How much is something worth?

The answer is the best price someone is willing to pay for it.

The commercial rights to Formula One have been acquired by the international world of corporate finance and have been traded in recent years amongst the various global funds as pieces of paper. Of course when the trades have been made, a value is created – it is based on the price the new investor is prepared to pay – and  F1’s value just kept on rising from the $2bn paid by CVC to a theoretical $12bn just prior to the proposed Singapore floatation. No investor in the CVC F1 paper money project has lost money.

Back in early 2012 Bernie Ecclestone claimed, “All the things that have to happen have happened. It will be finished by the end of June,” referring to the proposed F1 float. The “market capitalisation” (read price to buy the whole shebang) was claimed by UBS to be in the region of $12bn.

But the plan was not to sell off the F1 rights completely, just 30% of the shares, which would raise $3.6bn.

F1 debt

By 2012 CVC had placed a debt burden of $2.8bn into the F1 companies owning the shares. So the net value of F1’s assets (company value less debt) was really $9.2bn.

For the record the original debt CVC ‘placed’ on Formula One consisted of two main elements. The first $2bn was to buy Formula One which itself was a fascinating deal.

CVC borrowed $1.1bn from the Royal Bank of Scotland and secured this debt against the F1 companies. The other $900 million came from one of CVC’s own investors’ funds, but this too was secured against the F1 companies CVC was about to buy.

So day 1 of CVC’s acquisition, F1 had $2bn debt around its neck. This is called in corporate finance land – a leveraged buyout – where the leverage is 100%.

No you haven’t gone completely mad, in a way Formula One promised it would stand guarantor for the money CVC borrowed to buy Formula One.

The other $800m of the $2.8bn debt accumulated in the F1 companies by the time of the proposed Singapore float, is another transaction of interest.

After paying the teams and all its costs, Formula One produced at the time a profit of $400m a year for its owners. However, CVC and its co-shareholders felt they deserved a bigger pay out than that. So they borrowed $800m against the future revenues of Formula One and paid themselves a dividend. This is the world of the corporate gamblers is called a ‘leveraged recapitalisation’.

The $12bn pipe dream of a float came and went, and CVC have instead divested a substantial part of their shareholding and now retain just 35%, Bernie’s Bambino fund has about 5% and other CVC lookalikes own the rest – with the exception of the teacher pension funds of North America who TJ13 exclusively revealed bought a secret 4% back in 2014.

Having pulled off one leveraged recapitalisation, CVC and their cohorts decided this was a damn good wheeze. Borrow money, increase the debt against the Formula One companies and then pay it all out in a dividend. Given the uncertainty of the impending Ecclestone trial in Munich, this looked an even smarter move second time around.

So another $1bn of debt was loaded into the Delta Topco companies and all the CVC look alikes got paid another dividend – which surprisingly was similar to the price they had each paid CVC for their shares.

Add to this some bank charges and interest and other corporate world fees and expenses – and the current debt in Formula One is around 4$bn – or close as damn it.

So were F1 to float or sell at the $12bn price UBS claimed it was worth in 2012 – the net asset value would be $8bn (company value less debt).

Current Sale

Sky News has been reporting today that there is now a bid on the table to buy Formula One. The consortium of investors is fronted by Miami Dolphions owner, Stephen Ross who is putting up $500m. Interestingly, the German media baron Dieter Hahn, whose company Constantin Medien, sued Bernie 18 months ago in relation to a previous sale of F1 shares – is up for a $500m investment to.

Further Sky reports China’s version of CVC (kind of) is up for putting in $1.1bn leaving just over a further $2bn to be found from other investors to make up the $4.5bn cash being offered to F1’s current shareholders.

It’s not clear at present what, if any shareholding Ecclestone and Donald McKenzie would wish to retain, but even at a further $1bn – the headline amount to be paid for F1’s commercial rights is nowhere near the once lauded $12bn price tag.

The new shareholders will also be asked assume the $4bn debt which currently sits against Formula One.

These numbers are startling to say the least, because if we look again at the net asset value of Formula One now, (valuation less debt: $5.5bn-$4bn) we can see the net value of F1 is a mere $1.5bn – and not the $9.2bn at the time of the proposed float.

Future profits

Of course Formula One is a cash cow for its investors and part of the valuation is based upon future revenues due on contracts signed with TV broadcasters, race promoters and sponsors. However, it’s difficult to not conclude the current shareholders of Formula One are running scared were they to accept a bid of this nature.

EU complaint

Were CVC to sell at this price, it would reveal their level of concern over the impending EU commission’s investigation, and the potential ramifications for the owners of the commercial rights. Formula One is in clear breach of a previous EU ruling (article 82) which stated the commercial and regulatory arms of Formula One should be separate and no party with a commercial interest in the sport should be part of its regulatory structure.

Further, the contracts Ecclestone ‘agreed’ with the teams following the collapse of the Concorde Agreement are being argued to be unfair. And as Monisha Kaltenborn stated in the Sochi press conference, the smaller teams have alleged to the EU that they were forced into unfair agreements by Ecclestone, accusing him of ‘abuse of a dominant position’.

Should the EU find this to be the case, the ramifications for the F1 commercial rights holder could be enormous. Large punitive fines may be levied against the commercial rights holders, individuals may be prosecuted and restitution payments would in all likelihood be awarded to the disenfranchised competitors – and any ‘back’ calculation with interest could run into billions.

Formula One’s new investors will of course be aware of this and it is clearly factored into the cut price valuation they’ve place on Formula One. This is despite a source close to the new investor consortium stating, “They believe they can double F1’s profits.”

One day the phony paper trading has to stop.