Poor CVC Capital Partners. They seem to be earning very little money from Formula One these days. One source, which is traditionally very positive about the commercial rights holding company, suggests that the private equity group takes only 8.4 percent of the sport’s revenues these days.
Should we weep for these poor hard-working financiers?
Of course, the story has failed to mention quite a few rather important points which should not reasonably be overlooked by any serious observer. CVC acquired the various entities that make up the Formula One group back in 2006. In order to do this the firm borrowed the money and then refinanced and took on $2.92 billion in debt, secured with the future revenues of the sport. CVC immediately pocketed a dividend of $2 billion. Forgetting this payment is something of an oversight.
There was a further dividend in 2012 when CVC paid itself $865m after another refinancing to extend the 2013 maturity of the loans until 2017. Add to this sales of shares in the Formula One group. In May 2012 CVC took $1.6 billion when they sold a 21-percent stake to Waddell & Reed, BlackRock Inc and Norges Bank Investment Management. A month later they added another $500 million to the pot when they sold additional shares to Waddell & Reed.
There may be other dividends but I have not had the time to check. This means that in the six and a half years since the sale took place CVC has taken at least $4.18 billion from the sport, either by loading the sport with debts or by selling off shares to other financiers keen to join the financial gang-bang that Formula 1 has become in recent years. CVC still holds 35 percent of the shares and wants to sell them as well. On paper, these are worth about $3.5 billion more. CVC may have trouble borrowing any more money at the moment, but it would probably like to do so before departing.
The costs of the paying the debts runs at about $100 million a year, which is why the year to year profits are rather smaller than some might think (although this makes them rather tax-effective). The report that I mention also includes the fascinating detail that paying the staff of Formula One costs $39.8 million for the 313 staff members, not including Bernie Ecclestone’s annual salary of $4.2 million. So that means that the employees of the group make an average of $127,156 per person. Given that a large number of these people are riggers and cameramen and do not earn much, someone somewhere must be pocketing an awful lot of money.
The report also suggests that the Formula One group has running costs amounting to $328 million.
The other costs involved are to pay the teams. This amounts to $698.5 million, which is equivalent to 44 percent of F1’s revenues. It is irrelevant that this is a lot more than they used to make, given the fact that the balance between the promoter and the participants was (and remains) wildly out of kilter with normal sporting championships.
Given the vast sums of money paid to banks in interest on the loans, it is fair to say that the sport IS being raped by financiers and would be much better off if there was a way to get rid of them. Sadly, the teams cannot agree on the day to hold a meeting to suggest such a thing, the FIA is way out of its league when it comes to such high finance and there is no-one else with the gumption to come in and make it happen in the best interests of the sport.
joeblogsf1 
An interesting post Joe. The key word here would seem to be ‘debt’? Debt seems to have made the world go round for a good few years now and, let’s not forget, brought the global economy to the place where it found itself circa 2008.
Typical Private Equity dark arts..!! quite sad ..
Any idea about future plans for F1 now that the IPO has been cancelled? I also read last week something about Norway investigating Norges bank’s investment in F1 on the pretext that F1 was going public..
Your thoughts?
I hear there’s lots of sylt in rivers at this time of the year. Dirty stuff!
I just find it bizarre that the teams struggle to agree on something (a breakaway / “new series”) which would make them all, without exception, distinctly better off and more valuable.
The formula of ”buying” Ferrari’s loyalty and waiting for the rest to drop into line time after time seems bizarre as with no Prancing Horse the world would keep turning.
The very fact that a few egos and a lack of trust between a few costs their own teams 10’s of millions each speaks volumes.
It is not possible
Sad really isn’t it?
I’m not a fan of American sports but there’s a lot to admire about the way they’re run. Whilst I’m not advocating a ‘draft’ system in F1, a little more income sharing and a little co-operation would make everyone in F1 richer and make the sport much more appealing.
Ah the high cost of being a millionaire, or at least having several of them as directors of various levels of the F1 layer cake.
All that debt, must make the whole shebang worth about £10 NAV.
In a similar vein is Lotus Cars/Engineering still there?
Wow I don’t think I’ve ever seen it spelled out quite so clearly and frankly its disgusting what these people are doing to the sport. I cant believe that the teams are so short sighted that they cant do something about it. If there are meant to be some of the brightest people in the world in F1 then sometimes they really dont show it in the right ways.
