s pay-off, when the club was sold. According to the circular sent to Birmingham City shareholders, this amounted to a staggering £959,000, comprising 12 months’ notice £179,000; once-off bonus on company sale £520,000; and a bonus for each season played in the Premier League, starting 2009/10 £260,000.

Indeed, Yeung sued the former owners, as he believed that they had taken too many management fees out of the club, and even though they ultimately dropped the lawsuit, the 2010 accounts did note that the club recovered a total of £2.65 million “relating to management charges incorrectly invoiced to the club in previous years.”

Of course, the old saying caveat emptor springs to mind and it is fairly obvious that Yeung’s due diligence could have been better, especially as this was his second bite of the cherry, having failed to raise sufficient funds in his collapsed takeover bid of 2007, when he had to settle for a 29.9% stake instead. Despite this inside track, Yeung surely over-paid when he finally bought the club in late 2009 for £81.5 million, which was £17.5 million more than Randy Lerner paid for Aston Villa and £58.5 million more than Venky’s paid for Blackburn Rovers (though in both those cases, the new proprietors took on more debt).

"McFadden - absence makes the heart grow fonder"

In this case, Sullivan was right on the money, “He merely asked us about ten questions and failed to bring in accountants or auditors. It’s a bit like me buying a house and failing to conduct a survey and then moaning when the damn thing collapses.”

A similar lack of attention to detail was exposed when Yeung’s company lost a court case to stockbroker Seymour Pierce, who had sued the club for £2.2 million of unpaid fees relating to advice provided in the initial takeover bid, apparently because they had failed to submit three months’ written notice. At one stage, there was talk of this case causing the owners to lose control of the club, which may have been an improbable scenario, but it did raise questions over the strength of their financial backing.

As Seymour Pierce’s lawyer said, “Any reputable business would not choose to be in contempt of a British high court. If they are well funded and they are as substantial as they have told people, they would easily be able to fund the fee and then try to get leave to appeal the judgment.”

There has always been a dichotomy at the heart of Birmingham’s new owners: plenty of bullish talk about money being made available for new players, even though the holding company appears to have little financial substance. Indeed, Grandtop made significant losses in the four years prior to the acquisition and required a £57 million bridging loan to fund the takeover, which was only repaid after a share issue. This was a sign of things to come, as the current working capital issues are once again being addressed via another share placing.

"Nikola Zigic - more bang for your buck?"

If that’s not bad enough, there is also confusion over the identity of the real owner of the football club with some questioning Carson Yeung’s role, leading to a rebuttal by Peter Pannu, “He is not a front man, he is the main man”, though even he admitted, “I can understand why people have made assumptions. The legal documents are very complex and difficult to explain.”

That’s certainly true, but the latest placing document clearly identifies the anticipated dilution of Yeung’s stake that would result from this process. He currently holds 18.54% (in his name 5.82%, wholly owned Great Luck Management Limited 12.72%), which would fall to 16.25% after completion of the fully underwritten element and 12.47% if the maximum number of “best effort” shares are placed.

Apart from demonstrating the lack of confidence in BIH, given that less than 25% is underwritten, this share placing raises a couple of important questions: (a) If Yeung has so much money, why is he prepared to let his stake be diluted, especially as the price is half of what he previously paid? (b) How can he still be the “main man”, when he will own less than an eighth of the company?

In fairness, he would still be the major shareholder, if not the majority shareholder, and it is possible that other large shareholders are close business associates, who are happy to see him to lead the organisation. That said, he sure has come a long way since the days he ran a chain of hair salons, before apparently making money from the ubiquitous “property development” and becoming chairman of Hong Kong Rangers football club.

"The focus of Roger Johnson"

The company’s share placings have been under-written by Kingston Securities, a Hong Kong brokerage owned by Pollyanna Chu, chief executive of the Golden Resorts casino hotels company in Macau and reputedly one of the wealthiest women in Hong Kong. There are suspicions that she is the true power behind the throne, with some believing that it is only a question of time before she shows her hand, especially with BIH’s continual financial headaches, but Pannu has denied her involvement. Such a change might be welcomed by Blues fans, though it could be a case of jumping out of the frying pan into the fire, as she has a somewhat controversial past, having been investigated by the Hong Kong Securities and Futures Commission for “unauthorised and improper trading activities.”

