Borussia Dortmund — Another brick in the yellow wall

Borussia Dortmund has been one of the most successful German football clubs for decades. Second only to Bayern Munich in terms of Bundesliga titles, it was the first German club to win a European competition, the European Cup Winners’ Cup in 1966, and Dortmund won the Champions League in 1997. The 2019/20 season was typically successful for the club as it finished second in the Bundesliga and reached the Round of 16 in the final stages of the Champions League. Borussia Dortmund has qualified to play in the financially lucrative Champions League in eight of the last 10 seasons. The club’s fabled stadium, Signal Iduna Park, has long enjoyed the highest average football attendance (more than 81,000) in the world. It is the largest stadium in Germany and the famous Südtribüne-nicknamed Die Gelbe Wand (‘The Yellow Wall’) is the largest standing terrace for fans in Europe.

The corporate strategy has been to establish itself as the leading German football club after Bayern Munich, and to make its financial success less dependent on short-term sporting success by increasing the domestic and international marketing of the brand name to grow core revenue sources. On-the-pitch success has been consistently high, leading to long-term revenue growth from FY05–19 of 12.2% pa, improved profitability and a more stable financial position.

We value Borussia Dortmund using an asset-based sum-of-the-parts, which separately values the playing squad, the club’s brand (at a discount to the last quoted valuation to reflect potential market movements) and other assets (at net book value), and highlights the hidden or unrealised value of club’s assets. The current valuation of €13.03/share is at a premium of 166% to the current share price, which reflects concerns about whether and how quickly its revenue and profitability can improve given the restrictions enforced on the club to cope with COVID-19. Every 10% change in the value of the playing squad or brand is equivalent to €0.64/share and €0.49/share respectively.

The near-term outlook for the company is negatively influenced by the ongoing effects of COVID-19, which are likely to lead to reductions in most revenue streams and lower net transfer income. As a result, management expects to deliver a net loss in the coming year. To reflect the more difficult trading outlook, we downgrade our forecasts for FY21 and introduce forecasts for FY22, which cautiously assume no significant change in current operating restrictions or any cost savings to address a prolonged difficult trading environment, which are unlikely in such an event.

Borussia Dortmund was formed as Ballspielverein Borussia e.V. Dortmund (Borussia club for ball games) in 1909, hence the BVB 09 logo. ‘Borussia’ was taken from the name of the brewery, Borussia-Brauerei, which is today known as Dortmunder Actien Brauerei (DAB). Since its formation in 1909, it has become one of Germany’s most successful football clubs and most valuable global football clubs and brands.

The company was listed in October 2000, becoming the first publicly traded football club on the Frankfurt Stock Exchange. Indeed, it remains one of the few quoted European football clubs with an investible free float of 59.9%. Borussia Dortmund celebrates its 20th anniversary as a listed company in October 2020. Therefore, where possible in this note, we highlight the long-term progress that the club has made on the pitch and the company has made financially. The company transitioned from German GAAP to IFRS in FY05, which makes comparison of some financial reporting items on a like-for-like basis more difficult, therefore most of our narrative on financial performance focuses on the period since adoption of IFRS accounting.

Domestically, the club has won eight national championships (named the Bundesliga since 1964), four DFB-Pokals (the German knockout cup competition) and six DFL-Supercups (played towards the start of a new football season between the winners of the Bundesliga and the DFB-Pokal from the prior season).

Exhibit 3 shows Borussia Dortmund’s finishing position (quoted) in the Bundesliga in every season since FY01 in the 18 competing teams, as well as that of its main competitor, Bayern Munich. In addition, we highlight the lowest finishing position required to compete in the Champions League or the UEFA/Europa Cup in the following season. Since its IPO in 2000, Borussia Dortmund has won the Bundesliga on three occasions. In the last 10 seasons, the team has finished in the top four of the Bundesliga on nine occasions. Its prolonged decline between 2004 and 2008 reflects the financial troubles under previous management. The 2015 dip proved short-lived when the team finished seventh in the Bundesliga (change of coach), but still allowed successful international participation as UEFA Europa league quarter finalists in the following season.

