A Formula One IPO: pros and cons

The Formula One group, which is largely owned by CVC Capital Partners, is planning to list around 20 percent of the shares of the company on the Singapore Stock Exchange in July, with the goal of raising between $1.5 billion and $2 billion. This would value the company at around $10 billion. This is a very aggressive timeline for an IPO and it remains to be seen whether investors will go for the shares.

There are a number of significant questions that will cloud the value of the company. There is talk of a new Concorde Agreement being in the pipeline, but it is not yet signed and there is also the potential of legal action from at least one very large company that is not part of the deal at the moment. In addition there are questions about the company leadership. Bernie Ecclestone is 81 years of age and still doing a great job, but there is no sign of any succession plan, at least not one that has been made public. It could be that CVC plans to put someone like Sir Martin Sorrell, a current board member of the group’s holding company, into the leading role, but that will not happen until Ecclestone disappears from the scene.

There are also questions about various legal actions that could affect Ecclestone’s situation. Those are the risks for investors. On the upside, there is the potential of an expanded World Championship, with higher revenues, although these will inevitably be the source of discontent in the ranks of the teams, which believe that they should be getting a much higher share of the revenues. There is a also a significant debt load.

Formula One has appointed Goldman Sachs and UBS as its joint global co-ordinators for the IPO. Goldman has been advising CVC for some time and UBS is an F1 sponsor. There are four additional joint bookrunners: Morgan Stanley, Banco Santander, Singapore’s DBS Group and and Malaysia’s CIMB. They will now work to find syndicates and underwriters who will place the shares with investors. The next step will be road shows and discussions about the best offering price and the timetable for the flotation. The idea of using multiple bookrunners is to try to improve the offer price.

The disadvantages of an IPO for Formula One include requirements to disclose financial and business information which has never been a Formula One strongpoint, even before a flotation can be achieved. There is a risk that the required funding will not be raised, as happened before when a previous attempt was made to float.

A listing in Asia is clearly an attempt to cash in on the region’s interest in international sporting brands.

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Expanding…

There was no time to discuss the Concorde Agreement in Bahrain, as everyone had other more pressing matters on their minds, but I am hearing that Bernie Ecclestone is planning to try to negotiate an increase in the number of races on the calendar in the next agreement.

At the moment there are a number of restrictions placed on the Commercial Rights Holder (CRH) when it comes to the events. He cannot, for example, reduce the winter break unless they are more races (ie earning opportunities) for the teams. Thus he can have up to 20 races, but must still allow for a 12 week break. He must also allow for a three week break in August.

At the moment the maximum number of races allowed is 20, but the CRH must include six events from a list of 12 countries. The list of these protected entities is believed to include Abu Dhabi/Bahrain, Australia, Belgium, Brazil, Germany, Hungary, Italy, Japan, Monaco, Singapore, Spain and the United Kingdom.

In addition team consent is required if there are more than 17 races and at least half the races must be held in Europe and the United States.

From what I am hearing the plan is to increase the basic number of races to 20 and allow for another possible four. This will mean higher travel costs for the teams but more paydays. The costs can be reduced somewhat with the intelligent twinning of race meetings. This year there are a series of back-to-back races so that transportation costs are minimised.

Teams have been opposed to having more than 20 races because they believe it will require two separate race teams in order to relieve the pressure on their staff. NASCAR uses such a system because it has 36 championship races and five non-championship events. The scale of the travel in NASCAR is, however, far less than is necessary in F1 and most teams have their own planes in order to ease the hassle involved. While this may be possible for the biggest teams, it will mean that the smaller teams will be more stretched as they will have to do the whole calendar without staff alternation.

There is little doubt that F1 could probably find 24 promoters willing to pay the fees involved and that would mean additional fee revenues of $160 million or more. With new technology available the need for a travelling TV circus will probably reduce, but an increase in the number of races would result in fewer media organisations being able to justify the travel. The number of publications that have a representative at each race seems to be reducing in recent years.

The increase in the number of races would also mean an increase in the cost of TV rights, and thus bigger profits for the CRH.

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Reactions

The Lotus F1 Team has issued the following statement.