There have been a number of bizarre potential acquisitions announced by BIH, including Peace International Creation Limited (aviation), Diligent King Investments Limited (telecoms) and Good Partners Group Limited (property), though none of these appear to have been completed. Again, it makes you wonder what are the attractions of these unknown companies, when there many businesses around that would be far less speculative investments. As Spandau Ballet once sung, “Questions, questions/Give me no answers.”

In fairness to Carson Yeung, he has so far delivered on a number of promises: the money was found to purchase the club, the bridging loan was repaid and money has been provided to fund transfers (albeit not to the levels initially pledged). That said, the lack of transparency must be a concern for Birmingham City fans, not helped by the club’s parent company being incorporated in the Cayman Islands, an offshore tax haven. The Premier League have been satisfied to date, but their tests only require a guarantee that the club is funded until the end of the season and is not designed to look at long-term solvency.

"Calling Cameron Jerome"

Push will come to shove soon enough, as Birmingham’s ageing squad will need to be rejuvenated and that will require a fair bit of cash. The concern is that the complicated structure is acting as the proverbial smoke and mirrors to disguise fundamental financial weaknesses, while the hope is that the club do indeed manage to break into the lucrative Chinese market and reap the benefits. We shall see.

Encouragingly, Peter Pannu recently stated that Birmingham had to be “financially prudent” and could not be run on a “benefactor’s model” otherwise they would end up like Portsmouth, but he also said that Yeung was not going to “turn off the taps.” It’s a delicate balance that affects all clubs, but many of them do not suffer from the Blues’ Byzantine ownership structure.

In many ways, Birmingham City is an admirable club with solid, down-to-earth principles. They have a small budget, but have continued to punch well above their weight, earning the respect of the Premier League. Much of this is due to a fiercely loyal support that deserves more clarity from the club’s owners. As Peter Pannu said, when talking about the previous administration, “The fans would like to see the lifting of the corporate veil and their club run in a responsible and open way.” I couldn’t have put it any better myself.

Grounds For Concern At Schalke?

Despite winning their last three matches before Germany’s winter break, including a notable success against reigning champions Bayern Munich, this season has been a mixed bag for Schalke 04. They have struggled in the Bundesliga, making a desperately poor start when they lost their first four games, including a crushing home defeat in the derby against bitter rivals Borussia Dortmund, but have cruised through their Champions League group, finishing ahead of Lyon and Benfica to secure a very winnable last 16 tie against an inconsistent Valencia.

Their indifferent form in the domestic league has been made worse by the dazzling displays of Dortmund, who sit triumphantly at the top of the table and appear to be unstoppable in their pursuit of the title. In a way, this season has been the polar opposite of last year, when the newly arrived coach Felix Magath led a fairly ordinary Schalke side to a surprising runners-up position. Thus, expectations were fairly high this season for a team that was expensively reinforced over the summer with the addition of an exciting new strike force made up of veteran Spanish forward Raul from Real Madrid and the prolific Dutch goal scorer Klaas-Jan Huntelaar from Milan, backed up by the creativity of the promising midfielder Jose Manuel Jurado from Atletico Madrid.

Given Schalke’s angst-ridden history, their fans are probably not overly surprised with the unpredictable nature of their exhibitions this season, as they have long since become accustomed to expecting the unexpected of the Royal Blues. In fact, this is a team of many contradictions. By anyone’s standards, Schalke 04 is a huge club, one of the most popular in Germany with over 84,000 members, that has won the championship an impressive seven times. However, all of their titles were secured long ago between 1934 and 1958, the last victory coming five years before the formation of the Bundesliga in 1963.

"Raul in an unfamiliar blue shirt"

Since those heady days, they have come to be regarded as notorious under-achievers, who are liable to press the self-destruct button once they are in sight of an elusive Bundesliga title. No matter how big a points lead Schalke build up during the course of a season, something always seems to prevent them from being ahead when they reach the finishing line, so in the last decade they have finished second on no less than four occasions.