Exhibit 4 shows cumulative statistics for the top 10 teams in the Bundesliga 1 since FY01, the season in which Borussia Dortmund was listed. Of the 38 teams that have competed in the Bundesliga 1 since then, Borussia Dortmund ranks as the second most successful team in terms of points won, games won, games lost, goals scored and second fewest goals conceded. There is a survivorship bias given the worst-performing teams are relegated every season, and the long-term record omits the rise of new challengers, eg RB Leipzig over the last four seasons. However, it does reflect the team’s long-term and relatively consistent success. Borussia Dortmund is one of only six teams in the 38 that have competed in Bundesliga 1 over that time to feature in every season.

Internationally, Borussia Dortmund became the first German team to win a European competition, the European Cup Winners’ Cup in 1966, and it won UEFA’s most important and financially lucrative competition, the Champions League, in 1997. In the same season, it won the Intercontinental Cup, today known as the FIFA Club Word Cup, played between the champions of the Champions League and the South American equivalent, Copa Libertadores.

Since 2009/10, the club has qualified to play in the Champions League competition in eight of the 10 seasons and, during that period, the team reached the Round of 16, ie the knockout stage of the competition in six seasons, including an appearance in the 2012/13 final.

After listing in 2000, the company was at risk of bankruptcy in 2005, broadly attributed to extravagance, notably on foreign players, after winning the Bundesliga in 2002. New management (the current CEO and CFO) implemented a reorganisation programme, which included restructuring liabilities through a long-term, fixed-interest loan from Morgan Stanley, cost-cutting, and a strategy of revenue development and sustainable investment in players. Key initiatives included repurchasing the stadium, eliminating high rental costs and early repayment of the loan via a long-term agreement with marketing partner Sportfive, while early extension of flagship contracts endorsed the advertising strategy. Jürgen Klopp’s appointment as coach ahead of the 2009 season was in tune with management’s approach to player investment. A c €140m fund-raising in 2014, backed by key sponsors and new partnerships, was a strong endorsement of the strategy.

The listed company, which runs the professional football club, is Borussia Dortmund GmbH & Co KGaA, a hybrid corporate entity that combines elements of a limited partnership (ie KG or Kommanditgesellschaft) and one limited by stocks (ie AG or Aktiengesellschaft).

The share capital of the KGaA is divided into shares that are held by at least one shareholder which has unlimited liability (referred to as the General Partner) and other shareholders that have limited liability, ie the listed shares. The KGaA does not have an executive board but is run by the General Partner, which has sole legal authorisation to manage and represent the KGaA.

Borussia Dortmund Geschäftsführungs GmBH is the General Partner of the KGaA. The sole owner of this GmBH is the founding football club, ie Ballspielverein Borussia 09 e.V. Dortmund. This ownership of the GmBH provides effective majority ownership of the KGaA to the football club. This legal structure was designed to ensure a tight legal connection between the football club and the company. The managing directors of the GmBH are Hans-Joachim Watzke, Thomas Treß and Carsten Cramer.

The share capital of the KGaA at the end of June 2020 was held by the following key shareholders: Evonik Industries (9.83%), Bernd Geske (9.35%), Ballspielverein Borussia 09 e.V. Dortmund 5.53%, Signal Iduna 5.43%, Ralph Dommermuth Beteiligungen (ie the owner of 1&1) 5.0% and Puma 5.0%, leaving a free float of 59.86%. Evonik, Signal Iduna, Puma and 1&1 are long-term club partners, or sponsors, which are typically encouraged to have a shareholding in the company. Bernd Geske is a member of the Supervisory Board of the KGaA and belongs to the circle of friends of the Council of Elders of Ballspielverein Borussia 09 e.V. Dortmund.

