Juggling

In my experience in F1, teams that have no visible means of support generally come crashing down after a while. One can only keep the balls in the air for a certain period of time before things start to fall apart. Formula 1 eats money and so those who cannot afford to play soon fall out of the nest. We have seen some spectacular juggling acts over the years, but fortunately it seems that these days there is almost always someone willing to step in and buy an established team, if it has what is needed to do the job properly but has into trouble. The smart folk wait until they find a team that is really on the ropes and then pick it up for next to nothing.

The silly people pay $100 million or more.

There is a clear business plan that will work if a F1 team can be made to be successful on the race track, but it is rare that an outsider understands that a team is best left in the hands of the magicians with odd socks and even odder hairdos. It is the engineers who generate success. All too often the rich come in and think that because they have been successful in one sphere, they can do it in F1 as well and these “masters of the universe”, as Tom Wolfe memorably described such people, usually end up in a bonfire of their own vanity. F1 is a good investment if one has a properly defined exit strategy: a sale or a flotation. If you look at the money that has been made by racing individuals from the sale of shares in Williams, McLaren, Brawn, Sauber, Jordan and others one can see that there is potential to make a fortune. The really smart business plans also have ways in which the teams can be used as promotional tools while they are building in value. The problem is that in order to get to a point where a team has more value, one needs to spend a lot and while one can borrow money things get difficult if the borrowing outstrips the value of a team. In such cases, as we have seen on occasion, debts are turned into equity and someone else comes in and gets a slice of the business. The key question after that is whether they can go on borrowing more and avoid the embarrassment of having to sell up, or whether they decide to get out before they get in about their heads.

As an example, back in the autumn GenII Capital came very close to selling the Lotus F1 Team, even if they will not admit it. The goal then was to find a way to get rid of debts that some believe are in the region of $100 million. The deal did not go through, but we hear that soon afterwards Gerard Lopez was able to find another $35 million in loans to keep the show on the road. When a team does well on the race track there is always more money coming in, not just in larger sums of TV and prize money, but also as a result of new sponsors. Borrowing is fine as long as a company can go on finding people willing to loan money and there are sufficient assets that are available to be pledged. This is the kind of juggling that one is seeing more and more and one has to wonder where it will all end. Lopez was fortunate in that he got the team for next to nothing, with a $30 million loan from Renault to help him on his way, so if he has to sell every penny beyond the debt will be profit and he will still have had three years of free advertising for his company.

Over at Force India, one has to ask similar questions.

But for now the jugglers are all still there, even if the bankers behind HRT have dropped the lot and are now busy wiping egg off their faces…