While last season’s disappointment was compensated by the knowledge that Magath’s unheralded team had performed a minor miracle in coming so close, previous failures had been heartbreaking for Schalke’s patient fans. Their team had been seven points clear in 2007 before throwing the title away with three consecutive defeats, but the most agonising moment occurred in 2001 when Schalke were denied by a Bayern Munich equaliser against Hamburg that arrived in the fourth minute of injury time with the very last kick of the final game – from a hotly disputed indirect free-kick.

Throughout this barren period, the Schalke supporters have been nothing short of sensational. Even when it became clear during last season’s home defeat to Werder Bremen that die Knappen would once again end up as Bundesliga bridesmaids, the fans continued to serenade the players and coach, forcing them out for an emotional lap of honour. As WAZ wrote, “No champion can celebrate so beautifully.”

In a bid to reach the next level and avoid similar disappointment, Schalke have splashed the cash this summer. In fact, they have spent more than any other club in the Bundesliga with only Wolfsburg, backed by the mighty Volkswagen, coming anywhere close to their net spend of €19 million, which comprised €36 million of purchases (mainly Huntelaar €14 million and Jurado €13 million), partly mitigated by €17 million of sales (Rafinha to Genoa for €9 million and Heiko Westermann to Hamburg for €7.5 million). Those figures do not include Raul, who arrived on a free transfer, but whose two-year contract will still cost Schalke at least €8 million, based on his reported salary of €4 million a year.

This expensive investment in the squad was justified by Schalke’s automatic qualification for the group stages of the Champions League, which will bring in at least €20 million additional revenue, but the largesse was still somewhat surprising, given Magath’s comments last season, “No matter how well we are doing, we have to keep an eye on our finances. As far as transfers are concerned, we have to retain a sense of proportion. Everyone knows we don’t have much money, which is why we have to be careful when making investments.”

Indeed, when the club’s board announced that Magath had been given a €30 million transfer budget, many fans did not react with the customary delight, but were instead worried that the club was going to over-extend itself financially, which would once again raise the spectre of bankruptcy that had been narrowly avoided in the past via urgent cash injections from a plethora of varied sources. This has left supporters rather nervous and uncertain over the club’s financial situation, hence the investment in new players was seen as a cause for concern as much as celebration.

"The Night of the Hunter"

The supporters’ caution is understandable, as Schalke have been beset with financial problems over the past few years. They really thought they had it made when they arranged an €85 million bond in 2002 with the investment bank Schechter & Co, the largest club bond in Europe until then. At that time, this was regarded as an exciting financial instrument with analysts pointing to similar offerings at the likes of Leeds United, Newcastle United, Southampton and Leicester City as evidence of its viability. In hindsight, we know that in reality this was no more than a gigantic loan, securitized on future gate receipts – a poisoned chalice that has not worked out well at any of those clubs.

In Schalke’s case, the money was used to fund an extravagant spending spree with two main areas of investment: a palatial new stadium and a team fit to grace that modern arena. Such high expenditure is nothing new for Schalke. Indeed, in 2007 the club boasted that it had invested well over €400 million in the Veltins Arena, infrastructure (offices and training complex) and players since 1994.

In the following year they admitted that making these investments simultaneously “obviously took a tremendous effort”, but they still allowed themselves a touch of hubris by adding, “it is paying off more and more.” This was a reference to Schalke’s achievement in the 2007/08 Champions League, when they got past the group stage for the first time in the club’s history, only being narrowly defeated by Barcelona in the quarter-finals.

"Jurado keeps his eye on the ball"

Of course, this is the dilemma facing all football clubs. While they might be tempted to try to buy success, they need “to strike a balance between financial consolidation and continued progress on the field of play”, as stated on Schalke’s own website. However, it is obvious that winning performances on the pitch can drive revenue growth or, as former Schalke CFO Josef Schnusenberg explained, “It was clear to us that the kind of success we had last year would help us to reduce our liabilities much faster.”