Under DFL (the German Football League) rules, the so-called 50+1 rule was introduced in 1998, which prevents a private investor from taking over football clubs. It requires that clubs, ie the fans, hold a majority of the voting rights in order to play in the Bundesliga and commercial investors may not hold more than a 49% stake in the company. The rationale behind the rule is that the clubs should be run in accordance with the wishes of the supporters, to keep ticket prices low, and to keep debts and wages under control.

Following the club’s financial troubles in the mid-2000s, the corporate strategy was to establish itself as the leading German football club after Bayern Munich, and to make its financial success less dependent on short-term sporting success by increasing the domestic and international marketing of the brand name in order to grow the core revenue sources.

As identified above, it is clear the company has successfully established itself as a leading German football club. Now the strategy is to defend its position in the top flight of the Bundesliga, while continuing to exploit the brand and enhance revenue streams.

The team’s sporting success needed to be sustainable, ie without taking on new debt and achieving a balance between the company’s financial interest and its sporting interests, which can sometimes conflict, ie a player may be sold based on financial considerations rather than the potential impact it may have on the team’s performance in the future.

The key structural growth drivers for the business are that the team is one of the most successful and well-known German football clubs, with one of the highest average number of spectators in Europe, and Germany is one Europe’s largest football markets, but lags behind other markets in terms of media exploitation rights.

Borussia Dortmund reports revenue from five sources: Match Operations (ticket receipts for attendance at games), Advertising (sponsorship and advertising from companies), TV Marketing (broadcast rights), Merchandising, and Conference, Catering & Miscellaneous.

Exhibits 5 and 6 illustrate how the revenue sources have evolved since FY05, when IFRS was adopted. We have combined Merchandising and Conference, Catering & Miscellaneous revenues into ‘Other’ as there was a minor change to revenue disclosure between FY14 and FY15, and the combination aids analysis of longer-term trends.

In descending order of size, the revenue sources in FY20 were TV Marketing at 46% of the group total, Advertising 26%, Other 19% and Match Operations 9%.

Before the change in accounting standards in FY20, Borussia Dortmund included gross revenue from transfer deals in total group revenue. The charts above exclude transfer deal revenue which, due to its nature, fluctuates between financial years. When we refer to revenue in this note, it is to revenue before transfer deals, unless stated otherwise, which is consistent with the company’s new and future disclosure. For completeness, Exhibit 7 includes transfer deals.

Borussia Dortmund’s revenue has grown from €74.7m in FY05 to €370.2m in FY20, a CAGR of 11.3% pa, significantly ahead of German GDP growth. TV Marketing revenue grew ahead of the group average, with a CAGR of 17.6%, and CAGRs for the remaining revenues were: Other 10.8%, Advertising 9.1% and Match Operations 4.2%. FY20 was affected by the COVID-19 pandemic, predominantly in the fourth quarter when games were postponed and subsequently played behind closed doors before the end of the financial year. If we exclude the COVID-affected FY20 to give a better indication of how the company performed in more ‘normal’ times, the CAGR for revenue was 12.2%.

As a result of the differing growth profiles, TV Marketing is now the most important revenue for the group, increasing from 20% of total revenue in FY05 to 46% in FY20. Advertising was the second most important revenue source at 26% of the total in FY20, having been the most important revenue source in FY05 at 36% of the total. Other and Match Operations represent a smaller percentage of group revenue than in FY05 at 19% and 9% respectively, despite both exhibiting strong compounded growth rates.

