Floating Ferrari

The news that Fiat Chrysler Automobiles (FCA) is planning to spin Ferrari off into a separate company is interesting, but it is doubtful that the news will have much of an effect in Formula 1, although perhaps we will get a slightly better understanding of Ferrari’s financials as a result. What is clear is there will be little real change in the ownership, although once the company is fully listed there may be attempts by investors to build up stakes in the business. What is also clear is that the whole spin off process is idea designed as a carrot to draw US investors into ownership of FCA shares, bumping up the value of the company and giving it a more attractive share price and, importantly, more ability to borrow money. At the time, the move means that Ferrari does not lose its brand value by being too closely connected with FCA, which is a mass market manufacturer.

The plan is to float 10 percent of the company, which could be worth $1.1 billion, while distributing the 80 percent of Ferrari owned by FCA to its shareholders for free. This means that the value of FCA shares have shot up in the last few hours, adding value to the company, although the ownership will remain little changed. FCA boss Sergio Marchionne will remain as Ferrari chairman. This will mean that the shares are more attractive and FCA has also introduced a $2.5 billion convertible bond issue to raise additional cash to help fund his ambitious plan to increase production in the next five years by more than 60 percent. The announcement is designed to help FCA reduce its debt load which currently stands at $14 billion. This important as the company needs to invest at least $60 billion in the next few years to achieve all the measures planned, which include 30 new models across the range by 2018 and a growth spurt to seven million cars per year.
Fiat’s founding family, the Agnellis, will be the largest shareholder of both companies, with 30 percent of the equity in both cases.

The new Fiat Chrysler Automobiles has announced plans to list Ferrari on US and European stock exchanges. FCA owns 90 percent of the Ferrari shares (the other 10 percent belonging to the Ferrari family) and the plan is for 10 percent to be floated and the remaining 80 percent to be given to FCA shareholders. The result of the announcement was a leap in the value of FCA shares, which was obviously what it was designed to do. FCA needs to build up its value in order to attract more financing to help the company. It is doubtful that FCA will lose ultimate control of Ferrari as a result as Exor SpA, the holding company of the Agnelli family, still owns 30% of the company parent company.

Sport and greed

I wrote somewhere the other day that Formula 1 was “my sport”. It is, in my opinion, a sport that is owned, not by mean Scrooge-like characters who are in needs of ghostly visits in order to find redemption, but rather by all of us; by anyone who has an interest in, or passion for, such activity. That is an ideal and, alas, people are not ideal.

There is no clear definition of the word “sport”. Most of the definitions offered feature the same themes: physical exertion, skill, competition, entertainment, recreation, diversion. The word derives, so they say, from the verb to disport, which means to divert and amuse oneself. Other definitions include the fact that a sport has rules or customs to be followed.

But the underlying truth is that like culture, art and music, sport as a concept belongs to us all; to society. Sport has always been a social activity. It has been a way in which groups of people have bonded together, no matter what social class they come from.

When the Council of Europe tried to define sport its European Sports Charter in 1993 it came up with: “all forms of physical activity which, through casual or organised participation, aim at expressing or improving physical fitness and mental well-being, forming social relationships or obtaining results in competition at all levels”.

The social roots of sport are reflected in the names of teams: cricket was organised by county, football by city, town, county and in the case of Nottingham, by a forest. Others were groupings of people who worked in the same businesses like the Arsenal, Hamilton Academicals or Atherton Collieries. Others were based on the day or the place that the club met, like Sheffield Wednesday, Accrington Stanley or Plymouth Argyle; others did not play in the same place and so became Rovers or Rangers. There were clubs that adopted words or symbols expressing their nationality, the Albions, the Thistles and Tottenham Hotspur being good examples of this. As football grew so local teams would join forces to create one team which was big enough to represent the city in nationwide competition. Thus were born the Uniteds. I use Britain as the example but it is true everywhere.

In the world of chariot racing, in Roman times, the competing teams became so powerful that they became political parties and the sport transcended the races and started to affect society in general. The sport became too big for its boots and the emperors took control to stop politicking and even rioting.

Grand Prix racing has its roots in the Gordon Bennett Cup, which was a competition between nations. And while F1 is a modern invention, the tribal behaviour of fans is evident nonetheless.

So a key element of all sport has been the social one, not just on the field but also for those who came to watch. If the games happened on common land, then they were free, but when private land was used, the owner of the land was entitled to ask for money.

The widespread commercialization of sport which began in the 1960s created clashes and legal conflicts: who owned what rights? Was it those who competed, those who organised or those who commercialised? Sports wanted to attract money and while fans accepted to pay to go to stadia to watch games live, they have baulked at payTV, although the concept is basically the same. In earlier times, sport wanted the publicity that mass media provided and so sport on TV was free and now – not surprisingly – people don’t like paying for it. Sport, they believe should be free, at least on TV. As the world changes, so the financial models have altered as well and in the end market forces will prevail. If financiers suck all the money out of a sport that sport will fail. It is as simple as that. The happy medium is to find someone who gets a kick of building up a business, without the need to screw every single penny out of everyone. Alas, this is like a benevolent dictator, a hard thing to find.