The club’s former general manager, Andreas Müller, explained that the business plan depended on Schalke achieving at least third place in the Bundesliga every season, thus sharing in the riches of the Champions League. This is why they have put so much money into the squad, especially during the tenure of the previous general manager, Rudi Assauer, wonderfully nicknamed “Cheroot Rudi” after his cigar smoking habit. Such a growth strategy can make sense, but it comes at a price, not just in terms of transfer fees, but also a high wage bill. It is also a major gamble, as no club is guaranteed to qualify for the Champions League, especially in the topsy-turvy Bundesliga.

Nevertheless, Schalke have not hesitated to spend money in the past few years. Since the turn of the millennium, there have been only two years where they were not net buyers. In that period, they had a net spend of nearly €100 million (purchases of €161 million less sales of €62 million), a huge amount for a Bundesliga club and only exceeded by Bayern Munich and Wolfsburg. As the chairman recently explained, “Schalke 04 will not become a saving club. The pitch remains the foundation of our activity.”

In fairness, the transfer expenditure is higher in years when the finances have received a boost, like 2002/03 after the bond was issued and 2010/11 after they qualified for the Champions League, but their record in the market has been patchy to say the least with a limited return on the investment in players like Jefferson Farfan (€10 million), Christian Poulsen (€8 million), Orlando Engelaar (€6 million), Rafinha (€5 million) and Ze Roberto (€3 million). They also let Mesut Ozil go to Werder Bremen after a falling-out with management for the paltry fee of €4 million, only to see him shine at the 2010 World Cup, resulting in a €15 million sale to Real Madrid just two years later.

When you see the impact that Champions League revenue has on Schalke’s revenue, their strategy becomes a little more understandable. This was most evident in 2008, when the club reported record revenues, very largely thanks to €27 million from UEFA due to their Champions League run, which did not include €3 million additional gate receipts. On the other hand, Peter Peters, the board member with responsibility for finance and administration, ascribed the significant €23 million reduction in 2009 revenue to “failing to qualify for a European competition.”

The former CFO Schnusenberg actually said that future revenue growth could only be generated by European competition, as the potential for increases in advertising and ticketing had been virtually exhausted. That might have been slightly exaggerated, but the three German clubs in last year’s Champions League certainly did coin it: Bayern Munich earned €45 million, Wolfsburg €26 million and Stuttgart €23 million. In Schalke’s case, it might be too simplistic to say that the club makes a profit when it qualifies for the Champions League, breaks even if it plays in the Europa League and makes a loss with no European competition, but it’s not too far from the truth.

The other main reason why Schalke are struggling financially is the cost of constructing their sparkling new stadium, which opened in 2001. Holding 61,500 spectators, the Veltins Arena is one of the most modern stadiums in Europe, boasting a pitch that can slide outside the stadium, a retractable roof and a giant hanging scoreboard, but it cost a staggering €191 million with finance being raised entirely from the private sector. This meant that Schalke had to pay over €20 million every year in interest charges and repayments, which is a huge sum for a club whose annual turnover averaged around €125 million in the last six years.

"No stadium blues"

Although the new stadium has increased revenue, there is limited scope to raise ticket prices, due to the staunch resistance of German fans to paying too much to watch football. Similarly, the anticipated boom in hosting non-sporting events has not really happened, as there is so much competition from other locations. It very much looks like the club would have been better off going for a cheaper alternative, as they appear to have badly miscalculated the stadium’s revenue potential. This drain on resources was exacerbated by investment in other infrastructure, such as training facilities, medical centre, new offices, club shop, etc. Moving to a new stadium can be financially beneficial, e.g. Arsenal’s switch to the Emirates, but it should not be considered a panacea, capable of curing all financial ills.

The policy of investing in the squad, while at the same time significantly upgrading the club’s facilities, has resulted in uncomfortably high debt levels, the eight highest among football clubs worldwide according to Forbes (though I would question their numbers). For some strange reason, the club seemed almost proud of this approach with Schnusenberg proclaiming a couple of years ago, “We have used debt financing to take Schalke 04 to the position it is in now.” To be fair to him, at that stage the club had been reducing its liabilities (from €130 million in 2006 to €106 million in 2007), but these have been on a rising trend ever since then.