Revenue has declined in only three years since FY05: in FY09 when it fell by 3.8%, in FY18 when it declined by 4.6% and in FY20 when the fall was very modest. Revenue declines have usually followed seasons in which the team achieved greater success than in a typical year. In FY09, the revenue decline was mainly attributable to lower TV Marketing as the team appeared in the final of the DFB-Pokal in the prior season but reached only the third round of the competition in the following season. In FY18, all revenues excluding Advertising fell year-on-year due to a less successful season in European and domestic competitions. The team was eliminated from the Champions League after the group stage and went on to play in the financially less lucrative Europa League. In addition, in the prior season the team won the DFB-Pokal. As already highlighted, FY20 revenue was affected by the COVID-19 pandemic and led to a modest decline to €370.2m from €370.3m in the prior year. Before the outbreak performance had been good, with revenue growth of 6.3% y-o-y in the first nine months of the year.

TV Marketing is revenue earned from the broadcasting rights of the games played by the team. It has grown at a CAGR of 17.6% since FY05 and by 19% since FY10 due to inflation in media rights from increased demand for premium content from competing media platforms and the team’s improved and more consistent on-pitch success. It has become the company’s most important revenue source, with a high degree of visibility on the near and medium term.

Since FY11, the company has disclosed revenues from domestic TV (domestic and international rights for the Bundesliga), international TV (Champions League etc) and Domestic Cup, or provided commentary on the absolute growth rates between years. Please note that the totals in Exhibit 8 may not sum in every year, because not all items are disclosed in every year.

Marketing of media rights is conducted centrally by the organisers of their respective competitions, ie the Bundesliga and UEFA, hence it is outside Borussia Dortmund’s control. However, the system of revenue distribution to clubs is defined well in advance, which provides a high level of visibility to help clubs plan.

In FY11–20, the CAGR for domestic TV rights was 15.5%. The current domestic Bundesliga broadcast rights contract runs for the four seasons 2017/18 to 2020/21 and is worth €4.64bn in total, or €1.16bn per season. This was an increase of c 85% on the prior contract, which ran for the four seasons 2013/14 to 2016/17 of €2.5bn in total or €625m per season. The prior deal from 2009/10 to 2012/13 was worth €1.65bn or €412m pa, and the deal for the three seasons 2006/07 to 2008/09 was €1.26bn or €420m pa.

The method of distributing the income between the clubs in the Bundesliga (two divisions) was changed at the start of the current contract. Distributions are made based on four ‘pillars’, or criteria, including the ranking of the teams over different time periods and the playing time of younger players, versus two pillars previously. Distributions from international rights are made based on three pillars, with a proportion shared equally between the clubs and the remainder based on performance.

In June 2020, it was announced that the German broadcasting rights for the Bundesliga for the four seasons 2021/22 to 2024/25, ie covering Borussia Dortmund’s FY22–25, were sold for €4.4bn, a reduction of c €240m or 5% from the current contract. The lower proceeds reflect the timing of the auction, ie during the height of economic uncertainty and COVID-19 lockdowns. The main live pay TV rights have been split between the incumbents Sky Deutschland (Saturday games) and DAZN, a subscription streaming service (Friday and Sunday games), and some live games are screened free-to-air on Pro7. The majority of delayed highlights shows are with the state broadcasters, ARD and ZDF as before, apart from on-demand highlights straight after the game, which have been bought by Axel Springer. In the prior contract, Sky also had rights to the majority of Sunday games (DAZN had a number of ad hoc games).

UEFA (Union of European Football Associations) is responsible for the centralised marketing of all media and commercial rights for all European club competitions, and subsequent distributions to competing clubs. The rights are typically sold in three-year cycles: the current cycle covers the seasons from 2018/19 to 2020/21. The current rights in Germany are held by Sky Deutschland and DAZN, so are only available to be seen behind a paywall. In the 2000–03 cycle, gross revenue for the club competitions totalled €2,204m and, following high levels of inflation in every cycle except for the 2003–06 cycle, total revenue climbed to €9,605m for the current contract. After UEFA expenses and other payments, the net amount is distributed in a ratio of 4:1 between the Champions League/Supercup and the Europa Cup competitions. Distributions to Champions League participants are based on four ‘pillars’ versus three in the previous cycle: 25% to the clubs that participate in the group stage; 30% for performance in the latter knockout stages of the competition, ie Round of 16 onwards with escalating fees per game; 30% based on a coefficient which ranks a team’s 10-year relative success in the competition (the newly added pillar) and 15% based on the value of the club’s own TV market relative to all countries, ie the market pool. Distributions to clubs that compete in the Europa League are made in a broadly similar manner. Exhibit 9 illustrates how the pillars shaped distributions to three clubs in the Champions League, which had varying degrees of success: Barcelona (eliminated at the semi-final stage), Borussia Dortmund (eliminated at the Round of 16) and Liverpool FC (the winners). We also include the monies received by the winners of the Europa League in the same season, Chelsea, to highlight the relative financial attractions of playing and success in the two competitions.

