Formula One sale: Smoke and Mirrors

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Bernie Ecclestone is claiming that CVC are imminently to sell their shares in F1.

The venture capital fund have held shares in F1 for longer than would be usual for such an organisation, as Mr. E explained earlier this year.

“It’s like all hedge funds, they invest [other] people’s money for a certain period. It doesn’t matter how good they do, they have to give it back.

“Maybe they re-invest again, maybe they don’t, I don’t know. They’re past their sell-off date. They have extended it a couple of times.”

Five years is the average period for such funds to make investments and then withdraw.

However, Formula One is no normal VC investment and the returns have been fairly spectacular for CVC, at around $4.4bn.

The Guardian reported in June this year that this represents a return of 351%, which values CVC’s current 35% stake at around $8bn. Should CVC realise this value, the total return on their F1 venture would be around 1000%, a record for this corporate investor in their 34 years of trading.

Bernie emphasised yesterday the apparent urgency for CVC to sell, stating “Our shareholders at the moment are in such a position at the moment where they have to lose some of their shares, or all of them, shortly. That’s the way things are set up for them.

 “There has been a lot of interest. I would say there are three at the moment parties that… I’d be surprised if one of them doesn’t buy it shortly.”

Interest from investors in Qatar and the USA to acquire F1 has been reported this year, though Adam Cooper – who appears to have recently become a source of Bernie wisdom – suggests Russian investors are now also on the horizon.

(The potential of Russian’s owning Formula One is another article for another day. However, this smells of Ecclestone style leverage being brought to bear on another party).

When asked about the likely time-scale of the CVC sale, Ecclestone responded “This year.

The real story is not that CVC are apparently about to sell F1, but why the story has changed in a few short months.

Earlier this year, Donald Mackenzie – top dog at CVC – stated there was no need for CVC to sell. “There is no end date. We have 12-year funds, which we have to return the original money [to]. We have already done that.

So the pressure’s off. We like owning it; we don’t want to sell it. There are always some people who’d like to buy it: it’s a very good business.”

Toto Wolff responded to the news stating: “Bernie is always good for a headline. And headlines and controversy are a big part of Formula 1 that sells.

“As a matter of fact, the owners of the sport are investment companies: CVC has owned the sport for a long time, some of the other investment funds have been in there and made great returns, and it is clear that eventually they would sell the business, because that is not the core of their business”.

And indeed Ecclestone has hit the headlines in the UK with this ‘breaking news’. Most TV and Radio hourly sports bulletins are reporting the imminent F1 sale.

So why the change of heart from Bernie and CVC, when the investor funds are not due to mature for another two years?

 

The first consideration should be that Bernie – shock horror – is not actually telling the truth. This is just another of his frequent flip flops designed to throw the major stakeholders in the paddock into uncertainty.

A new investor is a big deal and affects the teams greatly depending on the vision and future plans for Formula One.

Toto Wolff acknowledges this: “For us, we are participating as a team, it’s important that we have a sustainable shareholder with a long-term perspective and vision, and whoever that might be we are looking at with interest.”

However, since the collapse of the Concorde Agreement, Formula One has been living in the uber short term.

The F1 world hangs on the outcome of one F1 strategy Group meeting after another, to see what resolutions to the long term problems of the sport have been addressed.

The usual result is – none.

At present we have the Lotus team future hanging by a thread, just as happened last year with Caterham and Marussia and Bob Fernley is again performing his role as F1’s prophet of doom – with alacrity.

The outspoken Yorkshireman explains the root of F1’s troubles. “It is really symptomatic of the agreements that we have that a team like Lotus and Force India and Williams, are not getting the funding coming through with the distribution of income.

“And yet at the other end [of the grid], where all the money is flowing, the thing we also fear is that at a whim, Red Bull will just decide to leave, and that is on the cards as well”.

Formula One with 6 or 7 teams, some operating 3 cars, would be a significant departure from its tradition. The problem is nobody knows how many fans would be lost in this process.

Another of F1’s most long standing participants may also leave the sport this winter; Renault.

The new V6 Turbo Hybrid formula is doing nothing for their image, and the FIA power unit development regulations appear to make it more difficult than ever for a manufacturers to catch up the rest when they fall behind.

Since Honda decided to rejoin Formula One, the appointed a new CEO in Takahiro Hachigo, who is not known to be particularly sympathetic towards Formula One. The current humiliation and nightmare Honda are experiencing will surely only be allowed to continue for a limited period of time.

We learned recently that Sauber and Force India have reported Formula One to the EU Commission for a breach in the sport’s governance regulations which the Commission previously ruled on in almost 15 years ago.

The regulator is not allowed to have any commercial interest in the sport, however the FIA’s shareholding and $40 million payment for agreeing to the F1 strategy group is a flagrant breach of this EU order.

This previous TJ13 article published in 2014, explores fully the previous rulings made by the EU COmmission on F1 governance. F1 and EU article 82

Formula One is now considered ‘a show’. And for the show to be successful in the manner the commercial rights holders wish, they need some influence on the regulations.

A new ruling from the EU may emasculate both Ecclestone and CVC, reducing significantly both their current power and influence.

Finally, TV numbers are falling. The two most recent GP weekends have seen in the UK a collapse in viewers of between 25-40% across the various broadcasting platforms. This does not bode well for future broadcasting deals and revenue streams into FOM.

The inexorable rise in income into F1 under Bernie Ecclestones reign appears to be unsustainable, and any future investor is buying future revenues. This income is ‘guaranteed’ by contracts, yet when Red Bull who are contracted to be in F1 until 2020 demonstrate they can walk away from their commitment on a whim, it does not bode well for other contracts negotiated by Ecclestone.

Given all this trouble looming, it could just be that CVC have seen the writing on the wall, and are prepared to sell quickly and at a significant discount – and this is at the heart of their change of heart.

Though the big question is, why would anyone would want to buy F1?

And as yet none of the named entities has confirmed even the slightest interest in buying Formula One.

F1 Investor returns relised to date: Source Formula Money

$628m EM TV

$644m Waddell and Reid

$839m Bayern LB

$849m Lehmen Brothers

$1,275 Hellman and Friedman

$1,345 Others

$4,169 Bambino

$4,362 CVC

 

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4 responses to “Formula One sale: Smoke and Mirrors

  1. There was a snippet in one of the Financials that on the day after the announcement of the Sauber/FI complaint, D. Mackenzie was waiting in the morning for BE to appear at his office.
    I wonder if there was any truth in the claim and if accurate does it have any significance in the requirement to sell!

  2. Sounds to me like Bernie has been destroying F1 over the last few years so that he can buy it and have 100% control. Then he can do what he wants.

  3. …this represents a return of 351%, which values CVC’s current 35% stake at around $8bn

    No, this is not how you valuate stock. Shell would be circle jerking all day long if their stock was valued on their revenues since their inception.

    The figure Bernie put on F1 is 10 billion (when there was the ‘plan’ for an IPO). This is rather optimistic, but this would value CVC’s stock at 3,5 billion. Some way off 8.

    • It’s not based on revenue – its investor returns taken over the period of investment – ROI, and on that calculation $8bn is the number.

      Agreed it is optimistic for all the reasons the article suggests ie going forward they’ve no chance of repeating the same rate of growth.

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