defining the purpose for borussia dortmund gmbh & co. kgaa · in march 2004, dortmund...

ESMT–713–0134–1

ES1341

This case study won the “Hot Topic: The Business of Sport” Award in the 2013 ecch Case Writing

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This case study was prepared by Urs Müller and Ulrich Linnhoff of ESMT European School of Management and

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or ineffective handling of a management situation.

Copyright 2013 by ESMT European School of Management and Technology, Berlin, Germany, www.esmt.org.

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February 19, 2013

ESMT Case Study

Defining the purpose for Borussia Dortmund GmbH & Co. KGaA Urs Müller

Ulrich Linnhoff

Bernhard Pellens

Introduction In its 100th year of existence in 2009, Borussia Dortmund (BVB) was the only German soccer club

listed on the stock exchange. With three days to go before the annual shareholders’ meeting on

November 24 of that year, the club's managing directors, Thomas Treß and Hans-Joachim Watzke,

went through the year-end figures one more time (see Exhibits 1-3). Although the situation had

improved since 2005 when the club was on the brink of insolvency, the closing accounts once

again showed a negative net income. After nine years as a publicly traded company, the BVB had

to report its fifth loss, this time for €5.9 million, which added up to a cumulative loss of more

than €145 million (see Exhibit 4). After the passing of a century, many stakeholders were

concerned about the way forward. What was the organization’s purpose? What was more

important, finally making a profit and meeting shareholders' expectations, or playing for the fans

and the club’s honor? What could the managing directors offer to their shareholders, who had

seen the value of their shares drop from €11 at the IPO to less than €1 in November 2009?

For the exclusive use of J. Pierce, 2017.

This document is authorized for use only by Justin Pierce in 2017.

ESMT–713–0134–1 Defining the purpose for Borussia Dortmund GmbH & Co. KGaA

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Borussia Dortmund in a nutshell In 2009, Ballspielverein Borussia 09 e.V. Dortmund, or BVB for short, was one of Germany's oldest

and most successful soccer clubs (see Exhibit 5). In addition to six German Championships and

two DFB Cups, BVB had won the European Cup Winners’ Cup in 1966, making it the first German

soccer club to win a European trophy of any kind. In 1997, BVB won the Champions League and,

that same year, triumphed at the Intercontinental Cup.

The club's roots lay in Dortmund's working class district, located around a square called

Borsigplatz. It was here that BVB was founded in 1909. Soccer was part and parcel of everyday

life in this part of the city: people identified with their club and helped shape its identity. And

the BVB became one of the great names in German soccer. In addition to its successes on the

soccer field, BVB also pulled in the largest crowds.a The atmosphere at home games was

legendary. Raising their voices in unison, the Borussia fans – clad in black and yellow – turned

their stadium into a cacophony of sound.1

At the height of the club’s sporting success in the 1990s, the management came up with the idea

of making BVB the first and only German soccer club to be listed on the stock exchange. At the

end of 1999, the club’s general assembly approved the flotation and Borussia Dortmund GmbH &

Co. KGaA was founded as a legal entity for the operation of professional soccer. A special feature

of German professional soccer was at play here: according to the “50+1” rule in the German

Soccer League Association's statutes, club shares could be traded on the stock exchange. But

unlike in countries such as the United Kingdom, investors were not allowed to acquire a dominant

position. BVB adhered to this rule by establishing the legal form of a GmbH & Co. KGaA. With this

construction the club had full control over management, independent of shareholdings (in 2009

the club owned only 7.2 percent of shares in the stock listed entity; see Exhibit 6).

The transformation from club to business The flotation clearly turned BVB from a soccer club into a commercial company. This followed a

general trend in professional soccer. In the 1990s in particular, there was a phase of rapid

commercialization of the game, due primarily to the money generated by TV broadcasting rightsb

and the sport's international marketing. Clubs created large merchandising departments and set

a According to BVB press spokesman Josef Schneck, season tickets were so sought after that a widow was

forced to tearfully throw her deceased husband’s season ticket into his grave to stop her adult sons’ heated arguments over which of them should inherit it.

b This increased year over year. While public service broadcasters paid a total of €2.25 m. to show league games in the 1977/78 season, a decade later this had increased almost tenfold to €20.45 m. for the 1988/89 season. In the 2000/01 season, a consortium of private broadcasters paid €355 m.