People in finance don’t often care about society. They are greedy and anti-social and in some cases sociopathic, and they don’t much care if the world doesn’t like them. They hang out with one another, pretending to be friends but will slit each other’s throats in business. The irony, of course, is that money is only important when you don’t have it and the smartest people realise this. Collecting cash, houses, cars, Fabergé eggs, racehorses or whatever is purely a reflection of ego or insecurity. It is a pointless exercise, as one descendants will only waste the wealth, as they grow up without understanding of what money means. As Bill Gates and others have demonstrated, using your money to the benefit of society is a far smarter way to live.

It was a lesson learned the hard way by Ebernezer Scrooge but, who knows? Christmas is coming and perhaps ghosts of Christmas past, present and future will drop in to see those who exploit this great sport and get them to see a bigger picture…

Last chance to sign up

Austin is going to be a busy place on Friday night with the F1 fans in towns and Halloween as well, so if you are an F1 fan and want to get some pease and quiet, away from the madding crowd, why not come along to An Audience with Joe. If you are reading this blog, you are probably keen to know how things really work in Formula 1. It is not easy to discover, but there is an easy way to learn – by asking questions to one of the sport’s most seasoned observers. You will also get fed great food and have the chance to have a few drinks with a bunch of like-minded American F1 fans.

The Audience with Joe will take place on Friday night (October 31) in Austin, at the Z’Tejas Restaurant at 1110 W 6th St, Austin. Entry is by ticket only. Joe will offer a very brief introduction, with a glass in his hand, and after that the floor is open to any questions that you want to ask. There are only a limited number of tickets available in order to ensure that all the fans have the chance to get answers to their questions and if you are shy you can always ask Joe directly during the break we have for dinner or after the event comes to a close. It will run for 7pm-11pm and thus will mean that you can avoid all those pesky trick-or-treaters who will be prowling the streets that evening The event costs $60 per person, while drinks will be available at normal bar prices. Joe has been to EVERY Formula 1 race in 26 years so he has a vague idea of what goes on behind the scenes in this most fascinating of all sports. For more information and to buy tickets, click here.

Pause for a moment…

I’m sitting in the Admirals Club in Chicago, waiting for a flight to Austin and, while everyone is agonising about F1’s financial models (none of which will happen) unless some of the people round the sport change, I think we should spare a thought for the hundreds of people who are now without jobs because of these debacles, and their families. This mess means upheaval and crisis on a personal level as well, which the smug masters of the universe at CVC don’t get, or rather don’t care about. People in finance want to make huge wedges of cash but they get a little touchy when you point out what they do to real people. Spare a thought to for the suppliers who may get caught in the crossfire, their only crime being to do business with people who ended up not paying their bills.

As I have said in another post, the sport generates $1.8 billion a year. It is downright scandalous that this cannot support 11 teams, even without a cost cap.

Oh Lord…

…I agree with Max Mosley.

The former FIA President has been on  BBC Radio 5 live as a result of the collapse of Caterham and Marussia and I have to say that I agree with his views.

“The big problem is that the big teams have so much more money than teams like Caterham and Marussia,” he said. “From a sporting point of view, the sport should split the money equally and then let the teams get as much sponsorship as they can. A team like Ferrari will always get more sponsorship than Marussia, but if they all get the same basic money, then they all start on a level-playing field, particularly if you have a cost cap where you limit the amount of money each team is allowed to spend.”

We also seem to agree on the engines.

“I’m in favour of the greener engines,” Mosley said. “The mistake was not saying to the big manufacturers that you can spend as much as you want on research but the maximum you can charge per season is something like £3-4m instead of the £15-20m, which I believe it is now.”

All very sound, Max.


The current debacle going on in Formula 1 has raised the question of whether there should be customer cars.  I have written about this before, but I think it bears repeating. Customer cars was where F1 came from and it should not be where it is going to. If one analyses the sport and asks what’s wrong, the answer is very simple: the sport generates $1.8 billion in revenues and it cannot maintain 11 teams making 20 appearances each year.

That is insane.

To understand why this happens one must look at history. Bernie grabbed the rights to promote the sport and has done an amazing job to build the sport up to the level it is at today. There is still loads of potential for more. However, in doing this Mr E buttered his own toast before anyone else got a taste and at one point he was taking about 65 percent of the revenues and the teams were left with the leftovers. They tried to get together to force him to change but on each occasion Ferrari accepted an offer and split away from the other teams. Ferrari is a key player in the sport and everyone accepts that the Italian car firm is a bit special. F1 and Ferrari go together. Ferrari did what was best for Ferrari. After Ferrari left the opposition crumbled. The end result of this is that Ecclestone has been able to whip the teams into line and keep more of the money for himself and those who have bought into his business.