Barcelona received more money despite being less successful than Liverpool in the competition, due to the coefficient payment (Barcelona has enjoyed more consistent long-term success in the competition) and the market pool payment.

Advertising is the sponsorship income from Borussia Dortmund’s key corporate partners as well as advertising on the billboards in the ground. It has grown at a CAGR of 9.1% since FY05.

Sponsorship revenue is typically earned from multi-year contracts, although there are annual contracts too, with leading international and regional companies that want be connected with sporting success and to promote their brands. The company has a proven ability to renew at higher prices or market new opportunities.

The company’s principal partners, which represent approximately half of total Advertising revenue are:

Prior to splitting sponsorship of the shirt by competition from FY21, Evonik had been the sole shirt sponsor since July 2006. Opel became the team’s first ever shirt sleeve sponsor from FY18, when clubs were allowed to find their own partners, prior to which sleeve sponsorship of all Bundesliga teams was sold under a centralised deal. Principal partners tend to be shareholders of the company in order to strengthen the relationship with the club.

In addition to these principal partners, there are three different levels of partner, which contribute differing levels of income in return for differing levels of sponsorship benefits: BVB ChampionPartner (partners include Opel and bwin), BVB PremiumPartner (partners include Coca-Cola, L’Oréal, Effect and Eurowings) and BVB Partner (partners include ARAL and REWE).

We believe the long-term partnerships identified above represent over half of Borussia Dortmund’s advertising and should be relatively predictable. For other partners, it is likely that some revenue will be sensitive to the economic cycle. Therefore, the COVID-19 outbreak and following economic downturn may have an impact on this revenue source from FY21. In the coming year, the recent signing of new shirt sponsor 1&1 and extension of the Puma deal is likely to support advertising growth.

During the global financial crisis from 2008 onwards, Borussia Dortmund’s advertising revenue declined by 0.3% in FY09 and by 0.9% in FY10, before growing by c 29% in FY11. Isolating the economic sensitivity of advertising during that period is complicated by FY09 and FY10, which coincided with below average Bundesliga league positions and the fact that partners pay a variable element dependent on the team’s success. From FY10 onwards, the club benefited from improved success in the Bundesliga.

The activity of seeking new sponsors is currently outsourced to Lagardère, which receives a commission on revenue generated. For Borussia Dortmund, commission and expenses are reported as Advertising within Other operating expenses. Over time, the effective commission rate has ranged between 26% and 31% of reported advertising revenue. At a cost of €27.0m in FY20, commission represents c 6% of total operating expenses of €440.3m. From FY21, the commission rate payable to Lagardère is reducing.

Match Operations represents revenue earned from the attendance of fans at its home ground, Signal Iduna Park, as well from friendly games played by the team including overseas tours, which typically take place before the start of the new season and during the winter break.

Management regards Signal Iduna Park, Germany’s largest football stadium with capacity for 81,365 fans, as its most valuable asset apart from the team. Known as the Westfalenstadion until 2005, the facility was built for the 1974 World Cup, but has since been extensively enlarged and modernised. The stadium is not multi-functional.

