It’s not possible to in a single article convey the mess that is F1 and its financial arrangements, and I’m not feeling inclined to write a book. Yet there are severe storm clouds on the horizon for F1 and it appears the governing body and the teams are oblivious to this.
The Korean Times reports the organisers’ of the F1 race are facing again huge losses. It is claimed they have avoided the contractual 10% escalation in fee from last year but still have a total budget of $67.5m to find.
The national government picks up about $5m and the rest is shouldered by the South Jeolla provincial government. Of course there is the ticket receipts, but the event has not been a raging success with mass crowds attending. The losses the provincial government has had to fund are 2010 $65m and in 2011 $54m. With a contract to 2016, local commentators are not sure they will be able to fulfill this commitment.
China, Singapore, Belgium have all received discounts from FOM on their race fees in the past year. Germany will need financing next year as Nurburgring due to host the race is in debt over 3oom Euro’s to their provincial government and the race organisers have gone bust.
Montreal race promoters are on the brink of insolvency as their Nascar promotions company (Octane Management Events) has filed for bankruptcy and there are grave concerns this will bring down the sister company (Octane Racing Group), that promotes the F1 race. This comes hot on the heels of Mr. Ecclestone telling Montreal to spend millions on upgrading their F1 facilities.
Australia have repeatedly suggested they cannot afford the current cost of hosting a race and the taxpayers of Melbourne are becoming more and more militant on the matter. Barcelona has called time on the annual losses and have entered an arrangement to host alternatively with Valencia. The long-standing promoter of the Hungarian GP died this year, Adam Cooper (respected F1 writer) says, “His death is thus a big loss for the country’s motor sport community, and it’s no exaggeration to suggest that the race might struggle [to survive] longer term without him”.
The picture for F1’s revenue raising capabilities from the circuits looks bleak, but to be fair, F1 race tracks losing money is a story that stretches back as far as F1 itself. In fact it was financial problems with F1 venues that gave Ecclestone his opportunity to begin the massive wealth accumulation he has achieved from the sport over 25 years.
The beginning of Ecclestone’s windfall
But in the early 1990’s when the circuits were bleeding money away this was funded by huge increases in the new TV rights that Ecclestone managed to sell. By using the Berlesoni media empire as an ally he managed to hike the price for the TV rights almost exponentially in a short space of time. Ecclestone negotiated and held these contracts with the new TV companies and funded certain venues personally, paying teams around 25% of the new cash and retaining 75% for himself.
Yet in 2012 this option is no longer available. TV revenues have peaked along with those in from the race promoters and no business plan to replace those revenues is evident. This year in the UK, the BBC unable to pay the money demanded to show F1, has been forced to share coverage with SKY TV, a subscription channel. The result is less eyeballs watching F1 and Italy and others are presently looking at a similar arrangements.
The problem with fewer people watching F1, is that sponsors when they renew their contracts with the teams may feel they are not getting the brand coverage that they used to and feel they should then contribute less. This will impact the advertising revenues pay-per-view TV can attract and they too will then demand a reduction in the price they pay to show F1.
There is talk of a long line of new countries wanting to host F1 races, but the reality is that as the new come in the old are departing. We have in 10 years gone from 13 European races to just 6 proposed for 2013.
The F1 float and sale of shares
The big news earlier this year was that Ecclestone and CVC were going to ‘float’ F1 and raise around $16 billion from this. Surely that would secure F1’s future for many years to come.
Unfortunately not. All that money would have gone to CVC and to Bernie Ecclestone as they hold the rights to receive all commercial revenues connected with F1. however, for various reasons including the world economic recession, they couldn’t get the float away and instead CVC have been selling of shares to raise cash.
So who are CVC? They are a private equity fund who invest in big business opportunities and these kind of organisations usually want an exit within 5 years and a whopping several hundred percent loan shark type return on their money.
Mark Kleinman, City Editor of Sky News writes, “F1 has been one of CVC’s most profitable investments, generating more than £2.3bn ($3.7bn) in returns for the group. CVC’s original investment to take control of the sport was a comparatively paltry £588m ($952m at today’s exchange rate).
Conversely, CVC made a much less profitable investment in Australian media empire Channel 9 and this has gone pear shaped. They reportedly paid around $6bn and the entity is now worth less than half of this. So desperate to raise cash CVC has shipped a substantial part of their holding in F1 earlier this year. Nearly 21 per cent to Waddell & Reed, a US-based institutional investor, with a further 6.9 per cent sold to BlackRock and Norges Bank Investment Management. Reports emanated a couple of weeks ago, that a further 9% was sold to the Singapore sovereign capital fund for around $1bn.
F1’s giant mortgage
This fund-raising should have solved CVC’s cash crisis and yet it was reported at the weekend that Ecclestone, CVC and their new partners are in the early stages of planning a so-called dividend recapitalisation. In effect, they will borrow a huge amount of money from some other investment bank, at premium rates of interest, and pay it to themselves immediately as a dividend. The loan, just like a mortgage, is secured against the next 5 years revenues F1 is predicted to raise from TV contracts, sponsors and race promoters fees up to the year 2017. They already did this back in 2006 for $2.45bn and instead of repaying the loan in 2011, it was deferred to 2017.