We have to be quite careful here when discussing Schalke’s debt, as there are two factors that complicate matters. First, most commentators refer to Schalke’s total liabilities, which includes debt plus other payables such as money owing on transfers and trade creditors. Second, the figures quoted sometimes refer only to the football club, but on other occasions are those from the Schalke Group.

Let’s try to make it easy by looking at the last published accounts (as at December 2009), when the football club’s liabilities stood at €135 million, including €88 million of debt, made up of €67 million outstanding on the bond and €21 million bank loans. That essentially covers the cost of the football business, such as buying and paying players, plus facilities. To that sum, we need to add another €114 million, primarily money owed for the stadium, which gives total group liabilities of €249 million.

Whatever the exact figures, there are a couple of important points that can be made without fear of contradiction, namely that the debt is far too big for a club of Schalke’s size and that it is still increasing. The key question, as Schnusenberg himself said so presciently a few years ago, is “whether the club is in a position to service this debt.” He went on to caution, “To achieve that, it is necessary to increase revenue. If that does not work, then we have a problem.” Well, yes, can’t really argue with that.

Actually, although the debt has obviously become a massive issue, it is not really the club’s biggest problem, which is liquidity, namely the ability to cover the running costs, such as paying the players, suppliers and the taxman. Germany’s leading business daily, Handelsblatt, reported that many invoices were allegedly paid late, using information from credit agency, Dun & Bradstreet.

"Farfan for the common man"

This is where the numbers reported in the profit and loss account can be very misleading. Although the revenue streams look good on paper, much of the cash from those income streams has already been utilised or pledged to others, including future gate receipts, sponsorship income and stadium naming rights. As an example, the club signed a significant shirt sponsorship deal with Russian gas producer Gazprom worth up to €125 million over the life of that contract, but most of this money (the fixed element) was received upfront, so hardly any cash will be received in future years, even though the annual income will be reported in the profit and loss account. A similar deal was done with kit supplier Adidas.

A shell company was formed to handle the latter transaction, called FC Schalke 04-Service GmbH, which is just one of the countless subsidiaries that make up the Schalke Group. Unlike, say, Borussia Dortmund, the club is not listed on the stock exchange, so does not have to publish consolidated accounts for the whole network of companies. This lack of transparency is a significant problem confronting analysts who want to review Schalke’s financial position, as they can never be quite sure that they are seeing the whole picture. The holding company owns companies covering the stadium, catering, ticketing, museum, licensing rights and the old ground, but that’s merely the tip of the iceberg.

"Rakitic: it's a celebration"

This intricate inter-company structure allows Schalke to seemingly create income in the football club out of thin air, though all they are doing is passing money from one group company to another. Nothing illegal there, of course, but it could certainly be described as creative accounting. There are numerous examples. In 2003, the old Park stadium was bought for a nominal sum, then revalued to €16 million, which was booked as “exceptional income.” Similar revaluation of companies formed to handle rights marketing and catering produced another “exceptional income” of €66 million in 2004, which miraculously turned a €23 million loss into a €43 million profit.

No wonder Schnusenberg said, “We live from hand to mouth.” It’s all done with smoke and mirrors, which does not exactly inspire confidence in the financials, especially as the club has already been investigated for accounting fraud (resulting in a small fine). It’s like a grand game of pass the parcel, but in this case nobody knows exactly what will happen when the music stops. It may be a little unfair, but when striving to review these accounts, I can’t help but think of Sir Walter Scott’s famous quote, “Oh, what a tangled web we weave, when first we practice to deceive.”

With those health warnings in mind, it is difficult to be confident about the strength of the balance sheet, even though this looks fine for the football club, as assets exceed liabilities by around €30 million in 2009. However, we know that does not represent the whole story by any means and the last available balance sheet for the Schalke Group showed negative equity of €56 million, which means that the group is technically insolvent.