Since FY05, Match Operations revenue has grown at a CAGR of 4.2% pa. Key drivers of growth have been minor increases in capacity, price increases and greater on-pitch success, which has led to more appearances in European competitions. The last financial year was affected by the COVID-19 outbreak, which meant that five home games in the Bundesliga (from a season total of 17 games) at the end of the season had to be played behind closed doors, ie fans were not allowed to attend games, and the club therefore earned no revenue from ticket receipts. If we exclude FY20, the CAGR for Match Operations revenue in FY05–19 was 6.9% and represented 12% of total revenue in FY19.

Within Match Operations, the company separately discloses revenues from domestic (Bundesliga games), international (UEFA competitions), national cup (DFB-Pokal) and friendlies (tours).

Revenue is naturally a function of the number of games played, the number of fans that attend each game and price per ticket. Therefore, in ‘normal’ circumstances, there is a relatively predictable element to domestic revenue, the most significant source of revenue, as there are 17 home Bundesliga games in every season, which are typically sold out. Over the long term, there has been a gradual increase in the capacity of the stadium as the ground has been updated, and management’s policy with respect to ticket prices is typically to grow them by inflation, as it is a community club. The club benefits from the advance sale of 55,000 season tickets (which may or may not include tickets to other competitions as well as the Bundesliga), roughly two-thirds of capacity with exceptionally high take-up, which brings revenue visibility. The remaining tickets typically go on sale approximately one month ahead of the game. The price of a ticket varies depending on location in the ground, the competition or team that is being played and concessions based on age and disability. We estimate that revenue per domestic game during FY19 was c €1.66m, the last season not affected by the COVID-19 pandemic.

While there is a reasonably predictable element from domestic ticket sales, revenue from other competitions is less predictable given these include knockout competitions or the fact that revenues are shared in different ways. For example, net income (revenue less stadium costs) from DFB-Pokal games is split equally between the two competing teams, and in the latter stages of the Champions League the home team receives all of the ticket income. Therefore, there is likely to be a variable number of home games for these competitions in any season that would affect revenue. Our estimate of revenue per European game in FY19 was c €1.87m, a slight premium to a typical Bundesliga game, which reflects a combination of higher ticket prices and lower attendance as standing fans are not permitted at these games.

Due to the outbreak of COVID-19, it was announced on 13 March 2020 that all Bundesliga games would be temporarily suspended after the 25th match of the season, of a total 34 games. The Bundesliga recommenced games over the weekend commencing 15 May 2020, with an elevated and significant level of media attention in overseas countries. There were nine games to play, and the season was completed before the end of June, as hoped. As all games were played behind closed doors, the club generated no revenue from ticket sales (refunding where applicable) and lost other revenues such as catering at games and merchandising.

Looking to FY21 and beyond, the COVID-19 pandemic remains a risk to future revenue from Match Operations, as there is a risk that games in all competitions may be played behind closed doors or with lower attendance again, and that overseas travel may not be possible.

In August 2020, the Bundesliga announced that attendance at stadia would be restricted from the start of the 2020/21 season in September until at least the end of October 2021, in response to the ongoing threat from COVD-19. The restrictions include away fans not being allowed to attend games (to limit the threat of infections while travelling), and that stadia will be all seated (to comply with social distancing requirements), which will affect Dortmund as the Tribune is traditionally a standing area, and the sale of alcohol will not be permitted at games. In September 2020, it was announced that the maximum attendance at games may be 20% of available capacity. For Borussia Dortmund, this would represent c 16,000 attendees. The club must agree the weekly allocation of seats with local authorities, which will consider reinfection rates in the local community. For the first home game of the 2020/21 season (versus Borussia Mönchengladbach), attendance was c 9,300, and for the second (home) game (versus SC Freiburg), attendance was c 11,500 vs the typical 81,000+. Weekly attendance at games is likely to increase until the end of October when the trial to see how attendance can be managed ends.

For Champions League games, there are currently no proposals to allow fans at games. The club hopes that UEFA observes the success it is having with restricting attendance.

