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Bayern Munich Gets Leg Up as Murdoch Boosts German League

When Bayern Munich lost the 2010 Champions League final against Inter Milan, it was a victory of largesse over careful German financial planning.

Bayern, which had turned a profit every year for a decade, was beaten by an opponent that had accumulated losses of about 1 billion euros ($1.3 billion) as it bought soccer’s biggest names such as Wesley Sneijder and Diego Milito. Bayern President Uli Hoeness still holds a grudge.

“I would not be happy if I win a Champions League like that,” Hoeness, a former World Cup winner who increased Bayern’s annual sales to about 320 million euros ($420 million) from 6 million euros since swapping the playing field for the boardroom in 1979, said in a January interview. “If I win a Champions League, I want to be in profit.”

As Bayern Munich came closer to another Champions League final with a 2-1 win over Real Madrid yesterday, Hoeness’s desire for clubs’ success to be tied to profitability received a boost as well. The German league signed a deal to increase revenue from local TV rights by 52 percent to a record 2.5 billion euros for the four years through 2017.

Sky Deutschland AG (SKYD) won all major rights packages as it seeks to replicate the success of another unit of Rupert Murdoch’s News Corp., British Sky Broadcasting Corp. (BSY), which became the biggest U.K. pay-TV operator with the English Premier League broadcasting rights.

‘Double-Edged Sword’

“For Sky Deutschland, it’s a double-edged sword as the price they paid is very high, but on the other hand they had to fire from all barrels because this is their killer app,” said Klaus Kraenzle, an analyst at Silvia Quandt Research in Frankfurt. “For the clubs, it’s the dream scenario.”

Sky Deutschland, 49.9 percent-owned by News Corp., retained the license to show live pay-TV matches via cable and satellite. It acquired additional rights to show the games on mobile devices and on Internet-based TV, snatching them from previous holder Deutsche Telekom AG. (DTE) Publisher Axel Springer AG (SPR) won some rights to show highlights on the Web.

Unterfoehring-based Sky Deutschland said it will pay 485.7 million euros per season. The company’s shares, which jumped as much as 27 percent yesterday before the announcement, erased some of the gains after the league disclosed the auction prices, closing 7 percent higher at 2.15 euros on the Frankfurt exchange. Today, the stock fell 10 percent to 1.93 euros at 11:22 a.m. local time, valuing the company at 1.5 billion euros.

Profit Target

Sky Deutschland needs to attract viewers as it targets an operating profit next year. Subscribers rose to 3 million by the end of the fourth quarter from 2.65 million a year earlier. BSkyB, in which News Corp. (NWSA) owns 39 percent, has more than 10 million subscribers and in January said first-half earnings before interest, taxes and one-time items increased 16 percent to 601 million pounds ($958 million).

Last July, as a phone-hacking scandal engulfed Murdoch’s U.K. publishing business, News Corp. dropped a 7.8 billion-pound bid to buy all of BSkyB, which has become one of its most profitable businesses. In February, Sky Deutschland announced plans to raise 300 million euros to invest in growth and said the move is “fully backstopped” by News Corp.

Yesterday’s deal will help German football clubs become more competitive internationally as “it’s a great result for the Bundesliga, it’s a big jump,” said Phil Lines, the former head of the Premier League’s international media division.

It also gives them a boost in Europe’s top club competitions where new regulations forcing clubs to spend only what they earn under so-called financial fair play regulation will come into force from 2014.

German Failure

The English Premier League generates more money from TV rights than its nearest competitors, the Bundesliga and Spain’s La Liga, making it the highest grossing domestic soccer league in the world. The Premier League’s current three-year U.K. contracts with BSkyB and Walt Disney Co. (DIS)’s ESPN are valued at 1.78 billion pounds and finish at the end of the 2012-13 season.

A German team has won the Champions League, Europe’s top pan-continental soccer competition, only once in the last 14 years, in 2001, when Bayern beat Spain’s Valencia 5-4 on penalty kicks after the game finished in a tie. The country’s top soccer clubs say it’s difficult to compete as rivals in England and Spain have higher television revenue and are not forced to operate profitably.

Bayern Munich yesterday won against Real Madrid at its home stadium in the first match of the teams’ two-game Champions League semifinal this year.

England Lure

While the superstars of La Liga, including Barcelona’s Lionel Messi and Madrid’s Cristiano Ronaldo, are among the world’s best paid players, Spanish clubs are facing a spending shortfall as broadcasters struggle to turn the clubs’ success into a profitable business. Spain’s biggest commercial TV stations have said that when the rights to broadcast next season’s top weekly games come up for sale in June, they plan to bid only if prices fall by half.

German rules demand clubs to have stable finances, operate costly youth academies and be controlled by members, blocking a sale of a majority to an investor. In contrast, in the English Premier League some clubs are bankrolled by Russian oligarchs and Middle East oil sheiks. Roman Abramovich and Sheikh Mansour bin Zayed Al Nahyan have spent almost $1 billion each to add players at Chelsea and Manchester City.

Despite its strict rules, the Bundesliga has been able to retain national talents like Bayern’s Bastian Schweinsteiger and Dortmund’s Mario Goetze, and attracted European stars such as Dutch striker Klaas-Jan Huntelaar.

The German league still faces an uphill struggle to catch up with revenues from international rights. The Premier League gets an additional 1.4 billion pounds from overseas sales over a three-year period. That compares with about 215 million euros for the Bundesliga starting this year.

Fruitful for Freiburg

Still, smaller clubs such as SC Freiburg in southwest Germany say all German teams will benefit from yesterday’s deal as the league distributes the money more evenly compared with other countries. In Spain, Real Madrid and FC Barcelona have their own television deals.

“It’s really important, especially for us as a small club, since the broadcasting rights make up a significant share of our budget,” said Rudi Raschke, SC Freiburg’s head of public relations. Debt-free SC Freiburg, which generates half of its 36.7 million-euro budget from media rights, was surprised that Sky Deutschland decided to pay so much, he said.

“We initially weren’t sure whether we’d be able to even increase the price,” he said. “So this is really good news.”

To contact the reporters on this story: Cornelius Rahn in Frankfurt crahn2@bloomberg.net; Tariq Panja in London tpanja@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong kwong11@bloomberg.net; Christopher Elser celser@bloomberg.net

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