Force India: How the tower of cards could collapse

Over the past few days I’ve been asked many times and seen people enquiring on various F1 websites as to how much is an F1 team worth. Of course the answer is simple, different teams are worth vastly different amounts. An F1 team is a business venture – registered with a legal identity independent of any rich owner and subject to the business regulations from the statutory authority where they are registered.

 Valuing a business

The way business ventures are valued is highly complex and sector/performance specific. There was old 3 times profit rule that was a fundamental when I studied Finance many years ago. Yet even this most simplistic valuation methodology is fraught with danger when you dig deeper. Is that profit before or after asset depreciation, asset goodwill, taxation, one off accounting entries of substance – I could go on..and on..and on…

I guess my favourite methodology which can be proved beyond doubt and its an old adage, which says “The value of something is best measured by how much someone is actually prepared to.”

F1 recent examples

We have 2 recent F1 teams that we can value on this basis. In November 2009, Daimler Benz the car manufacturer bought 75.1% of Brown GP in a deal that valued the business at $183m (£110m –wiki).  Earlier this year the remaining shares were purchased by Aabar and Daimler Benz for an unreported amount.

Just weeks before the inaugural Indian GP (October 2011), Sahara bought 42.5% of the Force India F1 team for a reported $100m. Vijay Mallya had originally purchased the team known as Spyker Ferrari F1 Team for $132m in 2007 (rushlane). So due to its performance over 2 years the value of the F1 team had risen from $132m to $235 based upon the priced Sahara paid for its share.

Yet these values are spurious at best. They are based upon the perceived profit (money in less money spent) a team makes. In F1 the success of a team mostly depends on how much money it has to spend on building a car. The bigger the budget, the more sophisticated the car, the better the results, the more prize money and sponsorship money it can attract. The veritable endless circle.

Risky Business

But the income of a team can vary wildly from year to year. Williams F1 recently reported accounts having income for the year of $120m (£74m) but over half of this ($57m, £35m) came from its main sponsor Venezuelan oil company PDVSA. This sponsorship is on a year by year basis and many believe dependant on whether Venezuelan driver Pastor Maldonado. Another $41m (£25) came from Mr. E/FOM as an advance payment on them signing the new Concorde agreement (joesaward).

It is obvious then that Williams income is very risky from year to year with in 2012 just over 80% of it came from 1 off arrangements. Teams like Ferrari, McLaren and Mercedes are owned by car manufacturers and don’t have this problem, but Force India is in a similar position to Williams.

Force India safe says bob Fearnley

In response to the recent events that have seen Kingfisher Airlines grounded for 2 weeks and close to bankruptcy and the associated arrest warrant issued for Vijay Mallya (for non-payment of bounced cheques for $ multi millions) Bob Fearnley, dept team principle, issued a statement via Reuters.

“It doesn’t affect the team at all. It has no bearing whatsoever. He added “I don’t think it will go anywhere. It is an offence in India to issue a cheque without the funds being there, for sure. There is substance in that, for sure. Why it was done I don’t know. It is so far below Vijay he wouldn’t have a clue what is going on anyway.”

Fearnley asserts that Force India is a completely separate entity from Kingfisher Airlines and are privately funded. He adds, “”For some reason in Formula One we are captivated by our own self-importance. In Vijay’s world, the Formula One programme is a relatively small entity,” and in that wonderfully naive statement Force India’s precarious footing is perfectly distilled.

Foundations built on sand

Force India is a Williams from a financing perspective and not a Ferrari, Mercedes or McLaren. As we know Kingfisher Airlines are in deep trouble, but Force India’s other sponsors are also all linked to the Mallya fortune. Sahara are a conglomerate owned by a rags to riches friend of Mallya. They have over the past years raised vast amounts cash by taking on debt to fund their meteoric expansion. They have been ordered to lodge $4.6bn with the Indian Supreme Court within 28 days to repay 20 million small investors they have defrauded.

Businesses that raise money this way usually do so because they are extremely cash short and can’t access funds from traditional sources. Whether Sahara then can find this cash in such a short timescale is highly dubious and it is most unlikely they will be writing any more cheques to Force India in 2013.

This leaves the team’s third main sponsor of the team. United Spirits (who own the Whyte and Mackay brand) has $1.6 billion of net debt and drinks giant Diageo (a McLaren sponsor via its Johnnie Walker brand) is circling the company with a view to taking control if Mallya is forced to sell to stay afloat.,

The Economist, India’s leading business news outlet observes the nuclear threat of collateral damage from the probable failure of the airline. “Mallya’s main listed holding vehicle has $1.8 billion of guarantees to the airline’s banks and to aircraft leasing firms. Its latest annual report says it is ‘reasonably confident’ that these [guarantees] will not be invoked. The paper concludes “If they were, it [all then] might be bust too.”

No where to turn

So, when the airline fails, it will be like a tower of cards collapsing in an instant and one would suspect that even if Vijay is left with a luxury yacht and some property smuggled away it would be hardly likely in his desperate fight for financial survival he will care much about an F1 team. After all he has shown no public concern over his staff family member that committed suicide due to ruin from 7 months work with no pay; probably too far below Vijay.

Bob Fearnley’s assertion that the team is not reliant on Kingfisher Airlines due to its private funding is more than hapless and probably originates from personal assurances made to his No.2 by Vijay himself.

Further, since the Mercedes and Spyker F1 team acquisitions, world finances have collapsed from their previous highs. Countries, companies and individuals are all fighting to reduce their debt mountains and an F1 team is a mega luxury and requires an investor with uber cash. The number of those who meet this criteria and wish to roll the dice in the casino of F1 team ownership would be miniscule.

Prophetic words

So finally, it is fitting that Fearnley’s words are heard again. “In F1 we are captivated by our own self importance…and in Vijay’s world the F1 programme is of relatively small importance.”

Therefore one would assume that should the Mallya companies collapse then Force India will then in fit Fearnley’s prophetic assertion and also become, “so far bellow Vijay, he wouldn’t have a clue [or even care] what’s going on”.

Please leave a comment with your observations.

Follow me on twitter (box to click in right hand column) if you are part of the twittersphere and retweet our tweets that show a new article has been written, it helps spread the word – if you are not twittered up you can click on the button at the top right of the page to receive an email when (and only when) a new article hits the net.

8 responses to “Force India: How the tower of cards could collapse

  1. The value of a company is normally, imo, best summed up by profit per person employed.

    We had a discussion about Mclaren not long ago, in which you said they couldn’t be called a car company, yet in this article, you said Mclaren are owned by a car company. It isn’t actually true, Mclaren automotive is a separate part of Mclaren ‘Group’, as are the F1 team. There are 6, 7 different companies that operate under Mclaren Group, including the F1 team, automotive, but there is also an electronics company, a software company in areas as diverse as solar panels. All autonomous, linked only by the board.

    Force India, are spnsored, iirc, not by Kingfisher Airlines, but by Kingfisher, and Sahara. Kingfisher are still doing very well. I don’t, yet, buy into the team being built on foundations of sand, nor that it is a house borne from a pack of cards. Malaya, however, yes, I think there’s long been concerns about him. The cheque bounced warrant is a bit misleading, however, for he wouldn’t have been the one responsible for that and I guess that will all be ironed out, behind the scenes in true indian fashion. Interesting time ahead though.

    I think, like many teams, Mclaren included, funding is becomming an issue and it is the non manufacturer teams that are looking the most vulnerable, as sponsorship is drying up, and title sponsorship isn’t getting the pounds, shillings and pence it used to. Mclaren needed a good year this year, in the WCC, to get more money for a title sponsor, as their’s is due to finish.

    I am watching a lot of this, of course, with a deeply vested interest and hoping that rumours circling deep within are true, and that another 1 or 2 Manufacturers are looking to enter the fray. Will Force India be fored to sell? Could be an interesting off season this year…

    Good article

      • Been abroad on business, unfortunately! Still read some comments, but was a bit rushed last week.

        Should be watching and not being rude all week now though 😉

        You’ve changed the layout too, I have noticed.

      • Takes a tad longer to find stuff, that’s pretty much the only detrimental thing I’d say. Content is king though!

  2. Welcome back hairygis.

    First time commenter, but I’ve been reading a lot of your articles Judge with great interest. I especially enjoy Hairy’s comments and the dialogue that shortly ensues thereafter.

  3. there is nothing need to worry about Force India finance future.both sahara & flykingfisher has solved their problems.sahara is also sponsoring indian cricket (world’s richest cricket board) & hockey team and also sponsoring national cricket team of bangladesh.both vijaymallya’s UB group & sahara are india’s biggest business tycoons

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.