Where is Galatasaray’s money coming from?

Turkish football giant Galatasaray is currently in the spotlight with its recent recruitment of superstars Wesley Sneijder and Didier Drogba.

While envying the accomplishment as a Beşiktaş fan, I could not help but notice, as an economist, that the combined annual salaries of the two players will be at least $15 million. Interestingly, Galatasaray was considered virtually broke merely a couple of years ago.

You could argue that the club is simply spending beyond its means, but the numbers don’t support this claim. Galatasaray was up to 29th in this year’s Deloitte Football Money League, which ranks clubs according to their revenues. So how did they manage this remarkable turnaround?

Good management was crucial. After he took over the club, chairman Ünal Aysal spent big on transfers, which paid off. The club won the Turkish league championship last year and qualified for the Champions League. It has so far earned around $25 million there.

It helped that the club has a brand-new stadium that can host 52,000 fans. Its VIP boxes are cash cows. It is also likely that Sneijder and Drogba will pay for part of their fees by increasing the club’s already-lucrative merchandising revenues.

But the key to this turnaround was financial engineering. The club sold some of its shares of public company Galatasaray A.Ş., starting Aug. 2011, which brought in around $50 million. They then revealed that, contrary to what the public had been told before, the stadium revenues belonged to the club, not the company.

According to Habertürk columnist Yavuz Semerci, ticket sales were registered as donations for “tax purposes,” but the gist of all this was the increase in the company’s share capital. Galatasaray A.Ş. shareholders were obliged to pay 25 Turkish Liras per share in order to keep their shares from being diluted.

The Hürriyet Daily News’ Çetin Cem Yılmaz recently quoted Galatasaray A.Ş. lawyer Sedat Bozanoğlu stating that the club had profited nearly $100 million from the operation. Sneijder and Drogba’s wages are peanuts compared to this sum.

The club participated in the capital raise by transferring the stadium proceeds, which were supposed to belong to the company in the first place, to Galatasaray A.Ş. If they knew of the company’s capital increase beforehand, their share sale would be classified as insider trading. If nothing else, the company’s share price took multiple hits because of these actions.

But Turkish equities watchdog Capital Markets Board turned a blind eye to all this. Some argue that this was one of the main reasons that led the government to summarily dismiss the Board’s chairman Vedat Akgiray in December.

Things may be improving. Galatasaray A.Ş.’s application for a second capital increase was denied on Feb. 1. There is an ongoing investigation of the old board that is looking at, among other things, this operation. A number of shareholders filed an official complaint in October.

How this drama unfolds will be a crucial factor in determining whether Istanbul has any hope in becoming an important financial center.