"Metzelder seems a little unsure of his position"

In fairness, there are some legitimate “hidden” reserves, as the real market value of the players (€141 million according to Transfermarkt) is significantly higher than that reported in the balance sheet (€31 million as at December 2009). Although we are not comparing apples with apples here, because of the timing difference, there is clearly considerable value here – but only if players are sold (which is not always a good idea).

To be fair, Schalke have taken some action to reduce their debts. In October 2009, the club agreed to sell Gesellschaft für Energie und Wirtschaft (GEW) a 50% stake in the stadium for €25.5 million (with the possibility of buying these shares back in the next ten years), but even this deal was not without controversy. First, GEW is a wholly owned subsidiary of the city of Gelsenkirchen, so this looks very much like a bailout funded by the taxpayer. Second, as this sale leaves Schalke with only 40.7% of the stadium, the Arena company will no longer appear in the consolidated balance sheet, thus further reducing visibility of the club’s financial position.

On the plus side, Peters stated that the contract meant “that funding is in place for the whole of the 2009/10 season. A further sale of rights, shares or players will not be necessary.” What did his predecessor say about hand to mouth arrangements? Meet the new boss – same as the old boss.

"Neuer - the only way is up"

Another element in the debt restructuring is the raising of €10 million of capital via a supporters’ bond, paying 5.5% interest and redeemable in six years’ time in 2016. Other German clubs have already issued similar bonds, including Cologne, Arminia Bielefeld and Alemannia Aachen, but this is hardly a badge of honour.

Most importantly, in the first half of 2010 the club managed to redeem the remaining €65 million from the 2002 bond that “had been limiting us in our actions” and to re-finance the debt with a ”major international bank” at lower interest rates, saving around €2 million a year. Peters gave this the full monty, proclaiming that “the shackles that have restricted us are history”. More worryingly for Schalke supporters, he claimed that this deal was done “in order to preserve the club’s independence.”

Schalke’s financial woes do make you wonder just how effective in practice are the licensing rules of the German Football League (DFL) that are supposed to regulate the finances of football clubs. After all, when Schalke were granted an unconditional license, Peters argued, “The outcome of the appraisal procedure is further evidence that we are on the right track financially.” While it is true that controls are tighter in Germany than other countries, the controls are clearly not flawless. The reality is that the licensing is primarily focused on a club’s ability to finance the next 12 months, as confirmed by Christian Seifert, the Bundesliga chief executive, “The key issue is to see if a club has the liquidity to allow it to play the upcoming season.”

"Magath - his way or the highway"

This means that the amount of debt is not necessarily an issue for the licensing. That said, Seifert announced before this season that there would be a stronger emphasis on debt in the future, “Until now we had the rule in the Bundesliga that if a club has negative equity, then it is not allowed to get worse the next season. From this season, a club must improve negative equity by 10% a season.” However, it is questionable whether even this escalation will affect Schalke, as the DFL only reviews the balance sheet of the club, not those of its affiliates.

Parallels have been drawn with the financial woes at neighbours Borussia Dortmund, who suffered a series of large losses a few years ago. Indeed, when the Revierderby was played a year ago, Süddeutsche Zeitung described it as “the old champions of debt meeting the new ones.” However, Magath dismissed such talk, “It's a completely unsound comparison. Dortmund were already on the stock exchange and had thus used up all their options. Even though we don't have money to burn at the moment, we do have a number of assets on our side, such as the stadium and the marketing rights.” The problem is that it’s far from clear that the club does still possess these assets, as they now only have a minority interest in the stadium and a lot of the marketing income has been pledged to others.

Bearing in mind all those caveats, up until last year, the club’s profit and loss account looked reasonably healthy. I should note that these figures have been provided by the club and cover the company FC Gelsenkirchen-Schalke 04 E.V., so are not the full group accounts. However, I have seen the Group figures for 2007 and 2008 and the differences are relatively immaterial, at least in terms of the bottom line: 2007 profit – football club €12.6 million, group €12.3 million; 2008 profit – football club €0.5 million, group €1.9 million.