Defining the purpose for Borussia Dortmund GmbH & Co. KGaA ESMT–713–0134–1

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up subsidiaries in a variety of sectors from travel and insurance sales to their own TV channels.

However, rocketing expenses in particular players’ salariesc – depleted these increased revenues.2

The large sums of money generated within professional soccer after the 1990s attracted

investors. In 1991, for example, the English club Manchester United went public. Within a

decade, it had become a highly profitable leisure business. By the year 2000, the club’s shares

were worth 10 times their original value. Professional soccer remained a risky investment though,

as share prices did not always rise. Big investments in good players were needed to succeed,

especially in international tournaments. But soccer was still just a game, after all, and even rich,

commercially successful clubs sometimes got stuck in a sportive downturn – much to the

excitement of the fans. It also became apparent that success in the game itself did not always go

hand in hand with economic success (see Exhibit 7).

Sliding into crisis On October 31, 2000, when it went public with a starting price of €11 (21.51 German marks) per

share, Borussia Dortmund GmbH & Co. KGaA netted itself €130 million.3 Just two weeks later,

however, the newly founded corporation was forced to break some bad news in its first ad hoc

message: one of the club’s premier players had been diagnosed with a serious medical condition.

After scoring 75 goals in 243 league games - seven that very season - BVB striker Heiko Herrlich

complained of impaired vision. A medical examination revealed that the athlete, who had moved

to Dortmund in 1995 for a transfer fee of around €5.2 million, had a brain tumor.4 To counter

speculation about his condition (including on the stock exchange), Herrlich decided it was best to

go public with his diagnosis. “You can well imagine what someone in this situation is going

through, but sportsmen always hope they will recover,” said BVB manager Michael Meier.5 After

falling in value on the very day of their issue, BVB shares slid even further downward.

But this bad news was just the first in a series of setbacks. Although BVB won the German title

again in 2002, the gap between Borussia Dortmund’s income and players' salaries continued to

grow, mainly due to the lack of revenue from international tournaments like the Champions

League. BVB had always counted on this desperately needed income, but it never really

materialized. In subsequent years, BVB narrowly but consistently failed to qualify for a European

competition (see Exhibit 8). But the management nevertheless assembled a team of players

unrivaled in Europe, spending €50 million on signing big stars and paying record salaries. When

salaries were at their peak, Borussia's players were earning €60 million per season; yet success on

c While the German Bundesliga’s wage bill for players totaled some €97.6 m. in the 1992/93 season, clubs

were already paying out €173.9 m. by the 1994/95 season. In 1998/99, the clubs paid their players a total of €317.5 m. and, by the 2001/02 season, this had risen to €515.8 m. The Bosman ruling was one of the main reasons for players' spiraling wages. On December 15, 1995, the European Court ruled that a player was entitled to a free transfer on reaching the end of his contract. This ruling significantly increased the length and value of player contracts as clubs tried to protect themselves against free transfers. It also became an established practice to pay a one-off signing-on fee when a player joined a club.




4

the field remained elusive. Marcio Amoroso – for a long time the highest transfer on record in the

history of the German Bundesliga – was a prime example of the club’s difficulties. Immediately

after going public, Borussia Dortmund handed over €25 million for the Brazilian center forward.

For a year, this appeared to be a good investment: Amoroso scored goal after goal and Dortmund

won the league title. After that, though, everything changed. Amoroso sustained an injury,

started arguing with his coach and fellow players and, ultimately, stopped showing up altogether.

In March 2004, Dortmund terminated his contract in order to at least avoid having to pay his

salary. Financially speaking, the transfer was a complete write-off of €9.7 million – and

contributed to a total annual loss of more than €60 million for the Borussia Dortmund GmbH &

Co. KGaA.6

By the end of 2004, Borussia was close to collapse. When club president Gerd Niebaum presented

the key figures for the fiscal year on November 17, 2004, he spoke of a “disastrous result.”

Borussia Dortmund GmbH & Co. KGaA had amassed liabilities totaling €118.8 million and had

reduced the equity from €150 million down to €25 million. In addition to that, management had

already pledged the trademark rights for €27.5 million to the insurance company Gerling in 2000.