The problem with that is that over time other teams have, quite rightly, argued that this is not fair and so Bernie has had to make concessions for them as well. Thus today we have a system that is skewed in favour of the big teams. How skewed? Well, read this and weep.

The main prize funds in F1 give the teams a fund of around $800. This is divided in two. One of the two parts in then divided into 10 and so each team gets about $40 million. The other part is divided up based on results, with established percentages for positions 1-10. The championship winners get about $80 million, the least successful get about $10 million. Thus added together, the top team would get around $120 million, the bottom one around $50. The 11th team got a one-off payment of $10 million. These percentages do not change but the revenues go up each year.

In the most recent round of negotiations Ecclestone had to increase Ferrari’s bonus payments to a total of five percent of the revenues: two and a half percent from the team’s overall share of the money and two and a half percent from the promoter’s share. Thus Ferrari gained $90 million before the prize fund was taken into consideration.

In addition to that, there was a new Constructor’s Championship Bonus fund , made up of 7.5 percent of the sport’s revenues (believed to come from the promoter’s share), which is given to the top three teams, based on the number of race wins achieved in the previous four seasons. It is not clear which seasons are included in this calculation, but if we take the period 2010 – 2013 as the guide, we see that the fund (worth around $135 million in 2015) will have been divided between Red Bull, McLaren and Ferrari. There were 77 races in that period, Red Bull won 41, McLaren 18, Ferrari 11, Mercedes 4, Lotus 2 and Williams 1. This meant that Red Bull took home about $80 million in addition to the regular prize money, McLaren took around $35 million and Ferrari took another $15 million. This will change in 2015 as Ferrari’s total between 2011 – 2014 will drop to five, Mercedes will sprint to around 20 and so Ferrari will drop out of the top three and lose its share of this fund.

However, there is also a thing called the Ferrari Protection Right, which gives the team a right of veto in respect of the introduction/modification of any technical or sporting regulations.

Although the Formula One group may now say that they get only 40 percent of the overall revenues ($720 million), it is still a massive amount compared to the 10th team in the Constructors’ Championship which took about $50 million and the 11th, which got just $10 million. There is still a very definite need for a budget cap – imposed by the FIA and not negotiated (although this may no longer be possible because of the need to go through the F1 Strategy Group) and for a redistribution of wealth. There is a strong sense in F1 circles at the moment that the FIA is weak. They won’t say it out loud for obvious reasons but they will say it to people like me and that is the overriding message at the moment: the FIA needs to lead to protect its most important asset.

Customers cars and third cars are simply the start of a slippery slope. Formula 1 is all about excellence. It is about being the best in the world, against the best in the world. If one can buy the most successful car then the competition is devalued – and has less interest for the public. To be the best of the best, you need to earn that status and allowing new teams who have access to cash to usurp teams that have battled for decades to be successful is simply unfair, whether it helps the marketing of the sport or not.

Imagine the situation if the top four teams were allowed to sell two cars to customers. Any more than that and the disaster would happen even more quickly. IndyCar has already been down this path and failed as a result. Once the CART series featured all manner of competing chassis: Chaparral, Penske, Longhorn, Wildcat, Coyote, McLaren, Eagle, March and Lola. Within a few years of open competition the car supply had reduced to just two chassis because the small guys could not compete with the big operations and, in the end, the series ended up with a single supplier.

Formula 1 has always been about constructors – it is what makes it different – and opening the field to customer cars would mean that the back half of the grid would have to make a decision whether to continue to try to climb the ladder, or simply give in and buy success. By doing so they would become dependent on the big teams at the front. There would be little choice because if Johnny-come-Latelys  turned up, the smaller teams would be displaced. With four teams providing four others with the best chassis, the effect would be that the fifth placed team, which currently competes for top 10 points, would suddenly become the ninth best team, fighting for 17th place at best. This would impact on the team’s ability to score points, and thus its ability to make money.

In reality, it would be worse than that because the top teams would always be keen to protect their brands and so as to ensure that their customers did as well as possible they would become more and more involved so that the eight two-car teams would very rapidly become four four-car teams. This would have two serious effects: it would increase the power of the big teams – which would be dangerous for the promoters and regulators – and it would wipe out the smaller teams. At the same time it would also destroy the manufacturing base of F1 so that if one day a couple of the big teams had to close down, the sport would instantly lose eight cars.

It is much healthier for the sport to have 11 teams who are independent of one another. Not all may be competitive, but all have ambition to succeed, rather than settling for customer status. The best way to strengthen the F1 grid is to find a way to restrict ridiculous spending on irrelevant parts and at the same time try to ensure that the money that the sport generates remains in the sport, rather than going off to faceless financiers who do not know nor care about the business, as is currently the case.


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