The excellent profit reported in 2007 is largely due to participation in the Champions League. In stark contrast, absence from Europe had a significant adverse impact on the 2009 results, which plunged to a hefty loss of €16.8 million, provoking supervisory board chairman Clemens Tönnies to comment, “The 2009 financial year was anything but a cause for celebration.” The outlook is more positive and the club believes that it “could return to the black” this year. Any guesses why? That’s right – qualification for the Champions League in the 2010/11 season.

In fairness, EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) has been positive for the last five years, albeit declining, implying that the club does at least generate good revenue streams. That is indeed the case with Schalke featuring in the Deloittes Money League list of top 20 clubs by revenue for the last seven years.

Despite no European competition in the 2008/09 season, Schalke still occupy 16th position in the table with €124 million, just ahead of Werder Bremen and Borussia Dortmund, though behind Bayern Munich and Hamburg. Of course, their turnover is still a considerable distance behind the leading clubs with Real Madrid (€401 million) and Barcelona (€366 million), earning around three times as much, largely due to their gigantic TV deals. Schalke’s TV revenue is among the smallest, while match day revenue is also relatively low, which emphasises the importance of commercial revenue. Indeed, this represents very nearly half of Schalke’s total revenue, a proportion only surpassed by Borussia and Bayern.

The eagle-eyed among you will have noticed that the Money League revenue figures are different from those in Schalke’s profit and loss account, which is due to two factors: (a) Schalke’s annual reporting period covers a calendar year rather than a conventional football season; (b) the Money League revenue excludes items defined as revenue in German accounts, such as profit on player sales.

Schalke should be praised for growing their revenue quite well (36% in five years), especially as match day income has remained flat. Commercial income has increased by a third to €61 million, but media revenue is the main swing factor, more than doubling from €16 million in 2004 to €34 million in 2009. When Champions League is included, like in 2008, this revenue stream is even higher (€56 million).

Nevertheless, commercial revenue remains most important, as is often the case with German clubs. A large population, supported by packed stadiums and an extensive free-to-air TV network, makes this a very attractive market for sponsors. Former CFO Schnusenberg had no doubts over the value of maximising commercial opportunities, “It’s very important to us. In Germany, we do not have rich owners, like Chelsea with Abramovich. Competing against them for us is like David against Goliath.” Indeed, Schalke’s commercial revenue is amazingly the eighth highest in Europe, ahead of consistently successful teams like Inter, Lyon and Arsenal.

The club benefits from a number of long-term contracts, such as its partnership with sports rights agency Infront Germany, which runs until the end of the 2017/18 season. Aside from perimeter advertising sales, this includes co-operation in marketing the Veltins Arena. Infront are big players in Germany, having similar agreements with Werder Bremen, Wolfsburg and Bochum.

Schalke also signed a very good shirt sponsorship deal with Gazprom until 2011/12, following former German Chancellor Gerard Schröder putting in a good word with his old buddy Vladimir Putin, though descriptions of the amount vary: €12 million a year (FourFourTwo), €100 million over 5.5 years (Wikipedia) and €125 million over five years (Financial Times). What is clear that the club is unlikely to receive the full amount, as much of the deal is performance related, with a club representative admitting, “The total only exists in theory. That sum can only be attained if we win everything.” Even so, this deal still compares very favourably with clubs in other leagues, being higher than the best shirt sponsorships in both Italy and France.

The kit supplier Adidas has extended its partnership to 2017/18, also covering marketing and merchandising, while the stadium naming rights deal signed with the brewer Veltins runs until 2015. Even the former shirt sponsor, insurance company Victoria, will remain as “a partner for the club and fans” until 2012 after handing over the reins to Gazprom.

The other side of the coin shows Schalke’s extremely low television revenue of €34 million, which is the second lowest in the Money League. The absence of European football obviously did not help in 2009, but the fundamental challenge facing Schalke arises from the small Bundesliga TV contract, relative to European rivals, as evidenced by the three last places in the Money League being occupied by German clubs.

The current deal runs for four years from 2009 to 2013 and is worth €1.65 billion for domestic rights, which works out as €412 million per season. This is slightly higher than the previous three-year contract, which was worth just over €400 million a year, though that did represent a 40% increase on the preceding agreement. The Bundesliga deal is about 40% lower than the €700 million received per season by the Premier League for domestic rights, which is bad enough, but is nothing compared to the disparity on overseas rights, where the Bundesliga only receives €40 million against €550 million for the Premier League. On a lesser scale, it’s a similar situation in Italy, which earns almost €90 million for overseas rights.

