Luca di Montezemolo has been known for occasional political posturing in the past and the latest reports about a breakaway Formula 1 series is just such a thing. Montezemolo was actually quoted as saying that there were three possible routes ahead: a deal for a new Concorde Agreement with CVC Involved; a deal with CVC replaced by another partner and a go-it-alone option. The Italian media then extrapolated this is into a breakaway threat. The reality is that Montezemolo would be wise to be in support of the Murdoch-Exor bid because it is being organised by his boss John Elkann and, as we all know, it is never a bad idea to keep the boss happy, particularly if you are 63 years old and have plenty of money as if you don’t wave the right flag, you may get sent on permanent holiday to Positano.
The reason that a breakaway cannot happen is that the teams, including Ferrari, have agreed (contractually) not to organise an alternative championship until before December 31 2012, while Bernie Ecclestone (on behalf of CVC) has agreed not to make individual teams individual offers prior to the end of December 2012. Both parties have agreed to use “reasonable endeavours” to agree upon an extension of the Concorde Agreement.
Case law has shown that a reasonable endeavours obligation allows a party to justify not taking a particular action if that action disadvantages the party under the obligation. It allows the party to balance the weight of the obligation against all relevant commercial considerations. Or to put it another way, CVC Capital Partners would not have to agree to a deal that made it less money than is currently the case, inflated though that percentage may be.
The other reason why Montezemolo might wish to evoke a breakaway is that it raises the stakes and potentially brings down the value of the company, which means that it would be cheaper for Murdoch-Exor to purchase the business. In short, the message being delivered here is that the longer this goes on the less value the business has and so it would be wise for CVC to take the money and run… CVC bought control of the company in 2005 for $1.23 billion. Ecclestone recently said it was worth $6-7 billion. As usual the answer lies somewhere between these two extremes. It should be noted that CVC has already taken at least $2 billion from the business, so it is simply negotiating further profit.
The restriction on making preparations until the end of the current Concorde Agreement on December 31 2012 means that a breakaway championship cannot happen in 2013. This sort of undertaking cannot happen overnight and work would need to begin now if it were to happen. Ecclestone has already tied up a lot of contracts, in order to strengthen the position of the Formula One group, these being vested in the new Formula One World Championship Ltd company, which has appeared this year.
joeblogsf1 
“Effective contract” and “periodicity” wouldn’t be jargon Joe would use when plainer speak does the job, but they’re what he’s banging on about.
Periodicity is interesting. If you ever rented, and a shorthold or other contracted term expired, the notice term becomes the interval of payments. Might be monthly, might be longer.
I could then imagine all sorts of side arguments being sprung. What if any term of payment under Concorde was advance payment for goodwill? That would be interesting – whose goodwill? Which way does it flow, if not two ways? How is the fair basis of that calculated and to whom does it accrue at different stages in specific performance? Lots and lots (if not quite all) of F1 balance sheets are goodwill, (what use last year’s car, and a huge wage bill?) so it’s not a throwaway consideration.
Spot on thinking, Joe.
Luca di’ just confirming he’s got a pair, and knows his local media’s fond weaknesses 🙂
– j
Making that a just a darned bit clearer: if your analagous rent agreement expires on a day (end of 2012), there’s still need to put in notice. That’s just the first day you can. Meanwhile, things roll over at an interval comparable or equal to the term between payments or breaks / adjustments. Therefore, you have a ongoing delay before you can move on, on top of the obligations to try to make nice, which Joe reports.
What is reported, the “endeavour” bit, is extra interesting when you wonder just how long it might take to unravel all the agreements. How long is that obligation to endeavour active, though surely at very least one year? Do teams really only finance themselves year to year, or to the next break option in Concorde, do their banks hold (specific as opposed to obvious implied general) covenants also obliging them to try to settle? That might put some interesting dividing lines between teams, depending on how they are structured, how truly independant they individually are.
I rather like the landlord analogy, because – all other things aside – the tracks are rather beholden to Bernie. Can’t see an empty building and homeless teams camping outside. It would make for some very amusing competition arguments. Presuming you need the absolute majority of teams to make a breakaway, where exactly is the competition . . . hmm, how long has Bernie tied down the tracks?
It’s analysis like this that sets your writing apart, Joe. Solid, well-reasoned reporting.
I’d like to run another perspective past you and hear your thoughts on it.