“Earlier today, the Bahrain International Circuit (BIC) issued a press release attributing quotes to our team showing support for the Bahrain GP. These quotes were part of a full internal and confidential working document, that was also sent on a confidential basis to all F1 team managers last week. Lotus F1 Team is one of 12 contestants of the Formula 1 World Championship and we would never try to substitute ourselves for the Fédération Internationale de l’Automobile (FIA), which is the only party entitled to determine if a Grand Prix should go ahead or not, and we endorse the FOTA statement that was issued earlier to this effect.”

FOTA previously said that, despite attempts to suggest that the decision was up to the teams, that “teams are unable to cancel Grands Prix. We race in an international series called the FIA Formula 1 World Championship, and it is therefore for the FIA to offer the teams guidance on these issues.”

The FIA is saying nothing, which does not add to its credibility, at a time when leadership is needed.

A decision will be made by the weekend.

It looks like people repositioning deck chairs on the Titanic.

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Bahrain International Circuit counter-attacks

The Bahrain International Circuit has responded to “media speculation” about the race with a statement which quotes “a number of neutral interested parties” including two representatives of the Lotus F1 Team, who visited Bahrain recently to investigate the security situation and sent a report to all Formula 1 team principals on 5 April 2012. The Lotus report said: “Yes there is a need to keep the circuit and the teams secure and they are doing this and they feel very comfortable about the arrangements. If there is going to be protestation then it will be confined to peaceful protests – you will maybe see some banners being waved and maybe some tyres on fire but that is all that they expect. We came away from Bahrain feeling a lot more confident that everything is in hand and to be honest if it wasn’t for a few more police you wouldn’t know any difference from the last year we were there.”

The two representatives were not named.

The statement quoted Britain’s Ambassador to Bahrain, Iain Lindsay on March 27, saying that: “The British government is pleased to see the progress the Bahraini authorities have made in implementing the recommendations of the landmark BICI, chaired by Prof Cherif Bassiouni. I firmly believe that the (F1) event can act as a way of bringing communities together… there are some who favour direct action on the streets. I believe they are wrong, and have little doubt that they represent a small minority of their own community and an even smaller minority of the Bahraini population. Incidents have been been mainly confined to particular districts, away from the city centre and areas frequented by visitors. I have little doubt that the Bahraini authorities will do everything they can to ensure that the Grand Prix goes off smoothly.”

It said that the UK maintains its “no travel restrictions” security status on Bahrain.

It quotes Ben Wallace MP, chair of the UK All Party Parliamentary Group on Iran. “Bahrain has made massive steps towards reform in the last year. Many observers have been encouraged by the independent commission of enquiry into events last year and so far 15 out of the 24 reforms recommended have been implemented. As chair of the UK parliament’s all party group on Iran I have been at the forefront of pressurising Bahrain to do more for its Shia population and have met a number of the opposition groups in the past months. If I thought it would help I would be the first to call for the cancellation. I believe however that as things stand, by allowing the Bahrain Grand Prix to go ahead it can play a part in healing the country.”

It also quoted a remark made in February by Professor Mahmoud Cherif Bassiouni, Chairman of the Bahrain Independent Commission of Inquiry, saying that “the Grand Prix is a significant national event, which is of great interest to a substantial percentage of the population and all of its communities. It is, therefore, an event of deserved national pride. Aside from the economic, publicity and public relations advantages that the grand prix brings to Bahrain it is, on the one year anniversary of the February/March events of last year, an important point of departure for the people of Bahrain to forge ahead in their national efforts towards reconciliation.”

It also quoted John Yates, a former assistant commissioner in the London Metropolitan Police Service, who is a paid adviser to Bahrain’s Interior Ministry on policing (and thus hardly neutral), saying in an interview this week that the authorities are aiming to provide adequate security that keeps F1 personnel and fans safe without showing overt force that impinges the event. He said: “It is very much hoped that the policing will be low key and discreet. But if there are problems, they … must be able to escalate their response if need be. People can be assured that if problems arise, then there will be a plan to deal with that, as there would be with any public event in the world. It’s a really important event for this country. There is nothing that in any way warrants for the race to be postponed.”

The statement did not quote Damon Hill, who did go to Bahrain and has since changed his mind about it being a good idea.

Zayed Al Zayani, the chairman of the Bahrain International Circuit, continued to be on the offensive, railing against “armchair observers – who have not been sufficiently interested or committed to investigate the situation for themselves”.

I guess that I am one of them.

“We have welcomed a number of people to Bahrain over the last few weeks, who have all been able to find out for themselves that the kingdom is ready to host Formula 1 next month,” he said. “I therefore urge all stakeholders in the sport to listen to those with an informed, educated view of the situation and to form their views on the facts of the situation, as presented by neutral first-hand observers.”

One assumes from this statement that the Al-Zayani believes that F1 can hold a race without any fear of any kind of danger for anyone during the visit. This is a very brave stance to take as he will be the first person to take the blame if it all goes horribly wrong for the F1 visitors in Bahrain. On the other hand he will probably also have to take the blame if the race does not happen, so in a political sense he has very little choice but to be positive.

The problem is not an easy one. There is, of course, a chance that the race could go ahead untroubled. The Bahrainis who want the race to happen (for whatever reasons) say that there is no risk. Perhaps some even believe it. Others think it is a rather larger risk. I have been to Bahrain and I have seen first hand rioting that the F1 race caused five or six years ago. It was happening outside my hotel. The problem is not new. It was there then and it is clearly worse now. The question is how much worse. The Internet is filled with messages from people on the ground. Not all of them are Iranian secret agents. The reporters who cover the sport are not working for Teheran. People are not making this stuff up.

We will go to Bahrain if the people responsible for such decisions say that we are safe to go. If people get hurt then it will be the responsibility of those who make these decisions. If there is trouble they will no doubt try to say that it was not their fault, but that will not be true. They will all have to resign, because they will all have been shown to have had flawed judgement.

But that is not the point. At least not yet. It is a question of risk and of image. The fact that there is even discussion – informed or otherwise – should start alarm bells ringing throughout the sport. Lest we forget that is what F1 is. It is a sport. It is a meaningless competition between young men driving very fast racing machines. It is not a political tool used to try to unif1y a country that clearly has a lot of people who have no desire to be unif1ed with the current regime. It is not a miracle cure.

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Damon rethinks Bahrain

Damon Hill says that Formula One should reconsider holding the Bahrain Grand Prix. The 1996 World Champion says that he has serious doubts about the wisdom of holding a grand prix in a country where tensions are high. Hill had previously voiced support for an event, after a visit to Bahrain last autumn with FIA president Jean Todt.

“Things are different now,” Hill told The Guardian. “The protests have not abated and may even have become more determined and calculated. It is a worrying state of affairs. What we must put above all else is what will be the penalty in terms of human cost if the race goes ahead. It would be a bad state of affairs, and bad for Formula One, to be seen to be enforcing martial law in order to hold the race. That is not what this sport should be about. Looking at it today you’d have to say that could be creating more problems than it’s solving.

“The view I gave after returning from the visit last year was based on my understanding of several factors; the substantial economic significance of the GP for Bahrain; that the report on the April riots condemned the actions of the police and security forces, and that both sides were to take part in meaningful dialogue to resolve the problems peacefully. Under those conditions one could imagine the GP being a great fillip for a Bahrain on the road to recovery. However, with under three weeks to go, conditions do not seem to have improved, judging by the reports in our European newspapers, social media and on Al Jazeera TV.

“The recent meeting to garner support for the race as a uniting event was troubling insofar as it tried to represent the rioting in Bahrain as the result of bad press reporting and as a ‘youth’ issue. Promoting the race as ’Uniting Bahrain’, whilst a laudable ambition, might be elevating F1 beyond even its own prodigious powers.

“I’m just saying we have to tread carefully. I hope the FIA are considering the implications of this fully and that events in Bahrain are not seen as they are often sold, as a bunch of yobs throwing Molotov cocktails, because that’s a gross simplification. If they believe that, they ought be more wary. You don’t get 100,000 people risking their lives in protest for nothing.”

Hill said he was not calling for the cancellation of the race, only for the governing body to reconsider whether it was in the best interests of the country and the sport.

“If we go, we all go,” he added. “But there is obviously still a great deal of pain, anger and tension in Bahrain. It would be better for F1 to make it clear that it properly understands this, and that it wants only the best for all Bahrain, or whatever country it visits. I think F1 is sailing very close to this limit.

“But there is an even more troubling thought, which is this: is F1 playing brinkmanship for purely financial reasons, while people are putting their lives in peril to protest against this event?”

A fair question.

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Different versions of the truth

If you listen to Bernie Ecclestone or the people who attended the Bahrain Grand Prix media lunch in London last week there is no serious trouble in Bahrain. It is all the fault of the media and the violence that is reported on a regular basis is just a bit of local hooliganism. The message was that Bahrain is safe and that all is well.