At the end of 2002, 94 percent of the stadium was sold for €75.4 million to the Molsiris real

estate fund, which incurred high ongoing rental costs. On February 17, 2005, the management

team announced that only a rapid and comprehensive recapitalization, with the cooperation of

all creditors, could save the club.

The managing directors’ challenge At the beginning of 2005, the new managing directors, Hans-Joachim Watzke and Thomas Treß,d

drew up a rescue package. Borussia Dortmund started to reduce the cost for the expensive squad

of players, partially by using young players from its own youth section or from other clubs.

Additionally, the club started buying back parts of its stadium, securing a sponsorship deal with

the insurance company Signal Iduna, which included renaming the arena.7 In June 2006, Treß and

Watzke signed a loan agreement with US investment bank Morgan Stanley International Limited.

Borussia Dortmund used a good two-thirds of this €79.2 million loan to buy back the remaining

shares in its stadium from the real estate fund and pay associated costs. In that same year, the

company conducted two capital increases to reduce – in combination with the loan from Morgan

Stanley – past debt, terminate the pledge of the trademark rights to Gerling, and increase

liquidity by €10 million. Two years later, the organization managed to repay the loan from Morgan

Stanley. For the first time in several seasons, it once again had a significant budget to pay the

running cost for the team – around €36 million.e This budget increase was crucial for paying

competitive salaries and keeping the top players. The cuts in 2005 had caused the last remaining

d Thomas Treß initially joined the restructuring effort as external consultant. On January 1, 2006 he became

one of the two managing directors. e These €36 m. equaled an increase of 50% compared to the previous budget of just €24 m.




5

soccer stars to leave BVB. Although Borussia was still in Germany’s top league, the club failed to

qualify for any international tournaments between 2004 and 2009. Speculative income from

international tournaments, however, played no role in the new management team's financial

planning (see Exhibit 9).

Although the worst appeared to be behind Borussia Dortmund in November 2009, the group still

recorded a negative EBIT for the last fiscal year. Its share price fell from €1.60 to just over €0.90

(see Exhibit 10), which was heavily influenced by stock sales from large investors such as Florian

Homm and Morgan Stanley. What prospects could the managing directors offer Borussia Dortmund

for the next 100 years? What goals should they set for Borussia Dortmund GmbH & Co. KGaA to

map out the way forward? Was it at all possible to run a long-term, profitable soccer business?

What was the purpose of BVB at all?




6

Exhibits

Exhibit 1: Consolidated balance sheet (in € thousands)

Assets June 30, 2009 June 30, 2008*

Non-current assets

Intangible assets 19,409 15,398

Property, plant and equipment 182,627 189,719

Investments in associates 264 184

Financial assets 416 309

Trade receivables and other assets 5,371 7,013

Deferred tax assets 6,561 6,495

214,648 219,118

Current assets

Inventories 2,269 1,713

Trade receivables and other assets 11,787 23,126

Cash and cash equivalents 654 7,912

14,710 32,751

229,358 251,869

Equity and liabilities June 30, 2009 June 30, 2008

Equity

Subscribed capital 61,425 61,425

Reserves 6,646 12,625

Own shares -138 -140

Equity attributable to shareholders 67,933 73,910

Minority interest 308 332

68,241 74,242

Non-current liabilities

Non-current financial liabilities 59,009 63,596

Non-current trade payables 300 1,150

Other non-current liabilities 49,302 51,165

Non-current income tax liabilities 2,205 3,232

110,816 119,143

Current liabilities

Current financial liabilities 11,750 5,220

Current trade payables 10,374 10,685

Other current liabilities 26,123 40,466

Current income tax liabilities 2,054 2,113

50,301 58,484

229,358 251,869

* restated




7

Exhibit 2: Consolidated income statement (in € thousands)