Although the new Bundesliga deal represented a double-digit percentage increase, it is still a paltry sum for what Christian Seifert described as “a very attractive product with the largest number of players at the World Cup after the Premier League.” As a result, German clubs receive far less TV money than their English counterparts, e.g. Bayern earned €70 million in 2008/09, which was considerably less than Manchester United’s €117 million.

For the sake of German clubs’ balance sheets, not to mention their competitiveness on the international stage, it is to be hoped that the Bundesliga makes the most of the national team’s success in South Africa and starts marketing itself better globally, as the situation is unlikely to improve domestically. Kirch went bankrupt and even Rupert Murdoch’s Sky Deutschland has struggled to attract new subscribers.

"This is Schalke!"

It’s quite the opposite story for Schalke, who continue to sell out the Veltins Arena, despite raising prices by a average of 4%. Although this will bring in an additional €2-3 million a year, Schalke’s match day revenue is a long way below many of its rivals, even though they have the sixth highest attendances in Europe, only behind, Barcelona, Borussia, Real Madrid, Manchester United and Bayern, due to the moderate ticket prices.

Standing tickets cost just €15, while the club is justifiably proud of the high proportion of tickets it offers at low prices: 31,000 at €25 or less. In addition, Schalke is the only club in the Bundesliga to offer free parking. However, this does mean that clubs like Manchester United and Arsenal earn more than four times as much match day revenue than Schalke.

Given that there are more than 11,000 on the waiting list for season tickets, it does beg the question of why the club does not further increase ticket prices, but this would be completely contrary to German football culture. As Peter Peters explained, “The fans say we only have success because they are here and they create this fantastic atmosphere. It's important. It's not like a jeans shop where people can just go somewhere else. Schalke is their life.” More prosaically, such a move would also damage the relationship with sponsors, who like to see full stadiums, so could end up actually losing money.

Schalke’s costs are around €122 million a year (€140 million including amortisation) with the largest element obviously being wages at €63 million. This is reportedly the second most expensive squad in the Bundesliga, only behind Bayern, but there are clear signs that the club seeks to control this expense. They have maintained the wages to turnover ratio in a very respectable range between 46% and 56% over the last few years, reducing the wage bill last year by €6 million when the revenue dipped. Part of this reduction is because the contracts are very performance related, so poor results on the pitch are at least reflected in lower salaries – every cloud has a silver lining.

That said, the frequent changes in coach have come at a price with former managers like Mirko Slomka and Fred Rütten remaining on the payroll long after they left the club. It’s difficult to say what will happen to the wage bill going forward. Although the club has suggested that it will cut salaries by at least €10 million, the cost for Magath and his management entourage cannot be cheap. Nevertheless, many of the expensive players’ contracts run out in 2011, so there will be an opportunity to address this quite soon. If the club could reduce the wage bill to, say, the level of Borussia Dortmund at €48 million (€15 million lower), that would go a long way to making the club more sustainable.

"Höwedes - an asset in both senses of the word"

Another option, albeit an unpalatable one, would be to sell some of the players to raise much-needed cash, as most of the family silver has already been sold. Indeed, there has already been plenty of speculation over the future of goalkeeper Manuel Neuer and defender Benedikt Höwedes. However, this would potentially hurt the team’s prospects of European qualification, thus losing those funds, so it’s a double-edged sword. Furthermore, if clubs suspect that sales are inspired by financial difficulties, they might well exploit this weakness by making much-reduced offers.

The club is undoubtedly making all the right noises, stating that “the era of debt making must be over.” After the 2009 results were released, they announced, “A difficult year has been safely navigated and the foundations for a successful future have been laid.” With regular participation in Europe, that might be the case, though it will be difficult to know for sure without more transparency. Let's hope so, as few would begrudge the long-suffering legions of fans of this grand old club some over-due success.