On the face of it, things don't get much better for Galatasary fans. They have a team of top stars, are through to the last 8 of the Champions League and have now been drawn against Real Madrid - life is certainly sweet for the Turkish champions. However, the club has spent heavily and recent announcements from the club confirm the club has some serious, immediate problems. 

Club President Aysal recently revealed that the club is teetering on the edge of bankruptcy with total debt of $328m. Worryingly, the club has $78m of short-term debt. Aysal explained that the club is financially exposed and that if anyone made a petition to wind up the club, it might prove successful. In a recent interview, he also advised that he would not have taken the job as President if he had known how bad things really were! 

Galatasaray have spent heavily on an all-out assault on the Champions League - they are aiming to break into the top-tier of European football on a permanent basis. Just inside the top 30 in the Delloitte Money League, there is a belief that if the club can become a fixture in the top footballing tier of Europe, the commercial revenue will follow. The club have been paying high wages in pursuit of on-field success - January transfer window signings included Drogba (E4m a year and the club picking up his tax-bill) and Sneider (a deal that will cost the club around £22m in fees and wages over the three year deal). The players join established stars such as Eboue and Elmander. 

Galatasaray don't operate on a 'benefactor model' like Man City or Chelsea but are part of Public Limited Company with shareholders. When it needs an injection of cash, the company needs to create more shares. In 2011 the company created new shares, raising around $50m. This was a highly controversial move, not least because it diluted the value of the investments of the existing shareholders (the chairman of the financial regulators, the Capital Markets Board, who allowed the share issue, was subsequently sacked). 

After further heavy spending, the club now needs more capital. The club recently announced that it intended to raise $96m via a new share issue – the purchasers would be Russian bank VTB. Worryingly for the club, the proposed share issue has been blocked by Turkish regulators. The Capital Markets Board has ruled that making a further share issues would have a serious impact on existing shareholders and cannot be supported. An action by 16 private investors has also been launched aimed at permanently preventing the share issue. To make things worse for the club, in February the Capital Markets Board fined Galatasaray £250k for misleading the regulator and the public over player contracts in 2010.  The regulator looks to be standing firm - currently the share issue is going nowhere. Politics and football are closely linked in Turkey and there remains the possibility that the club President may have somewhat overstated the threat of bankruptcy to help drive through the contentious share issue. 

Club President Aysal announced that in addition to clearing part of the debt, some of the funds from the proposed share issue are required to meet FFP requirements. Under FFP rules, any new losses need to be covered by injections of equity from the club owners. For Galatasaray, the owners are the shareholders. Although we don’t yet know the size of the club losses over the 2011/12 and 2012/13 season, the President’s announcement suggests that a significant injection of cash is needed by the end of 2013 just to meet FFP requirements. Without the injection of equity from shareholders to cover the losses over the first Monitoring Period (2011/12 and 2012/ 13 ), Galatasary would fail the FFP test.

There are three main financial reasons that a club might fail the FFP test:

1. Overdue payables (i.e. falling behind on tax/social security and transfer fee commitments)

2. Failure to inject equity to cover losses (i.e. club debts increasing)

3. Overspending (i.e. failing to Break Even)

UEFA’s CFCB panel has already handed out UEFA bans to several clubs (including two in Turkey) for having ‘overdue payables’ and clearly takes this failure very seriously. However, given that the FFP rules were introduced specifically to tackle the issue of growing club-debts, it seems likely that this offence might be viewed as the most serious of all the three offences. Galatasaray will find themselves in a very difficult position indeed if it cannot raise the funds to inject the required equity. Although Aysal likes to point out that “Sustainable success creates income”, it remains to be seen just how sustainable Galatasaray’s success will be.

**Update 24 March** 

This article generated lots of interest and is worth a post-script. Following concern about the interview where the threat of ‘bankruptcy’ was raised, the Galatasaray president has since stated that he was misunderstood. In a club statement he explained that he had really meant to articulate that the club had had historic problems which it was now on the way to overcoming. Whether this explanation is credible might depend on which side of the polarised Galatasaray/Fenerbahce divide you sit. As I have pointed out, there is a suspicion that the President may have overplayed the immediate financial worries to drive through the share issue. 

So, where does Galatasaray’s money come from and are they really in trouble? 

I am grateful to Luca Marotta from http://luckmar.blogspot.co.uk/ for providing the latest Galatasaray accounts. My turkish and online translation tools are not good enough to enable me to dive into the detail of this (though I am sure Turkish fans will enjoy analysing the accounts). However there are a few things that jump out. 

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 Galatasaray lost €15m in the year ending May 2012 and since then the club have spent heavily. However, the Champions League success will bring in something around €27m this season. With the addition to the extra games and commercial revenue, all things being equal, it is possible that the club might report a modest profit this campaign (though analysis of the accounts would be required to really understand the position). The other thing to point out is the negative equity in the club. The spending looks to be fuelled by debt and the shareholders equity is a huge negative figure (-€107m). There is clearly a need for cash injection into the club and from 2012/13 the permitted loss under FFP rules average just €10m a season. Clearly Galatasaray have club set-up that would easily exceed €10m loss without a Champions League campaign. 

So, Galatasaray’s model might just work long-term provided they continue to enjoy Champions League success every season and also get a much-needed injection of capital into the club. It seems a rather precarious existence and we should be mindful of Leeds, who had  a spectacular financial collapse when they failed to qualify for the Champions League. Only the Turkish champions are guaranteed a place in the lucrative group stages and the club should be mindful that that they failed to qualify as recently as 2011.

 Further reading: