The FIA and FOM share the blame equally for failing #F1 teams

Breaking News: 21:43 GMT – TJ13 exclusive

Baljinder Sohi and Sonny Kaushal, the Indian steel billionaires have made an offer which has established them as ‘serious’ in the eyes of the Marussia Administrators, FRP Advisory LLP.

The offer is to fund the team to the end of the season, and depending on the monies received from FOM, settle the outstanding creditors – not in full – but to a percentage of what they are owed.

Currently, Marussia by finishing 9th in the F1 constructors’ championship, stand to earn just over $60m. The debt in the business is reputed to be $46m.

This would see the brothers then double the balance of cash remaining having paid the creditors in part.

The figure of a £55m ($88m) – cited by the Telegraph – is an offer made by the brothers to the Administrator and is based upon $44m remaining from the cash in and the debtor’s being settled, with a further $44m being added to fund the team for 2015 from the brothers.

The Administrator has made a counter offer, which is being considered.

Sohi claimed today, “We are very close to a deal, but it has to be the right price. We have put in a serious offer and we will see what happens.” $16m was the estimate of the difference between what the Administrator requires and what the brothers originally offered.

Time is short because the team are funded to the 31st October, however, if a buyer is not found by then, the Administrator will be forced to declare the business no longer ‘a going concern’.

—————————————————————————————————

As did Caterham, now Marussia have requested ‘the Administrator’ take charge of the team’s finances, as they are clearly close to or indeed insolvent. It is not clear which of the Marussia legal entities is/are included, however, FRP Advisory LLP have been appointed as the firm to administer proceedings for the racing entity that is Marussia and now a period of fact finding and analysis will ensue.

The Administrator will now attempt to establish the monies owed to creditors and the assets which may underwrite some of this.

Further, given the future cash flow of Manor Racing Ltd, the decision will be made whether the company can run whilst a buyer is sought, or whether a wind up and sale of assets is required.

Despite re-registering the team’s head office to a street in Dublin at the time Crimea was annexed, the man behind the scenes providing the cash to keep the show on the road was in fact, Andrey Cheglakov apparently kept the ship afloat due to the desire to see Marussia race in Russia. Then again it may be that Andrey was in fear of Putin’s wrath should the “Russian” F1 team fail to appear on the Sochi grid.

Questions are now being asked whether Cheglakov has pulled the plug and also whether Marussia even have an engine contract for 2015 with Ferrari. The new bosses in Maranello have indeed questioned the value over supplying engines to teams which merely run at the back of the grid.

It is believed that Cheglakov has already funded Marussia F1 to the tune of £185m ($296m) and now believes that simply, enough is enough.

Geoff Rowley, a partner in the firm FRP Advisory had this to say today. “Whilst the team has made significant progress during its relatively short period of operation, the highlight of which included securing two constructors’ championship points in the current F1 season, the position remains that operating a F1 team requires significant ongoing investment.

“With the existing shareholder unable to provide the required level of funding, the senior management team has worked tirelessly to bring new investment to the team to secure its long term future, but regrettably has been unable to do so within the time available. Therefore, they have been left with no alternative but to place the Company into administration.

“With the Marussia F1 Team now in administration, the joint administrators have assessed that, given the current financial circumstances of the Group, it is not viable for the Marussia F1 Team to participate in the next race, the 2014 Formula 1 United States Grand Prix, due to take place this weekend in Austin, Texas.”

As to the future, “The Company will continue to operate while the joint administrators assess the longer term viability of the Company in its present form.

“Following Austin, there are two further rounds of the 2014 championship remaining, in Sao Paulo and Abu Dhabi, and the team’s participation in those races will depend on the outcome of the administration process and any related negotiations with interested parties in what is a very limited window of opportunity.

“No redundancies have been made following the Company’s entering into administration and all staff have been paid in full to the end of October. The ongoing staff position will however be dependent on whether the Company can secure new investment in the limited time available.

“We remain highly focused on engaging with interested parties.”

We have debated here at TJ13 the value of an F1 racing license of teams in difficulty. As yet the best answer proposed described its worth as a ‘lottery ticket’ in the game of scoring a championship point.

The same is true of Formula 1 teams. What value do they have?

Fundamentally, the value of anything is related to its ability to function and do as it was intended to do – Is it then ‘fit for purpose’?

The purpose of a Formula 1 team may appear obvious at first glance and its ultimate objective be ascribed to winning. Yet, clearly this is not the case for all teams within the sport..

Whilst there may be a number of reasons for the teams at the wrong end of the grid to enter and remain in Formula 1 – a billionaire owner’s ego, a ‘race team’ from another category’s desire to ‘have a go in the BIG time’ – the reality is, that for teams like Caterham and Marussia, their goal from year to year is in fact to survive.

Hence the value of the team is its ability to do exactly this, and when they fall into administration with debts greater than assets together with the fact that their cash flow is too weak to support a skeleton operation, the value of the team is practically zero.

Caterham look to be finished, despite reports to the contrary. They will finish 11th this year and receive no prize money or 2015 entry funding grant. The value of their business to any deluded potential investor is just a touch more than the administrator can recoup from the sale of the assets at auction.

Marrusia have a little more chance of survival. If the bottom of the constructors’ championship table remains the same, then Manor Racing will receive around $64m in prize money, appearance fees and the share of the TV rights (TJ13 calls entry grant funding – essentially for teams placed 1-10).

It may be that having not incurred the cash flow implications of travel to the Americas, the current management can battle through until this year’s payment is received, to survive another year.

The prospect for a buyer of Marrussia is still dependant on the level of debt which has accumulated in the company. The debts allegedly stand at around $46m, so any prospective buyer will wish to pay as little above this as possible because they will have to find the bulk of the cash to fund ‘the F1 dream’ once again.

There are reports that a pair of English born Indian billionaire brothers are interested in acquiring Marussia. The numbers quoted by the daily Telegraph are misleading, though it appears Baljinder Sonhi and Sonny Kaushal are considered to be of ‘serious’ intent.

The paper reports the deal is £10m ($16m) short of making the ownership switch a reality, and Sohi claims, “We are very close to a deal, but it has to be the right price. We have put in a serious offer and we will see what happens.”

Max Mosely explains the problems facing any new entrants into the sport of Formula 1. “It’s not a fair competition any more,” he said speaking to the BBC. “The big problem is that the big teams have so much more money than teams like Caterham and Marussia and in the end, they were bound to drop off – and they may not be the last.”

This happens because it is nigh on impossible for the smaller teams to find the income required to go racing for year on year. Therefore they either rely on a benefactor or they increase their levels of debt to those which eventually become unsustainable.

In the end, even the most egotistical billionaires get bored of writing cheques for millions each year to merely trail around at the back of the field – so they one day just pull the plug. This means a team in this position is now ‘not fit for purpose’, and when that is the case – they go bust.

One simple solution, is for FOM to ensure the Caterham’s and Marrusia’s of this world can afford to complete a season without being too reliant on billionaires and large funding from sponsors.

If this can’t be done by a budget cap, then the FIA in conjunction with FOM should reduce the income the bigger teams receive from the sport proportionately.

The English Premier League is one of the most successfully market an run sports globally. TV revenues are way in excess of those paid to Formula 1 and the funding of the competitors should be a lesson the the world’s premier racing series.

This was the distribution of funds for the season 2013-14.

Premier League TV & Prize Money Breakdown Between 20 Clubs
NO# TEAMS MERIT MONEY TV MONEY SHARE LIVE MATCH FEE TOTAL
1 Manchester City £24.0m £55m 25*£750k=£18.7m £97.7m
2 Liverpool £22.8m £55m 28*750k=£21.0m £98.8m
3 Chelsea £21.6m £55m 24*750k=£18.0m £94.6m
4 Arsenal £20.4m £55m 25*750k=£18.7m £93.4m
5 Everton £19.2m £55m 16*750k=£12.0m £86.2m
6 Tottenham £18.0m £55m 23*750k=£17.3m £90.3m
7 Manchester United £16.8m £55m 25*750k=£18.7m £90.5m
8 Southampton £15.6m £55m £7.5m (10 matches) £78.5m
9 Newcastle United £14.4m £55m 14*750k=£10.5m £79.5m
10 Stoke City £13.2m £55m £7.5m (5 matches) £75.7m
11 Crystal Palace £12.0m £55m £7.5m (10matches) £74.5m
12 West Ham United £10.8m £55m 15*750k=£11.3m £77.1m
13 Swansea City £9.6m £55m 13*750k=£9.7m £74.3m
14 Sunderland £8.4m £55m 13*750k=£9.7m £73.1m
15 Aston Villa £7.2m £55m 15*750k=£11.3m £73.5m
16 Hull City £6.0m £55m £7.5m (9 matches) £68.5m
17 West Brom £4.8m £55m £7.5m (8 matches) £67.3m
18 Norwich City £3.6m £55m £7.5m (9 matches) £66.1m
19 Fulham £2.4m £55m £7.5m (7 matches) £64.9m
20 Cardiff City £1.2m £55m £7.5m (7 matches) £63.7m

Here the bottom club received 65.1% of the monies awarded to Manchester City, who won the league. Or put another way, the winner only received around 50% more than the last placed club.

In Formula 1 the bottom placed team receives around 10% of the highest remunerated and the gulf from last to first – as a mark up – is over 1000%.

Of course this status quo has come about because FOM have encouraged political support from the bigger teams and for this Bernie et al have have feathered their nests in particular of Ferrari, McLaren, Red Bull and Williams.

Further, to add value to the smaller teams permission to race in F1, the FIA could restrict the field in the sport to 11 or 12 franchise owners. These franchises can be traded and this route should be the ONLY way a new team owner can enter the sport.

Earlier this year, TJ13 advocated this course of action when the FIA approved the entry of Haas and probably that of Forza Rossa too. By approving new teams over and above the 11 competing in 2014, the FIA merely undermined the value of the racing licenses held by Marussia and Caterham, reducing their worth to potential buyers.

Thus, the power to resolve the issue of the failing smaller teams is within the grasp of the FIA. They could act unilaterally as Max Mosley did, when he slapped a parc ferme regulation on the F1 cars following qualifying – which rendered useless the qualifying engines which the teams refused to relinquish.

Under an FIA approved franchise system, prospective new owners would in effect compete to buy the racing license of a smaller team, thus creating a goodwill value in their businesses.

Then Caterham, with a mere £12m of debt, may be considered an attractive option for a buyer, who may have to pay significantly more for a Force India or Toro Rosso should they lose out to someone competing with them for the acquisition of the green team.

As usual, the FIA, FOM and the larger teams are so utterly self indulgent, that solutions like fairer distribution of funds and a franchise system will inevitably fail to be considered, let alone enforced.

This has been crystal clear to knowledgeable F1 fans recently, when they consider whether the FIA can even administer its own safety regulations properly… breath and holding – are here, not mutual bedfellows.

And as in 2008/9, Formula 1 lurches once more toward a period of grave uncertainty, because those who should know better, can’t see the wood from trees – from which came – their own finely crafted mahogany desks.

Advertisements

17 responses to “The FIA and FOM share the blame equally for failing #F1 teams

  1. Jaysus no hope of FIA accreditation for whoever wrote that, dead right though! If it was like the good auld days I’d slip you my pass under the fence!

  2. I agree wholeheartedly with the article. Every man and his dog have been saying make the distribution of the money fairer. Everyone except Bernie and the rich top teams who, it would appear, will be amazed when it all falls to pieces before their eyes. The sport is not sustainable in its current form, and is being milked dry by people who don’t care, as long as they are making their bank balances grow?

  3. I disagree with many parts of the article. For a new team to enter F1, they have to find a $20M non refundable deposit, prior to being vetted by the FIA, and probably Bernie has some kind of say. So bypassing that process has some value. Quoting the English Premier league as a glowing example of financial rectitude, was hopefully tongue in cheek. This article will quickly disabuse that notion. http://tinyurl.com/nfn2uzb Football clubs will spend every penny they get, and then some. Compare the prize money to their turnover and debt. Marussia looks to have more current debt than Caterham, according to their published accounts. http://tinyurl.com/oxcco3f The $46M looks way out. The Caterham racing team looks to be at a low debt point, because of the various transfer agreements to other group companies that are now in receivership. Whilst I would agree that a more equitable distribution of F1 revenue is needed. That doesn’t address the fact that the bigger teams will always spend more to win, and lesser funded teams will be at the back of the grid, just as it always has been. A franchise system would be against the mandate of the FIA to have open competition. It would also allow teams to potentially ‘turn up’ for the appearance money. Remember that using the Football comparison, fails to recognise that Football Clubs have other competitions to enter. It would also put even more power into the hands of FOM and Bernie.

    • … the deposit is refunded over the season as cash flow…. to ensure the team survives to the end of the year.

      Total debt – 135m – is irrelevant, most of it is to the Russian shareholder who will lose most, if not all of it it. The $46m is to other creditors.

      Further, football clubs are limited in what they can spend – or they receive punitive fines running into tens of millions of pounds. This system is relatively new and will require time to see if the teams comply.

      And how many EPL teams have gone bust recently?

      • @tj13

        Surely better to have certainty of an established licence. No football club bankruptcies yet, however the level of debt across all clubs is unsustainable. Control of budgets is needed in F1. Not holding my breath.

        • …..seeing as they doubled their income last year with the new TV deal… it is probably sustainable – so long as they don’t go signing lots of long term contracts for silly money – then get relegated….

          From what we’re hearing tonight, the Marussia deal could well be done in the next 24 hours….

          These brothers have got the bug…..

          • I really hope Marussia can be save, don’t know why but when you saw guys Graham Lowden speaking on the TV I would always listen to what he had to say. It’s such a shame guys like him aren’t leading the whole sport, it would be such a richer environment for everyone concerned, including the fans.

            Keeping EVERYTHING crossed this deal goes ahead.

          • The might have gotten the bug, yes, but have they got the money to keep the team running?

  4. “Here the bottom club received 65.1% of the monies awarded to Manchester City, who won the league. Or put another way, the winner only received around 50% more than the last placed club.”

    Judge, 65.1% is closer to 2/3 (rather than 1/2), so the winner received only around 33% more than the last placed club.

    • Bit like one of those trick maths problems this one!

      97.7 – 63.7 = 34
      50% of 63.7 = 31.85

      • I can already feel the math bugs crawling up my spine! I think it all depends on the base, here.

        63.7m represents 63.7 / 97.7 = 0.65, hence 65% of 97.7m. Otherwise said, 2/3.

        50% of 97.7m = 48.85m. Otherwise said, 1/2.

        The difference between last and first is 97.7 – 63.7 = 34m

        34 m represents 34 / 97.7 = 0.348, hence 1/3 of 97.7m.

        The 34m is quite a bit smaller than 48.85m, pointing to more equitable revenue sharing.

        • …. LOL

          No 97.7m less 63.7m = 34m

          If we start with lowest prize money awarded as THE BASE…

          add the 34m to the 63.7m and the increase is 34 divided by 63.7 = 53.3%

          Around 50% MORE as stated in article

          As Matt says on the PC – ‘Its Math – tough’ 😉

          • So, put differently, and correct me if I’m wrong:
            – the winner received 50% more than the last placed club
            – but the last placed club received 33% less than the winner

            Am I missing anything? 🙂

            Funny thing percentages… Add in negative numbers as a base, and you’re in fun-land.

    • No because mark up and mark down are different – can be confusing

      100% of 100 = 100
      Therefore 66 as a percentage of 100 is 66%

      If we take 66 as the whole ie 100%
      Then the number 100 is around 50% more than the 66

      Hence 66 is two thirds of 100
      But 100 is 50% more than 66

Leave a Reply