It’s not just F1 & other Motorsports Craig, all sport is being corrupted by far too much financial reward, as was the case with banks ( and still is the case with banks! ), I didn’t think football was so easy to corrupt, until there were regular cases of match fixing. Boxing has been corrupt since time began….cricket has been corrupted and matches fixed, tennis, any sport can be a target, golf has been, and I really didn’t believe car racing could be until Piquet Jnr took a dive at the wall in Singapore, along with all the espionage stuff. It’s so sad that this can happen and there isn’t enough control to stop it, because most of the money goes to those in control….
I’m no economist, nor could I ever claim to have a detailed understanding of the finance structure behind Formula 1, however from the things I’ve heard and read about CVC it seems pretty clear that they’re performing what amounts to daylight robbery of everyone invovled. I don’t see how this is allowed to go on? Surely if it’s as clear-cut as you make out the teams could/would do something about it as they’re the ones getting shafted, and a lot of them are losing money hand over fist right?
Splendid enquiry Joe.
it is clear and evident to me that after reading this latest piece that the monetising of what was once a daredevil sport has been turned into a travel and entertainment cartel which explains why yours truly has determined that other than the Wold Endurance Championship ( WEC ) and your blog I have no interest in this seasons’ show.
thank you very much for your devotion and please seriously consider your business relation with this corporate structure as time goes by.
I’m looking forward to following M. Webber as he shifts to this true racing format.
When looked at like that, it does make CVC and FOM seem little more than a pyramid scheme!
Hmmm, 8.9 percent is a great return on investment in the current market conditions. Try finding places to put your money to get 8.9 percent! Given that, they are doing really well. They can give me one percent and I would be a happy man! Truth is that 8.9 percent of a big pie is a serious chunk of change. This is all creative accounting with everything they can think of thrown in as an expense. I for one will not care if this lack of revenue gets them out so long as we get someone more progressive in attitude on the other side.
I think the teams need their own Bernie. Are Ferrari ( LDM ) not quite as intelligent as they would like to believe themselves to be ? They made circa £300 million profit from the car company last year so they could seriously add to their bottom line if they used their power in concert with the other teams. They could have had at least a billion of that 4.2 that CVC have milked. Great blog thanks very much.
The teams HAD their own Bernie. It was Bernie.
Is ‘raped’ really the right word? I’m surprised you would use that term.
Unless you can find some examples where financiers make this kind of a return on the whole as Joe describes accurately, on a large investment as this, then I think Joe is using absolutely the right word. He could also add to that that Mr E has knowing and willing stood by (whilst filling his own pockets) while these vultures plunder and rape F1
If you think about it, the situation is actually similar to a lot of rape cases. The rapist comes along, takes forceful advantage of a vulnerable party, and then turns around and tries to claim itself as being the victim (“she was wearing too short a skirt!”) and court sympathy or understanding. Then, onlookers criticize the actual rape victim for not doing enough to prevent the rape in the first place. Just because the victim doesn’t put up a fight doesn’t make the term less applicable though.
And while in this case, the victim has enough strength to fight the rapist off, it can’t be bothered. In that sense, it is fair to criticize both parties.
It’s exactly the right word…
Don’t know why you’d be surprised to see Joe use the English language properly…
Don’t be blinkered. In 1712 Alexander Pope published ‘The Rape of the Lock’. The word has long had various nuances of meaning, all signifying some degree of purloinment…
Right. Ass-raped is much more appropriate.
But, the teams must enjoy it, because they do nothing to stop it…
Could not have said it any better. On a superficial level, the data says F1 is pulling in the most revenue ever. But I assume this is due to clevel accounting games and manipulation of financial derivative instruments.
Joe, my question is: in your opinion, how much actual growth (audience expansion, actual consumer spending) is F1 achieving now versus what I assume to be the “golden era” (for me anyways) of the late 80’s – early 90’s?
“paying the staff of Formula One costs $39.8 million for the 313 staff members, not including Bernie Ecclestone’s annual salary of $4.2 million. So that means that the employees of the group make an average of $127,156 per person.”
I know that you are a “self-employed” person but do you really think you can divide the employment costs by the number of employees to get an average salary? That really is too simplistic. You are not taking account of cost of employment such as Pensions (5%?), Employer’s National Insurance (13.8%), Holidays (12.07%) that any UK employer will incur. There may be other costs that will be under that heading also.