Regardless of the suitor, anyone that is seriously looking into investing in F1 will be doing at least a rough analysis of what would be required to form a breakaway. This would help to inform the price they are prepared to pay, if nothing else (the harder to break away, the safer their investment would be). The more detailed this analysis, the more viable it becomes as a “Plan B” that can be actively used as a tool to help drive the price down. Then, depending on how greedy everyone is being, sometimes the numbers turn out such that Plan B actually looks like the cheaper option…
Forming a breakaway series in general is something that the Murdoch family has a great deal of experience with, having watched Kerry Packer do it with One Day Cricket and their own experience with their Rugby breakaway series more recently. They would definitely have learned a lot from the Rugby fiasco, which proved to be a rather long and painful affair, although it was resolved profitably.
With the Rugby specifically, the incumbents worked hard in a modern corporate setting to tie up all of the clubs and players into contracts but Murdoch was still able to create a toe-hold that was then extended into a deal to eventually get most of what they wanted.
As you report, the teams are precluded from arranging something like that, however, as Whitmarsh was at some pains to point out the other day, no members of the “teams” were going to be at the meeting in Germany but that doesn’t entirely stop their shareholders from having discussions.
Ultimately, a breakaway is a hugely expensive and risky undertaking and (again, as you report) at this stage it only makes sense to be a scenario that is being stirred up in order to help get expectations in order on the pricing front.
Still, even with the various entanglements, a News-instigated breakaway does seem to be much more viable than the teams trying to set up their own series!
Rj
Where there’s a will there’s a way. Trouble is I don’t think talk of a break away series is anything but posturing.
And if that wasn’t enough, Montezemolo should find out what happened in the Cart vs IRL war in the USA from 1996 to 2008. The only winner was NASCAR.
A F1 series without Ferrari, Mercedes, RB and McLaren would be uneconomical and drive the value of the F1 franchise so far down that the owner at the time would lose basically all of their value. Therefore, whatever those 4 are seeking (I suspect more money) will be accommodated in some format.
However, don’t for a minute think there isn’t work being done at this moment to set the basics for a breakaway series as any document put together by a lawyer can be defeat by another just as smart lawyer.
Thanks Joe, knew your answer wouldn’t disappoint 🙂
I mentioned clause 4.5 (a) and 4.5 (b) in another post, and you mocked me 😉
Karen,
No, I said that you sounded like Christian Sylt… That is not mockery.
Ever so slightly veering OT, is this the only way to negotiate with BE, and is that a Sensible EJ lookalike coochy cooing Bernie?
(safe for work unless you work for Bernie)
It’s always the same story : Ferrari wants more money.
Last time they use the breakaway series thread, this time the phantom bid.
What next ? Ferrari quits F-1 ?
The English Premier League was established via ‘breaking away’. Be it on the pitch or on the track, the teams are what the punter will pay to see perform. The rest is ‘hovno’. Looking forward to seeing someone calling bluff. A contract is nothing more than an appointment. Intent is everything.
Joe – It would be interesting to hear your view on whether a new series would work.
For example, with a lower cost structure, it could hail the return to historic tracks that have been left off the Bernie circus in the past few years.
Adrian Jr,
It is really not relevant whether it would work or not, as there will not be one.
CART was a breakaway series itself, Titus.
Making assumptions on previous experience is normally sound but sooner or later there can be a game changer. There is relative peace between the stakeholders so the game is unlikely to change. Between Ferrari and the FIA president there seems to be a possible power block should a move be made. Ecclestone and Mosely contrived a sweetheart deal to the exclusion of future developments. This is the area where pressure for change will be born. The teams are collectively weak but should two legs of a three legged stool be solid then the teams may be able to muster enough unity to carry a deal. At most the deal will be for the News Corp takeover with more annual dividends to the FIA and the Teams.
Rj,
well noted the late Kerry Packer.
At this level, you simply have vast egos to deal with. There’s a story i’ve heard from a few croupiers, about a Texan high roller boasting of his wealth, whilst trying to barge in on Packer’s table. Response: “Toss you for it, son.” Texan bit changes, but never the Packer bit. Bells on, in the media game. Particularly since the software guys pipped them at the gross margin game . .
You need someone a bit outlier, say Ernesto Bertarelli, who at least with his Alinghi sailing team, looks like he knows the concept of fair play. He might be a interesting candidate, because despite no mean businessman, he didn’t graft & slug it all the way, isn’t overtly belligerant, pays attention to the finer points of sporting pursuits. Nice way of saying he’s not a playboy, but could be, indulges his passions. Young enough, pleasant face. Roman, so might culturally reign in di Montezemelo.
If we’re going to have all change, make it fresh. I think otherwise we’d be happy if they just sort the racing. (Touching wood, saying prayers as i write..)
– j
Rj,
i omitted to say that i meant the last thing you do is sell to a contemporary. Don’t forget either that Bernie is self made. Rupert inherited, no matter how well he did. Same generation, Bernie has no obvious inheritors (sold anyhow) so i think he might have very pointed views about male line succession, quite apart from having no son. Wonder if he would have sold, if he had. Two attractive daughters are a compelling reason to wrap your money in impenetrable trust . .
cheers!