In Exhibit 12, we aggregate a number of revenue streams into ‘Other’, due to the change in disclosing the various sources between FY13 to FY14. Since FY05, other revenue has grown at a CAGR of 10.8% pa. In aggregate, it represented c 19% of total group revenue in FY20. As well as the more obvious revenue streams of team merchandise and sales of beer at the stadium, it includes booking fees for the sale of tickets and fees received for squad players who represent their national teams, so can be quite variable.

Merchandising represents the award of licences and revenue from the sale of team merchandise, eg replica team kits. In addition to partners’ wholesale distribution channels, sales are made via a major FanWelt centre near the stadium, branded stores (FanShops) in Dortmund, sales kiosks at the stadium and e-commerce, www.bvbonlineshop.com. In FY14–20, revenue was relatively volatile, but over this period has declined at a compound rate of 0.8% pa. At €33m in FY20, it represented c 9% of total group revenue. Growth should be driven by the increasing global appeal of the brand, as well as the company’s ability to increase and improve the range of merchandising.

Conference and catering is closely linked to attendance at the stadium as well as the company’s ability to monetise improved, ie higher value hospitality.

Sporting success and therefore investment in the squad was, and still is, required to be sustainable, ie without taking on new debt, and achieving a balance between financial and sporting interest. These can sometimes conflict as the company might sell a player based on financial considerations rather than the impact this may have on the team’s future performance.

Borussia Dortmund’s strategy has been the development of a competitive team with a focus on identifying promising young players at minimal cost (even free), who can then be further developed at the BVB Academy.

Over the long term, Borussia Dortmund has a reputation and proven track record of prudent investment in young talent while maintaining, and indeed, improving success on the pitch. In Exhibit 13 we highlight net transfer spend per season (amount received less amount spent on the squad) since the 2010/11 season for a range of Borussia Dortmund’s competitive peers. These include the large/leading clubs in Europe, the leading clubs in Germany as well as the emerging RB Leipzig. We also include cumulative totals for the 10 seasons from 2011–20 and the 20 seasons from 2001–20.

Borussia Dortmund has been the only one of the 16 clubs listed to generate a net surplus on transfers in 2001–20 and 2010–20, which is testimony to its ability to recruit and trade talent in football over the long term. The cumulative total is helped by the impressive net surplus of €164m in 2017/18 from the sale of two players: Dembélé to Barcelona for €138m and Aubameyang to Arsenal for c €64m. However, the net unrealised value of the current squad as shown in Exhibit 14 suggests that the club’s ability to spot and nurture talent continues.

The figures reflect the fact that clubs select and buy players in different ways. Some place more emphasis on buying established/more expensive talent over developing younger/less expensive talent. It also reflects that different backers of clubs following, say ownership changes, eg Chelsea, Manchester City and Paris Saint-Germain, had a greater appetite and available finances to invest in developing teams and brands.

According to www.transfermarkt.com, Borussia Dortmund currently has the 15th most valuable squad of 500 football teams that are valued globally, with an estimated market value of €587m versus the purchase cost of €288m. Exhibit 14 shows the current estimated market value (in descending order) versus the purchase cost of the top 20 most valuable football squads.

Borussia Dortmund is one of three German teams to feature in the 20 most valuable football squads in the world. Of the 20 clubs, nine have an accumulated purchase cost greater than €500m, and all clubs have a squad with an estimated market value greater than the accumulated purchase value. When considering the relative return on investment, ie percentage gain, Borussia Dortmund has the fifth highest unrealised gain in the value of its squad at 104% on the purchase value of €288m.

The current playing squad, with estimated market values from Transfermarkt.com and purchase values, is shown in Exhibit 15. Two players, Jadon Sancho and Erling Haaland, at a combined market value of €197m, represent c 34% of Borussia Dortmund’s squad valuation. During the 2020/21 summer transfer window, there was much speculation about the future of Jadon Sancho. The club received a number of bids from Manchester United below the rumoured asking price of €120m, but he was not sold. The summer transfer window saw the arrival of Jude Bellingham (aged 17) from Birmingham City at a cost of €11m (valued at above €27m) and Jesus Reinier (aged 18) from Real Madrid.