No doubt the CVC does not deserve our sympathy but silly digs (“someone somewhere must be pocketing an awful lot of money”) based on the wrong figures do not make for a good argument.
How do you know what I am taking into account?
Err, because I can divide $39.8 million by 313 to get $127,156?
So can I, but Joe was saying that many will be under that figure (either before or after all that other stuff you mention), and some will be under it by a great deal. Therefore some of the other employees must be making huge sums.
If Joe is correct that a lot of these people are Cameramen and riggers, they will probably be self employed anyway, and only earn when the circus is in operation.
Also, even if they are salaried; NI, Holiday pay and Pensions are generally considered part of the overall remuneration package, and a Gross Salary of $127,156 is a pretty decent salary in most parts of the world…..
Having led us to the cliff-edge of despair with this report Joe, you can’t just leave us to go over. What options are there to grasp, even if theoretical and barely possible?
As regards ‘gang bangs’ I don’t know that this applies in the case of F1 as described. The woman, being the centre of attention at such an occassion, is usually the one who calls the shots….
I don’t speak from personal experience.
CVC put up the capital and took the risk, how is that rape? The investment could have just as easily gone south and they lose every penny, as I’m sure there have been many deals that did not work out for them. If anyone else was so sure that this purchase would turn out to be a homerun like it did, then they should ask themselves why they did not step up at the beginning and bought it themselves.
This is the kind of thinking that will bring Marxism back from its very deserved grave. I would prefer it stay there, where it belongs. Sadly, too many people seem to think any scheme that maximizes profits at the cost of everything else is just fine and dandy. Now, I fully realize we’ve been fed a steady diet of this kind of destructive nonsense ever since the UKian Iron Lady and USian Ronnie Cowboy… but that doesn’t excuse not thinking it though.
Seems to me you’re not thinking it though. Fact: it wasn’t vulture capitalism that pur Marxism in its grave; rather, it was a very-bridled version of capitalism that did that… one that recogized the monumental diff between a capitalist society and a decent society that had a modified, limited version of a capitalist economy upon which rules were imposed. The present near-absense of rules does not make the result either justified or acceptable. Too bad people keep accepting it.
Tosh
There’s a good t-shirt that’s on sale at various outlets and websites. It has a picture of Karl Marx on the front, and underneath it is the slogan: “I told you it would all go wrong”, referring to the events of 2008 when assorted people in the financial sector had us on our knees before a super-massive fiancial black hole, and threatened that if they were going to go down, they would take us down too, unless we bailed them out. This situation arose as a direct result of the “very bridled” capitalism to which you refer.
Now I’m no Marxist by any stretch of the imagination, though I would offer to buy you this t-shirt for Christmas or your birthday if in any way it would enable you to maintain a sense of perspective.
“The investment could have just as easily gone south and they lose every penny.”
Absolutely out of the question. These people would just not go there unless there was a guaranteed pot of gold at the end of the rainbow as a dead cert. These people don’t get involved in anything just to break even. They won’t even consider that as a worst case scenario. As Joes says in the article, immediately upon purchase they took a £2 billion dividend.
These people don’t make mistakes.
“These people don’t make mistakes.” Hmmm… Lehman Brothers ring any bells?
There are no guarantees.
These people do make mistakes. They still wake at night thinking of the bonfire of the vanities…
That’s a rather uninformed view. CVC did take a risk putting up the money and there’s never an assured pot of gold. If it were that easy everybody could study up to become one of “these people”.
Being a finance type myself, I think the correct way to view this is by being somewhere in the middle of what the original commenter and you said. CVC did take the risk but by extracting those massive dividends, they burdened the F1 business with debt thus proving they don’t care about the sport.
As a fan, you have every right to feel aggrieved. The sport is being looted.
As a businessman, what CVC did makes sense, they have a responsibility to their investors.
Depends which one you are really.
I am a passionate fan. If I was a businessman I would never be as greedy as these people are. I don’t object to profit but rather to profiteering. Enough is enough in several different senses…
My understanding is that CVC put the risk/liability for the loans back on F1 (whichever entity), in exactly the same way that the Glazer family did with their ‘purchase’ of Manchester Utd.
That is, they took out a loan to buy Man Utd, then made the club liable to make the payments… Whilst at the same time helping themselves to healthy dividends.
That’s about it. The sport was sold down the river and now we must fight the crocs and piranhas
Lovely piece, Joe. I must admit, when I saw the other article, I thought “Oooh, so now he’s doing for CVC what he used to do for Bernie”, and was pleased to see your clarification.
