Assessing Bayern’s transfer window from a financial perspective – boom or bust?

My colleagues have done an excellent job exploring questions like these from all conceivable angles. In this article, I intend to evaluate Bayern’s transfer window from an economic perspective. Financially speaking, have Bayern taken too much of a risk? Or have they perhaps not taken enough of a risk? Have they acted prudently with respect to the special circumstances of COVID-19? Do the new signings represent good value for money?

Financing transfers: A question of liquidity now…

I do not intend to conduct a full-blown, in-depth analysis of FC Bayern’s financial performance in this article. We have done this elsewhere and we will certainly do so again when the 2019/20 financial report comes out. For the purposes of assessing Bayern’s transfer window performance, I will particularly focus on their current liquidity rather than figures like revenues, EBIT or profit, because their current liquidity, ie how flush with cash they are, in my opinion most accurately reflects their ability to invest in new players right now, in this very window. My assessment is based on the very simple premise that all transfers Bayern do are paid for in full and up front or will become due during the ongoing season. Therefore, if Bayern had not have enough cash on hand or had been unable to obtain it quickly in the window, they would not have been able to spend it on new transfers.

At the end of the financial year 2018/19 on 30 June 2019, the “FC BAYERN MÜNCHEN AG Konzern”, ie the entire company including all its subsidiaries, had cash reserves of €159m and an equity ratio of 68%. Their operating cash flow was €56m, meaning that during the financial year they generated €56m free, available cash to do with as they please from their key operating activities not including player sales. They also have zero long-term liabilities such as bank loans or bonds (a fact that they are very proud of). On top of that, fast forward to today, Bayern have just won the Champions League, which has given them a fresh cash injection of €130m, an increase of €50m on the year before, where they earned about €80m after crashing out in the round of 16.

As these figures indicate, Bayern at present is a highly liquid business. They sit on massive cash reserves, have no long-term debt and because of their high equity ratio they could easily take out a loan in an instant if they felt they needed to to sign new players to bolster their squad. On top of that comes the Champions League windfall of an extra €50m on last year in cash, which they could also invest in new players immediately without compromising their financial baseline.

… And in the future

But that is the present. Prudent financial management (in fact, prudent management of any description) will always consider and plan based on future expectations. Therefore, when Bayern sign new players in 2020, it is not enough for them to look at their very healthy financials at present, but they have to take the COVID-19 pandemic and its expected implications for the club’s future financial situation into account as well.

Herbert Hainer estimated that Bayern will generate approximately €100m less in revenues this season than last. Based on the assumption that the COVID-19 pandemic will prevent the Bundesliga clubs from returning to usual matchday operations with full stadiums, and thus also keep the sale of merchandise and sponsorship revenues down for the entire season, this seems a reasonable estimate. In a normal season, Bayern roughly generate €90m in gate income which they will not do now, and the absence of crowds will have further knock-on effects on merchandise and sponsorship revenues. Also, there is a chance that the COVID-19 pandemic will negatively affect Bayern’s overseas income, especially in Asia and America, since they will not be able to take their usual summer or winter tours of these regions, missing out on reinforcing their brand awareness there.

At the same time, Bayern’s assumed decline in revenues by €100m this season is halfway offset by the windfall of +€50m in additional Champions League revenues compared to last season, reducing the calculated revenue hit to €50m. However, this means that they are still down an extra €50m in cash this season compared to last without any notable corresponding reductions in their ongoing operating expenses. They still have to pay the salaries of their employees, they still have to maintain their infrastructure, they still have to operate the Campus, and so on. As a result, these €50m less will penetrate through to the bottom line almost completely.

Nevertheless, given the financial indicators I mentioned above, €100m less in revenues this year should not be too much cause for concern to Bayern. In fact, they could sustain the entire loss out of their cash supply and still have some €50m left. FC Bayern’s long-term financial record as well as their short-term liquidity are excellent. Exclusively regarding their current liquidity, they could arguably have signed one or even a few rather expensive players in the window without overextending themselves financially.

Bayern’s spending on transfers this season

With a view to the transfer market, the question of how much Bayern want and can invest in new players, therefore, does not depend on their current liquidity, but almost entirely on how pessimistic or cautious Bayern’s expectations are concerning the development of the pandemic over the coming year(s). Do they believe that it will be in check and crowds allowed to return to the stadiums without restrictions by next summer? How quickly do they believe the transfer market, and thus the availability of players, will recover from COVID-19? How hard will their international business be affected mid- to long-term by the virus raging through Asia and the Americas? As how significant do they asses the risk that COVID-19 makes a massive comeback during the winter in Germany as well, including the Bundesliga teams, potentially bringing the Bundesliga to a second hold with indeterminable economic consequences?

Questions like these will have determined how much risk Bayern were willing to take in this summer’s transfer market and shaped the profile of their activities. They will guide my assessment of Bayern’s summer transfer window in this article, too.

So without further ado, let us take a look at Bayern’s transfer market activity:

Who has been signed?

1. Bouna Sarr (28), 4-year contract, €10m, right-back
2. Eric Maxim Choupo-Moting (31), 1-year contract, free of charge, offensive midfielder
3. Douglas Costa (30), 1-year loan, €10m salary, winger
4. Marc Roca (23), 5-year contract, €9+6m, defensive midfielder
5. Tanguy Nianzou (18), 4-year contract, free of charge, center-back
6. Tiago Dantas (19), 1-year loan with an option to buy, contract details unknown, midfielder
7. Leroy Sané (24), 5-year contract, €45+10m, winger

Who (conspicuously) has not been signed?