Why do this? Why saddle F1 with a mountain of debt against what we’ve already seen is an uncertain income stream. Surely Ecclestone and CVC have raised enough money from the near 40% of the F1 shares they’ve already sold. Yet to persuade these other bankers and funds to buy into F1, it appears there may have been an understanding, a back door deal to return their investment to them in double quick time. How? by this immediate dividend ‘recapitalisation’.
The need for urgency
Yet what’s the rush? Why are these people not doing as before and just taking their vast payments when the funds come into the F1 coffers year by year? Why do they want the next 5 years cash now?
I wrote a couple of weeks back about a trial Munich prosecutors are allegedly bringing against Ecclestone. One of the charges could demonstrate that the F1 rights were originally procured by Ecclestone and CVC by fraudulent means. This would jeopardise the legitimacy of their entitlement to all the F1 revenues and if proven the FIA could revoke the original deal they made bestowing these contracts.
Hence we now can see the reason for such urgency to mortgage F1 to the hilt and take now the next 5 years revenue. It appears to be driven by the fear that the entitlement to this multi billion dollar income may now be at risk.
Ironically, this may be the opportunity F1 needs to regain control of its own brand’s worth. The FIA and the teams should be able to manage the F1 commercial rights between themselves, without paying 50% of it to bankers, speculators and gamblers. The cost of acquiring this control they so easily gave away may be a huge multi billion dollar mortgage which would need to be paid off over the next 10 years or so; and then a new dawn may begin.
Please leave a comment with your observations.
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Fascinating. Brilliant piece, thanks.
The Munich bank (whose name escapes me), CVC and Ecclestone are also being sued by a family who believe they sold their share too cheaply under advice from the bank. It appears Ecclestone, et al, have managed to put an injunction not allowing her lawyers to look into the files from the german case already being built. It seems that this is all unravelling in front of us and if anything, the F1 teams should sit tight and watch this all come to a head, then buy on the cheap.
I think a whole world of pain is heading Ecclestones way. There’s an old adage that you should be nice to people on the way up, as one day you might have to come back down. Ecclestone has not so much burned bridges, he’s set fire to them, then hacked them down, then put them trhrough a machine to turned the burned wood into charcoal, then set fire to them again. He has that many enemies, that they’re all coming for them. He’s an arrogant bully who has made an awful lot of enemies, and few allies.
He’s in a spot of bother, which means CVC are too, as they readily climbed into bed with them.
Absolutely right, the bank is BayernLB and the family is the Kirch family (it’s actually some film company owned by Kirch’s widow. All in my article “Ecclestone Indictments Imminent” 25th sept (I think). They have applied to the court for the right to see prosecutors files on Gibkowsky. Prosecutors are amenable but Ecclestone has temporary injunctions in place at present.
Really worth reading. But since the global crisis, and standing the division between the teams, will they be able to tighten the ranks and go for it? I doubt: it seems to me that, apart long term Bernie golden sons at Ferrari, there should have been more car manufacturers involved at this point for the teams to stand a chance of regaining what belongs to them. Had it been Audi, Mercedes, BMW, Renault, Tata, Toyota, and so on, it would have been a different story. I hope it won’t result the same way as endurance or world rally championships.
I completely agree the teams so far have done nothing and are weak.
The article was hard to write because there is so much to tell about what are many but small factors. I was trying to suggest that if Ecclestone/CVC were found guitly from charges raised in Munich, the FIA may take away their license to the F1 commercial rights because of a breach in the terms of the contract they have.
Some sharp observations, and excellent writing. I hope Bernie gets whats coming to him, I can’t stand that man.
I was reminded today of the maxim that someone on the way up should be careful of how they treat people, as if they’re ever on the way down – they may need some support – we’ll see.
Reblogged this on Things and Stuff and commented:
Superb piece by thejudge13 on F1 and its future
great article, more please………………………
Thank you. One about to land in 5 minutes – RT it if you follow on twitter.
And we’re told it’s impossible to get the banks to lend.
Don’t know about you, but if I had a couple of billion, I’m not sure I’d be lining up to lend it to Bernie & Co. to pay themselves a dividend with.
These are not banks as we know them. They are institutions who gamble big big money on high risk ventures for massive returns. CVC has had over 10 times its money back in less than 8 years. So the gamble now is will the cash cow continue – or will the FIA cancel their contracts if the Munich case finds fraudulent procurement of those rights.
this is why they want the cash now.
Indeed. But the banks who are lending to pay the special dividend do not make huge returns, just something of a premium on the interest charged – and are taking on a significant risk should the rights to the revenues which repay the debt be challenged, as you suggest is possible.
RBS Capital bank who lent £200m to the Texas owners of Liverpool, made £100m in charges and interest in less 4 years. The banks that assisted the Glaziers in the leveraged buy out of Man United were charging 22% with 25% penalties for roll overs in the first 4 years.
Of course you’re right it may be that they can’t get anyone to fund this dividend recapitalisation until there is clarity over the Munich legal matters. Yet look how stupid the South Jelloa local government were.
Great read. I’m looking forward to cheking out more comments later.
why borrow at premium rates to pay a dividend now? tax avoidance
Also gets the cash out to shareholders before any chance of the FIA ruling on corrupt share transfers to CVC.
Thanks for that link JP