John Timoney, the former US police chief hired to consult with Bahrain’s police force, tells a rather different story, in an article published by Al-Jazeera, the Qatari news agency. He justified the increased use of tear gas in Bahrain by citing the increasing problems facing the police.

“There’s a complaint that there’s excessive tear gas,” Timoney said. “What I’ve observed is a huge increase in the number of Molotov cocktails being thrown at police officers, night after night.”

A huge increase in the number of Molotov cocktails being thrown at police… Night after night.

That was not mentioned in London.

The continual use of tear gas to quell protests was investigated in some depth by Al-Jazeera. There have been reports since before the first anniversary of the troubles in Bahrain in February that the authorities have been keeping down protest by hemming people into their villages, using tear gas. Human rights groups say that at least 25 Bahrainis have been killed by excessive tear gas inhalation, 18 of them since the damning report on the country was published at the end of last year.

“Many villages in Bahrain are now sprayed with the gas several times per week,” Al-Jazeera reported. “At times it seems much of the country is affected: On a recent evening, Budaiya highway, the main east-west thoroughfare outside Manama, was blanketed with gas from clashes in several villages which sit along the road.”

The article also reported on claims that the police are shooting tear gas canisters into houses because the authorities want to create a problem between the protesters and the people who are not actively protesting.

At the same time the TradeArabia news service is reporting that the Bahrain Chamber of Commerce and Industry is asking for investigation into attacks on businesses, which would suggest that the opposition has adopted a more subtle form of protest.

“Businesses in Bahrain have suffered major losses in the last few months and the present spate of demonstrations; sit-ins, legal and illegal rallies and acts of sabotage and vandalism have had serious consequences and continue to have a detrimental effect,” the organisation said. “This has got to stop. This could have catastrophic effects on Bahrain’s economy, which is already reeling. Whether it is assaults on security men, streets being closed or even businesses being targeted purely on sectarian grounds, no civil society can tolerate this. We have to work together to ensure this ends as soon as possible to help get confidence back in business and the country’s economy.”

Judging by these reports, from reputable sources, what was said at the media lunch in London was a load of old hogwash and suggests that the protesters are a lot more canny than the Bahrain government would have us believe. This means that F1 will need to be on the lookout for rather more imaginative forms of anti-government behaviour if the Grand Prix circus does go to Bahrain in three weeks time.

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Stories

Dear God, does there have to be a conspiracy theory about everything? I have seen suggestions today that Sauber deliberately DIDN’T win in Malaysia. To my mind, that is absurd. A young driver drove his heart out and made a mistake when he pushed too hard. The team not only wanted to win, but it needed to win as well as its budget needs topping up this year and the fastest way to get money in F1 is to win. The suggestion that an ambitious driver like Sergio Perez would give away his first chance of a win is a horrible thing to suggest, and I cannot see any evidence to support such a claim. It is also pretty insulting for the team, which is one of the most honest of all in the sport.

Media sensationalism of this kind is such that reputations mean nothing, which I think is a great shame.

There is also a very silly attempt going on to turn the recent Force India/Aerolab decision into something it is not. If you read the pages of pages of well-reasoned and sensible argument from the judgement there really is no reason to argue with his decision. I have yet to meet an F1 journalist who was smarter than a High Court judge, although I have met one or two who are deluded enough to think that they are. If Force India appeal the decision, good luck to them, but I fear that all that will come out of it are more legal bills.

In both cases I cannot see any evidence that there is a real story to be told. Still, one might argue that it will attract readers…

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Bahrain and Formula 1

So a bunch of Formula 1 people have got together at a function in London and have said that Bahrain is a fine place to go; that there are no real problems there and that the media is to blame for the current situation. They say that protests are just being caused by a few dozen disgruntled individuals and that one can be mugged or knifed in cities all over the world and that Bahrain is no different to many other places.

Wonderful. It is just a shame that the final doubts about the place were not swept away with invitations to the event for Amnesty International and Human Rights Watch, the two major human rights organisations in the world. If they had come to the party and said that all was well, then no-one would have any worries.

But since when was Bernie Ecclestone an expert in human rights? He knows how to make billions, and good for him, but I am not sure he is the right person to pass judgement on the political unrest inside Bahrain. Are we to believe that the tens of thousands who turned out on the streets a year ago complaining about the regime are now satisfied with the government of the country, particularly when they know from an independent report the things that the authorities did to people who opposed them?