During the 2019/20 season, Jadon Sancho was the third highest goal scorer in the Bundesliga with 17 goals, and Erling Haaland was the joint sixth highest goal scorer, despite playing just 15 games, with 13 goals. Across all competitions, Erling Haaland scored 16 goals in 18 appearances, has already gained much admiration from other clubs due to his prolific goal scoring record and reaffirms the club’s ability in identifying young talent. The leading scorers in the Bundesliga were Robert Lewandowski of Bayern Munich (34 goals) and Timo Werner of RB Leipzig (28 goals), who was subsequently sold to Chelsea. With respect to goal assists, Jadon Sancho and Thorgan Hazard were ranked second and third respectively in the Bundesliga with 16 and 13 assists, behind Thomas Müller of Bayern Munich with 21 assists.

The company’s senior management (see below) is backed by highly experienced members of the non-sports businesses and coaching staff.

In the sections above we highlighted the growth drivers of Borussia Dortmund’s revenue. Before we consider the effects of COVID-19 on the company’s results in FY20 and its outlook, we show how strong long-term revenue growth in FY05–19 translated into improved profitability, cash flow generation and cash returns for shareholders.

In FY05–19, Borussia Dortmund’s revenue grew at a CAGR of 12.2%. Over the same period, EBITDA increased from a loss of €15.9m to a profit of €116m, reaching a high of €137.3m in FY18 due to an exceptionally successful season of transfers. From FY06 (we exclude FY05 due to the reported loss), the CAGR for Borussia Dortmund’s EBITDA of 32.4% pa compares very favourably with long-term revenue growth over the same period of 12.9% pa, which demonstrates the operational leverage in the business.

The key line items of Borussia Dortmund’s income statement since FY05 are shown in Exhibit 17.

Looking at the main expense items, the above-average growth of personnel expenses has been compensated for by the lower growth of other operating expenses to deliver an improved normalised operating margin.

Personnel expenses have grown at CAGR of 14.5%, the highest long-run growth rate of any of the company’s expenses, as might be expected given the environment of wage inflation for football players at the more successful teams across Europe, and have modestly exceeded the long-run growth rate of revenue. At €215.2m in FY20, they represented c 58% of revenue.

Other operating expenses include costs related to staffing of matches, retail operations, advertising commissions, general admin expenses, as well as expenses relating to transfer deals including commissions. There will be a reasonable element of flexibility in the cost base.

We draw attention to the new accounting and disclosure of ‘net transfer income’, which is equivalent to net profit on the sale of players (gross proceeds less the written down value and associated transfer/agent fees) for FY19 onwards, which was required by IAS 8.42. Previously, gross amounts for revenue and unamortised costs, etc were recognised. The net effect is that profitability is not affected, but gross revenue and costs for the group, as previously disclosed, are lower. At €82.9m in FY19 and €40.2m in FY20, success in the transfer market is an important driver to the company’s profitability and its ability to pay a dividend.

Amortisation represents, primarily, the annual write-down of the value of the team squad, and it too has represented an increasing proportion of the total cost base, reflecting increased investment in the squad.

The company introduced an annual dividend in FY12, which is paid in the following financial year. The initial dividend for FY12 was set at €0.06 per share and increased to €0.10 in the next two financial years. In FY15, the dividend was reduced to €0.05, since when it has been stable at €0.06, representing a cash outflow of €5.5m pa. For the year ended June 2020, no dividend was proposed given the uncertainty created by COVID-19.

In Exhibit 18 we present a summary of the key elements of Borussia Dortmund’s free cash flow generation and its uses, and the improving net financial position since FY05.