2008/09 2007/08*

Revenues 114,730 112,984

Work performed by the company and capitalized 0 90

Other operating income 2,244 8,626

Cost of materials -3,538 -4,707

Personnel expenses -50,013 -45,355

Depreciation and amortization -17,397 -15,501

Other operating expenses -46,410 -45,687

Profit/loss from operating activities -384 10,450

Income from investments in associates 80 45

Other interest and similar income 129 525

Interest and similar expenses -5,828 -11,089

Financial result -5,619 -10,519

Profit/loss before income taxes -6,003 -69

Income taxes 81 358

Consolidated net profit/loss for the year -5,922 289

Loss from cashflow hedges 0 -1,736

Comprehensive income -5,922 -1,447

Attributable to the consolidated net profit/loss for the year

Equity investors of the parent company -5,981 215

Minority shareholders 59 74

Attributable to comprehensive income

Equity investors of the parent company -5,189 -1,521

Minority shareholders 59 74

Earnings per share -0.10 0.00

* restated




8

Exhibit 3: Consolidated cash flow statement (in € thousands)

2008/09 2007/08*

Profit/loss for the period before taxes -6,003 -69

Depreciation and amortization of non-current assets +17,397 +15,501

Loss from disposals of non-current assets -6,200 -4,281

Interest income -129 -525

Interest expense +5,828 +11,089

Income from investments in associates -80 -45

Changes in other assets not classified as from investing or financing activities

+14,183 -16,673

Changes in other liabilities not classified as from investing or financing activities

-16,638 +63,266

Interest received +53 +478

Interest paid -5,828 -9,130

Income taxes paid -1,152 -3,055

Change in restricted funds +0 +19

Cash flows from operating activities +1,431 +56,575

Payments for investments in intangible assets -18,317 -3,056

Proceeds from disposals of intangible assets +9,711 +4,543

Payments for investments in property, plant and equipment

-1,661 -1,693

Payments for investments in financial assets -108 -84

Proceeds from financial assets +0 +29

Dividend received +0 +50

Cash flows from investing activities -10,375 -211

Proceeds from the sale of own shares +4 +4

Dividends paid to minority shareholders -83 -56

Proceeds from finance raised +0 +19,690

Repayments of financial liabilities -4,155 -81,773

Repayments of liabilities under finance leases -178 -203

Cash flows from financing activities -4,412 -62,338

Net change in cash funds -13,356 -5,974

Cash funds at beginning of period +7,912 +13,886

Cash funds at end of period -5,444 +7,912

* restated

Source: Exhibits 1-3: Borussia Dortmund Business Report 2008/09, 110, 111, 114.



Defining the purpose for Borussia Dortmund GmbH & Co. KGaA

9

ESMT–713–0134–1

Exhib

it 4

:

Nin

e-ye

ar o

verv

iew

of

key

num

ber

s (i

n m

illion

)

Fin

anci

al Y

ear*

* 2000/0

1

2001/0

2

2002/0

3

2003/0

4

2004/0

5

2005/0

6

2006/0

7

2007/0

8*

2008/0

9

Rev

enue

s 84

.8

113.

0 12

9.1

98.1

74

.7

89.1

97

.1

113.

0 11

4.7

EBIT

-8

.0

6.2

7.1

-66.

7 -4

1.6

-11.

2 15

.6

10.4

-0

.4

Net

pro

fit/

loss

-1

0.9

0.7

3.3

-67.

7 -5

4.5

-20.

8 10

.1

0.3

-5.9

Cas

h fl

ow

11.7

33

.2

34.5

-3

9.0

-6.6

25

.8

-15.

5 -6

.0

-13.

4

Equi

ty

146.

8 15

0.3

148.

5 80

.8

28.5

37

.6

86.5

74

.2

68.2

Num

ber

of s

hare

s 19

.5

19.5

19

.5

19.5

29

.3

43.9

61

.4

61.4

61

.4

* re

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ed

** C

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rep

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- Fi

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200

3/04

in

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ce w

ith

Ger

man

Com

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Law

(H

GB)

- Fi

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200

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Inte

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iona

l Fi

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ial Re

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dard

s (I

FRS)

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ce:

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cas

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bas

is o

f Con

solida

ted

Fina

ncia

l St

atem

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200

0/01

-200

8/09

.