However, one small point about the salaries – good-quality professional TV cameramen, vision-mixers, editors, etc., don’t come cheap. Although it wouldn’t surprise me if someone somewhere was pocketing a fair bit as you say.
Meanwhile F1 teams struggle to survive. Well done, F1.
Joe
Whilst I agree that a better long term owner should be found, I have to disagree with the terms you use to describe CVC’s investment in F1.
Firstly, you need to look at who are the beneficial owners of the investment funds put in by CVC. Generally these are sovereign wealth and pension funds. I.e. taxpayers like you and I. We all want our pension funds to do well and if CVC are to earn their management fee, then they should be doing all they can to make a return. If the investors agree to a 2/20 fee structure, then that’s their issue too. I don’t have a fundamental problem with that. After all, its capitalism.
Secondly, in today’s environment, few teams have the money to participate in a buy out of CVC. They are spending every cent in the development arms race. They have the power to change that independently of CVC. But they won’t. Arguably a pool of manufacturers or benevolent billionaires could team up, but the teams (even as owners of F1) would likely never agree on anything. If say, Dietrich Mateshitz bought F1, then whats to say he wouldn’t be like Bernie Mk2? That might not necessarily produce the desired results for the sport either. After all, ticket prices and merchandise were expensive prior to the CVC purchase. Ironically you could argue that having an owner independent of the teams means there are less conflicts of interest at a sporting level.
Thirdly, what we really seem to be missing is a strong FIA. Much like a government regulator, this would put in place the rules for the sport – eg subsidising certain historic GPs, or setting budget caps. However, we know this is not the case.
I’m just curious to know who it is you feel should be receiving this money. Of the total revenues, the teams take 25% of everything. The teams do not provide venues, the teams do not bring travelling support but yet it appears they receive all the money the venues pay for hosting F1? Considering the teams sold their commercial rights many years ago, they appear to be receiving every single penny of money they could lay claim too.
The formula one group provide a calendar for the teams, a world stage for the teams and their sponsors, and arguably pay them all the money from gate receipts at each of its races, and doesn’t expect the teams to sell a single ticket. In return the F1 group sells and makes all it’s money from selling TV rights and trackside advertising. All it asks in return is that the teams race . The teams gave up their rights to any of this money when they sold the commercial rights to Bernie!
The teams don’t do enough to connect with the audience directly. They need to find a way of generating revenues from the general public, and take more responsibility for filling the grandstands, both individually and collectively.
Joe
you have said “In May 2012 CVC took $1.6 billion when they sold a 21-percent stake to Waddell & Reed, BlackRock Inc and Norges Bank Investment Management”
Was this 21% of CVC’s shareholding or 21% of the total equity? If it was of the total why such a (relatively) small amount? If it was 21% of their shareholding can we assume that they still have a controlling interest?
Joe I saw the story you are referring to as I follow Karun Chandhok and it came up in a link he Tweeted. What I don’t understand from your piece is whether you are saying that the 8.4% figure is wrong. I couldn’t see it in the stpry on the link Chandhok posted up. If it is wrong then what is the actual amount CVC is taking from the sport’s revenues?
The 8.4 % is right in terms of that being the amount that CVC will take of 2013 profits by virtue of owning 35% of F1. The sleight of hand is to pretend that this is a ALL they have gotten from the sport.
That’s what I dont understand. The article that Chandhok linked to doesn’t say that the 8.4% is ALL CVC have gotten from the sport. It refers to it as CVC’s profit share, which is equivalent to 8.4 per cent of the sport’s revenues. I’ve just pulled that directly from the text and my question is whether this is accurate or not. Sounds like it is accurate but CVC gets income from sales of shares as well as the profit share. Correct?
The article is zoning in on the profits and revenues so I can see why it doesn’t refer to sales of shares. My concern is whether the numbers are accurate and it looks like they are.
Numbers in the hands of the unscrupulous are dangerous
Thanks. My concern is whether or not the numbers are accurate. I do not care for the political leaning of the sources.
Just to illustrate how the article being discussed is not an outright lie, but also not the whole truth, there is a report on Pitpass today about Bernie talking about selling the stake he still personally owns. In that story mention is made of another investment fund Norges who own 4.5% of F1. (about 1/8th of what CVC own).