I should add that I have no doubt that the race IS designed to bring hope to the country and that there ARE moves being made to make progress towards getting Bahrain back on the right track, but this does not mean that the opposition will just sit there and do nothing; nor that the authorities will not use excessive force to deal with anyone daring to disrupt the event. I stand by my belief that by going to Bahrain at this time F1 is putting its head into a noose and hoping for the best. It is also politicising the sport when it does not need to do so. And it is a huge risk because protest can come in many different forms. It does not have to be pitched battles on the streets. Protest can be blocking access roads to the venue, having a sit-down protest on the grid, or following the example of Fidel Castro back in the 1950s when his men kidnapped the World Champion Juan Manuel Fangio and held him prisoner until the race weekend was over.

I fervently hope that there will be no trouble because the sport does not need such bad publicity, but at the same time I do not think it is right for F1 to swan around giving the impression that all is well, if just up the road there are people trading tear gas, Molotov cocktails and bullets on account of the F1 circus being there.

Those who have the power (and the responsibility) to take decisions about the sport, have made their choices. They must now accept the consequences of those choices. The Formula One group decides on the calendar, and the FIA decides on what is good for the sport. If they get it wrong then the people responsible for those decisions must be held accountable.

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CVC to saddle F1 with new debt

There are reports that the Formula One group is to pay its owner CVC Capital Partners a dividend of around $1 billion in cash, as part of a loan refinancing. This is no surprise as CVC Capital Partners has been looking for ways to release some of the value in the F1 business at a time when there are uncertainties about the future of the sport, in terms of the financial model, the succession planning and the willingness of the teams to accept continued exploitation of the business by financiers. The teams have failed to stick together and have only themselves to blame for having allowed themselves to be divided and conquered. As long as the Formula One group and Ferrari work together this is unlikely to change.

The refinancing plan includes not only a tranche of profit for CVC, but also a maturity extension of the loans, which were due to mature in 2013. It is believed that a sizeable chunk of the debts have already been paid, hence a new loan is not easing the burden for the sport, but rather extending it. This has now been pushed out to 2017, which is believed to coincide with the end of the latest Concorde Agreement, which is currently being cobbled together by Formula One.

The intention is to offer investors a guaranteed return of five percent over the London Interbank Offered Rate (LIBOR) of interest. This will make the sport a cash cow for financiers for another five years, while at the same time as leaving CVC in a position to float or sell the business as and when the current problems are sorted out and the business has more value. That is likely to be two to three years at least.

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Sergio Perez stakes his claim

The one outcome of the Malaysian Grand Prix which is sure to be creating much chatter on the Web today is the performance of Sergio Perez, and at the same time the under-performance of Felipe Massa. Fernando Alonso won the race with his Ferrari, but Massa could do no better than 15th, a shocking 97 seconds behind after 56 laps. Massa launched into this season hoping that he could put his recent troubles behind him, but thus far he has fared badly. The problem is the same. Felipe cannot make the Pirelli tyres work. Ferrari engineers will tell you that his speeds in corners and so on are just as ever they were and that they on a par with Alonso, but Fernando can make the tyres work for him – and Felipe cannot. In some cases it is clear that the car is not good (notably the Mercedes) as neither driver can make the tyres work on that chassis. In other cases the tyres work at certain temperatures and not at others (notably on the McLarens) and in the case of Ferrari, the driving style of the drivers seems to have a completely different effect on the rubber. It is tough for engineers to figure this stuff out because of the different variables involved, but this is what they have to do – and they will get better at t, but it seems that Pirelli’s work to create better racing has achieved exactly what was intended. And that has got to be good for the sport.

But it is not good for drivers who cannot use the tyres, and do not understand how to change their driving styles to get the rubber working. Sergio Perez clearly knows how to do it and one can see Ferrari looking at the situation and surmising that it is illogical for them to go on with Massa if they could swap him for Perez. The chances are that Massa’s style might work with the Sauber and so maybe he would be better off as well. It is hard to know for sure. Perez is a Ferrari junior driver and he has now made his mark. If Ferrari decide that he is a good recruit for the future, it is illogical to wait to make a switch. Sauber has little choice but to accept a deal, although I doubt Ferrari would force the situation. In nay case, it will be worth watching what happens in the months ahead.

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