1. Callum Hudson-Odoi (19), €77m

Who left?

1. Mikael Cuisance (21), loan, €??m
2. Thiago (29), €22m+x
3. Sven Ulreich (32), €0.5m
4. Alvaro Odriozola (23), end of loan
5. Coutinho (28), end of loan
6. Ivan Perišić (31), end of loan

Now what is the immediate financial impact of these signings and departures in year one? I base my assessment on the assumption that Bayern paid and received all due signing fees at once and in full (apart from Roca, Thiago and Sané, where it is clearly stated otherwise). I add to this number the incoming players’ yearly salaries, based on an estimate that seems reasonable to me, and subtract the salaries of the departures. This amounts to (ignoring Dantas, who is meant to be used in the second team):

By the same token, the non-arrival of Callum Hudson-Odoi saved Bayern an estimated €77m signing fee + €5m yearly salary = €82m, which would have boosted their cash expenses in the current financial year to €168.5m.

Bayern’s COVID-19 transfer balance

Now what are we to make of these figures? Despite Bayern’s long-standing business viability and sound current liquidity, a net cash drain in the order of an estimated €86.5m in signing fees this transfer window and salaries over the coming year has taken things to the limit in my opinion, even for a club of Bayern’s financial prowess. Sure, in addition to Leroy Sané they could arguably have afforded to sign another big money player like Callum Hudson-Odoi. In fact, they could in theory almost have paid for him in full in cash. However, this would not only have been an entirely uncharacteristic move for Bayern given how notoriously loath they are to dip into their huge fixed deposit account. Considering the uncertain economic outlook I outlined above, it would also have meant that the club would have taken a considerable – and ultimately probably unnecessary – economic risk. They have just come back from one of the most successful seasons in the club’s history. They won the treble and looked positively invincible for months. After the end of the season, there were several clearly identified positions in the squad that needed reinforcing, most notably at right-back, in defensive midfield and out wide.

Bayern managed to fill all these vacancies before the end of the window and there is potential for endless debate as to whether in sporting terms the players Bayern have signed have sufficient quality to meet the standards of a club of their lofty aspirations. But in this transfer window Bayern had to factor into their decisions not only to the footballing requirements of their squad, but also their expectations regarding the continued impact of the pandemic on their business. In reconciling both of these demands, Bayern in my opinion have shown good judgement in their selection of players as well as the type and duration of contract they have given the players they have signed. For one, not signing another expensive player like Callum Hudson-Odoi besides Leroy Sané in these unstable times was exactly the right decision, especially on a long-term contract. In fact, Bayern chose their permanent signings very wisely. They signed on a permanent basis Leroy Sané, who was expensive, but probably much less so than before COVID-19. Also, they had wanted to sign him for a long time and they consider him one of the cornerstones of their attacking game for years to come. The other permanent signings were Marc Roca, who was reasonably cheap and is meant to fill the numerical vacancy in midfield left by Thiago’s and Cuisance’s departures; Bouna Sarr, who was also comparatively cheap and desperately needed in defense as a backup in the full-back positions; and Tanguy Nianzou, a center-back talent who came on a free and will command only a small salary.

Other than that, Bayern relies on loans. The two names that stand out most are Eric Maxim Choupo-Moting and Douglas Costa. Some people view these signings with considerable misgivings because neither player exactly resembles what you would call a visionary investment into the future of the squad. Choupo-Moting is 31 years old and was considered surplus to requirements at PSG after the end of last season. Costa has already played for Bayern in the past and not everyone has the best memories of his exploits wearing the Bayern shirt. But signing these players was never meant with the primary objective in mind to advance the sporting quality of the squad in a meaningful way. These signings were driven by economic considerations, and as such both deals have been very astute as they represent a sensible compromise between quality on the pitch and bottom line impact. Crucially, both players have only been signed on one-year loans and neither player cost a signing fee. Eric Maxim Choupo-Moting’s contract at PSG had run out at the end of last season, making him a free agent. Douglas Costa also did not cost a loan fee, but Bayern have to shoulder his entire salary of approximately €10m per year. This might seem a steep amount at first glance, but considering the tight schedule of games until the end of the season, Bayern did well to add another winger as backup, and if the alternative was a player in the range of Callum Hudson-Odoi (€70m+), it was an economically very well-judged and foresighted decision by Bayern not to go for the big money pick, but to chose a comparatively cheap yet arguably still serviceable alternative.

All in all, these signings in their entirety paint a picture of a club that has – in my view – successfully tried to navigate a difficult path in these challenging times. With their decisions on whom to sign on which type of contract, Bayern seem to have struck a more than reasonable balance between prudent financial conservatism in accordance with the circumstances of the COVID-19 pandemic and not losing sight of the footballing quality of their squad for next season. They made use of their very healthy financial situation and added long-term (and partly expensive) footballing substance to the squad with Sané, Roca, and young prospect Nianzou. However, although they could have afforded to, they did not carry their willingness to spend too far. With Choupo-Moting, they chose to sign a player free of charge on a very reasonable salary as a stopgap solution in attack, who is capable of filling several positions. The same is true for Douglas Costa, who is significantly more costly than Choupo-Moting, but still far more affordable than the long-term alternative of Callum Hudson-Odoi or a player of his caliber would have been. These two loans especially, but the complete mix of signings as a whole, clearly spells a club making the effort to bridge the time of most uncertainty until next summer when, if all goes well, the impact of COVID-19 on football will have diminished significantly, the economic outlook changed for the better, financial planning become less unpredictable, and the issue of how to put the squad on a sustainable future path can be revisited anew.