In 2012 Norges got $93 million in dividends for their 4.5% share. So it’s fair to assume that CVC also got a dividend and that their’s was in the region of $720 million. This after Norges paid CVC $300 million for those shares.
CVC are making a LOT out of F1.
“What I don’t understand from your piece is whether you are saying that the 8.4% figure is wrong”
I’d hazard an educated guess and say that it’s probably, technically, not “wrong” (notice I didn’t say “correct”). It’s just that large organisations such as these are famed for their “creative accounting”, or, ahem…. “being economical with the truth.”
Very astute observations. This is just an example of what you can do with “creative accounting”, or perhaps in this case, being “economical with the truth”. The plain fact remains that, to those people who are more informed than the average punter and are prepared to do just a bit of digging, then the obvious question is well if the sport isn’t brining you much revenue in, what the hell are you doing here? It makes you wonder why they said it in the first place. Are they angling to sell off even more at a very tidy profit, or are they after something else? They don’t just say things for the sake of it, there is always an ulterior motive. You just wonder who they are either trying to kid, or what they are after.
It is really depressing to think about all this. I feel like they could make more money by properly nurturing the sport, but the short term must be more attractive to them. What a shame.
I really don’t know what is worse; the fact that CVC is raping the sport, or the fact that the teams can’t agree to take action for their own good. I suppose it is in the nature of both financiers and F1 teams to think of themselves.
F1 needs a visionary. A wealthy visionary with influence and power, and noble intentions.
CVCs first responsibility is not to the sport but to the people who have invested money in them. The same goes for several other FOM shareholders. They are doing exactly what they are supposed to do, but those things do not include worrying about the long term health of F1. There is the problem: CVC will make a pretty penny out of F1 (much more than 8.whatever % of 2013 turnover) and then get out once they have taken a good profit. It’s not theft, it’s not unethical, it’s exactly what they should be doing FOR THEIR CLIENTS and F1 is not a client.
Are you an F1 fan?
‘Financial gang bang’ LOL Joe you absolute legend!
I apologize in advance for my thick skull, but did you enumerate how much debt in-total CVC has at the moment?
No
I have read your piece carefully and now understand. Holy smokes. $4 billion in debt. That’s a big nut to crack.
Surely the roots of this occurred when the FIA gave away the deal of a lifetime with their 100 year rights deal costing little over £3m per year. This gives the promoters an unbelievable security of tenure and unchallenged position. If it had been say for a 10 year term, with competitive tender 18 months before expiry, pencils would have been sharpened and new ideas and perhaps more equitable agreements would have been the result.
This along with self interest from the team and meekness from the circuits talked into deals they can’t afford, has been the 3 factors that have contributed to the behind the scenes position it finds itself in. IMO.
This kind of structure is absolute common in private equity LBOs. I’ve done it myself in a smaller way on a private deal.
The principle is always that the target company carries the risk, not the investment fund, so they will recapitalize the large initial equity stake for debt as soon as they have streamlined operations enough to generate the debt-servicing capacity they need in the business. This allows them to get their money back in their bank account, and to use OPM (Other People’s Money) to leverage up the target. F1 needed little streamlining, so they could do the swap basically as soon as they could find a lender.
This in turn creates the classic leverage that generates the spectacular returns on common equity – when they sell all or part of the business it is basically all cream. And if there are surpluses in operations after paying servicing debt, that’s also free cash flow they can skim to shareholders as dividends.
The debt on F1 is not really that risky. The global TV pays the bulk of the revenue, and that’s not going away in any hurry, so even though $4B looks high, it’s easily serviceable. And once it has been serviced and reduced to zero, they own the business free and clear (not that they would do that completely as it would reduce the tax shield on operational earnings; you always want some debt in the mix for several reasons). It’s jam on cream.
Nothing illegal about it, it’s the same thing that happens in almost every business with any kind of debt/equity ratio, just amplified. I think the mistake is to confuse F1 with sport; it’s strictly business, and if the owners of the business have decided they want it to pay $100M in debt servicing fees per annum, that’s up to them.
I didn’t say it was illegal. I just hate to see the sport damaged by these jackals (that is what they are). Bernie is to blame he opened the door to them from greed alone.
I don’t see them as any more avaricious than any other investor, they just raise the amplitude. It’s just business – sport is probably tertiary at best, the TV show is the product. Anyone who runs an overdraft or ongoing credit card balance is doing the same thing in microcosm – they are leveraging their own cashflow with OPM, some more aggressively than others.