– j
Permanent holiday to Positano is not a bad option! I spent my honeymoon there last year. Very nice part of the world.
Rj,
another cool point from you about “Plan B”.
Yes, but a bit two dimensional chess 🙂
I suggest the answer is: “End Run”.
you cannot deal simply man to man if they are always wriggling away from even a good deal from them. Get it all the time in media deals. Done it myself the other way around, overvaluing vestigial assets and ideas. If you want to make commercial mountains out of ripples rising in the verdant earth of your mind, the route is alone, all the way. Otherwise you trade out.
best from me,
– john
doh,
pp4, L2,
“for them” not “from them”
sorry all, ouch
I gave Mosely a hard time the other day, about his PR nous, and being just a little bit open. It was genuinely meant by me.
Here’s a serious player, actually managing that.
http://www.telegraph.co.uk/finance/8335604/Carlos-Slim-At-home-with-the-worlds-richest-man.html
Some of that is very funny, other bits actually touching.
But whatever you think about ridiculously rich people, this is a good example of how to talk to the press. The guy’s trying.
Take notes, Max. You may not have the squillions, but you might as well be even more rareified a creature.
– j
Clearly there are many good contractual and legal reasons for a breakaway not being possible, but even if they could be overcome, it would never work. The main reason being any established and relatively well funded current F1 team would have a clear run at the championship if they stayed.
It isn’t difficult to imagine a mid field team saying thay are going to be part of the breakaway only to change their minds at the last minute and remain in the FIA World Championship, thus giving themselves a much increased chance of winning the same drivers championship that Fangio Senna and Schumacher won and the same constructors trophy that Ferrari McLaren and all the others worked so hard to win in the past.
The organisers of any breakaway would, of course say that the “old” titles are now irrellevent, and the new series is the premier motorsport championship, but the old one would surely continue, and would still be widely watched.
Conflicting interests and the desire to secure an advantage for themselves would allways scupper any chance of the teams organising anything on this scale, and thats before Bernie starts bribing/cajoling/threatening people to stay!
There are worst places to be sent to pasture than Positano :)….
However transparent this seems to everyone here, I believe it is an effective strategy up to a certain point, all the parties know it is a bluff, but they cant really afford to call Lucca on it(or the other major teams for that matter).
Joe, from what I’ve been reading, it seems that heads of other teams are warming up to the idea of being co-owners of the sport and looking at examples such as the NBA here in the US not only does it look like a viable model it seems to have the possibilities of being very successful. Do you think there is any possibility whatsoever that the Murdoch/Exor bid could expand to include FOTA (or all the teams) as stake holders in the commercial rights?
I have no idea on how European Law might afect such an arrangement, but it does make sense to me (law permitting), that the majority of the proffits generated by the sport go back into the sport as opposed to the current situation where just over half the money generated flies out never to be seem again by F1.
The barriers to assembling a replica of Formula One’s traveling road show are not nearly so high as many would imagine.
Certainly, in the early days of the sport it *was* a dark art.
No longer.
Today, companies like IMG (and many others) offer turn-key solutions for those desirous of a traveling sporting series. The only prerequisite is the money to pay for it. They will do everything. Book the travel, arrange the venues, negotiate the contracts, everything.
True, it is far more economical for a sporting series to arrange all this themselves, but a company like IMG could get a breakaway series off the ground in mere months. In fact, I’d say no more than 3 to 6 months would be required to set up a fully functional break-away series. The major time constraint would be booking of venues. Were Ferrari and McLaren on board, I expect tracks would fall over themselves in order to see the series land at their door. There are oh-so-many tracks these days.
Formula One is not nearly the largest of the traveling road shows. Many rock concerts move more men and materials than do the CVC owned companies. This is largely because the F1 companies moved much of this work onto the teams and venues. The teams are often responsible for moving their own kit and always responsible for booking their travel. The venues are responsible for -almost- everything at a given race. This greatly lightened Bernie’s load as compared to other events, but also made it easier for the teams to break. The effort behind something like the Tour de France dwarfs the man, material, and logistics of Formula One.
I’d be shocked to find the existing teams did not have more than enough cash to arrange a season or two of a breakaway series run by a fixer like IMG before transitioning to internal management. I suspect Red Bull, McLaren, Ferrari could afford it alone.
(FWIW, I’ve worked in this industry. It’s not rocket science, there are many groups capable of organizing something on this scale in a relatively short period of time).
Joe – understood. But sometimes its interesting to hypothesise!