10

Exhibit 5: Chronicle of BVB

1909 Foundation of Ballspielverein Borussia 09 e.V. Dortmund

1910 Admission into the West-German Players Association

1914 Promotion into the A-class

1956 German Champion


1963 German Champion and founding member of the German Fußballbundesliga (German top league)

1965 DFB Cup winner

1966 European Cup Winners' Cup

1972 Demotion to the Regionalliga West

1974 Construction of the stadium “Westfalenstadion”

1976 Promotion back to the first league

1984 Close to insolvency

1989 DFB Cup winner



1997 Champions League winner and Intercontinental Cup Champion

2000 October 31, 2000: Initial Public Offering (IPO)

November 14, 2000: Ad hoc message about brain tumor of Heiko Herrlich


2003 Finalization of third construction phase for the stadium “Westfalenstadion” that now accommodates more than 80,000 guests

Source: Compiled by case authors on basis of information from Borussia Dortmund webpage, http://www.bvb.de (accessed September 12, 2011).



11


Exhib

it 6

:

BV

B c

orpor

ate

stru

cture

Sour

ce:

Com

pile

d by

cas

e au

thor

s on

bas

is o

f Bo

russ

ia D

ortm

und

Busi

ness

Rep

ort

2008

/09.




12

Exhibit 7: Sports performance, transfer balance, and economic performance

Source: Rothenbücher, J. (2010). The A.T. Kearney EU football sustainability study. A.T. Kearney.




13

Exhibit 8: Overview of BVB’s sports results since the IPO

Season Position in Bundesliga International competition

2000/01 3rd Place ./.

2001/02 German Champion Reaching the UEFA Cup final

2002/03 3rd Place Champions League: elimination during round of last 32

2003/04 6th Place Elimination during qualifying phase for the Champions League

2004/05 7th Place ./.

2005/06 7th Place ./.

2006/07 9th Place ./.

2007/08 13th Place ./.

2008/09 6th Place ./.

Source: Compiled by case authors on basis of information from Borussia Dortmund webpage, http://www.bvb.de (accessed September 12, 2011).

Exhibit 9: Development of Borussia Dortmund’s revenue by type (in € million)

Source: Compiled by case authors on basis of BVB Annual Reports 2006/07 and 2008/09.




14

Exhibit 10: Share price development from IPO to Nov 2009 (in €)

Source: Yahoo finance, http://finance.yahoo.com/q?s=BVB.DE&ql=0 (accessed September 12, 2011).

Endnotes 1 Steinhoff, J. (2005). Borussia Dortmund Trauerspiel, Stern online, March 2, http://www.stern.de/

sport/fussball/borussia-dortmund-trauerspiel-536972.html (accessed September 12, 2011). 2 ARD und Arena kaufen die Bundesligarechte, Faz online, December 21, 2005, http://www.faz.net/

s/Rub9CD731D06F17450CB39BE001000DD173/Doc~ED012D2C5A35A4E56AC2231865BB403DF~ATpl~Ecommon~Sspezial.html, RP online, http://www.rp-online.de/sport/fussball/Die-Entwicklung-der-Spielergehaelter_ bid_19462.html, and Bellsted, K., and T. Reimann (2005) Zehn Jahre Bosman-Urteil, Stern online, December 16, http://www.stern.de/sport/fussball/sportrecht-zehn-jahre-bosman-urteil-551616.html (accessed September 9, 2011).

3 Finanzkrise: NRW lehnt Hilfen für Borussia Dortmund ab, Spiegel online, February 17, 2005, http://www.spiegel.de/wirtschaft/finanzkrise-nrw-lehnt-hilfen-fuer-borussia-dortmund-ab-a-342269.html (accessed September 12, 2011).

4 Hirntumor bei Heiko Herrlich festgestellt, Welt online, November 14, 2000, http://www.welt.de/ print-welt/article547253/Hirntumor_bei_Heiko_Herrlich_festgestellt.html (accessed September 12, 2011).

5 Ibid. 6 See: Annual Report 2003/04, 34: “The realized book losses totaled €9.7 m. and resulted from the

termination of the contract with the player Marcio Amoroso.” (translated by case authors). 7 Westfalenstadion heißt künftig Signal Iduna Park, Faz online, October 14, 2005,

http://www.faz.net/s/RubFB1F9CD53135470AA600A7D04B278528/Doc~E6C43A6B3285742988375F87F34003DD6~ATpl~Ecommon~Scontent.html (accessed on September 12, 2011).

2001 2002 2003 2004 20062005 20082007 2009

10 9 8 7 6 5 4 3 2 1



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