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CVC Capital Partners, the private equity firm that controls the Formula One group, has enjoyed considerable rewards from the investment in the course of the last eight years but, at the same time, it has had a great deal of negative publicity as a result of the relationship, something which the besuited wunderkinds are not used to dealing with. They prefer to stay in the shadows while they are stripping the assets out of solid companies, not least because the world’s financiers have something of a reputation for being greedy. The source of the discomfort with Formula One has been because the boss of the Formula One group Bernie Ecclestone spent a good part of the year having to ferry backwards and forwards to Germany to go to court to answer charges of bribery. In the end he chose to pay $100 million to avoid a judgement, which was perhaps not the best way to convince the world that he was innocent – even if he was. It seems that the risk has now passed and the money men have (finally) reappointed Ecclestone to the board of directors of the Formula One group and announced that he will continue as the CEO. This appears to be because they cannot find anyone willing to come in as chairman and tell him Bernie what to do. It is an odd state of affairs that a private equity firm is putting its faith in an 84-year-old with no apparent succession plan, but presumably they are hoping that he will live to be 100 and that this will enable them to continue to award themselves vast dividends from the sport for years to come.

If Ecclestone drops dead next week they will look rather silly. However they will probably have done their homework and discovered that while the average life expectancy in England is 78.9 years for men, according to the Office for National Statistics there are some remarkable statistical quirks in the numbers as old men in the Royal Borough of Kensington and Chelsea tend to live to 93, apparently because they have vast sums of money (you cannot live there without it) and can afford the best doctors. Whether this will convince the stock markets that the Formula One group is worth a flutter remains to be seen, particularly as the European Commission is already sniffing around the business, having heard someone whisper the word “cartel”.

Peter Brabeck-Letmathe, the chairman of Nestlé, will continue to serve as chairman, although he has not been well in recent months, while there are two new non-executive directors: Luca Montezemolo, formerly the chairman of Ferrari, and Paul Walsh, the ex-CEO of Diageo. Montezemolo has enjoyed a very close relationship with Ecclestone over many years, and was previously a non-executive director as a representative of Ferrari, now he is independent.

It seems that CVC has decided that there is no point trying to throw out Ecclestone and has now capitulated completely.

Whether this will help the sport remains to be seen. Ecclestone does what he does very well but he was quoted recently as saying that the sport’s target market is 70-year-old Rolex buyers (he later said he was misquoted). The odd thing is that everyone believed that it is something that he would have said. The bad news is that the sport has revenues of $1.6 billion but cannot keep more than nine teams alive and three of them are not very healthy.

A few details

As the blood-letting at Ferrari continues with the announcement that the Scuderia is to part company with former Bridgestone engineer Hirohide Hamashima, who had been responsible for the team’s tyre performance analysis, the word from Germany is that former Ferrari team principal Stefano Domenicali has finally got a title that explains what he is doing at Audi AG. His official title is Vice President New Business Initiatives. It is not entirely clear to whom he is reporting but it would be logical to assume that new business would come under the marketing and sales umbrella and it is no surprise to see that Audi’s board member for this is an Italian, a former Fiat high flyer called Luca de Meo, who worked with Fiat between 2002 and 2009. He then joined Volkswagen as head of marketing for for VW passenger cars before joining Audi in September 2012.

It is worth noting that the board member responsible for motorsport at Audi AG is Dr Ulrich Hackenberg, the board member for Technical Development. It is possible that Domenicali might be (or perhaps might have been) assessing an F1 project for Hackenberg, but it seems that his future may be elsewhere in the business.

Wanted: Chairman

It seems that former Diageo boss Paul Walsh has decided that he does not want to be the chairman of the Formula One group. This will inevitably be seen as a victory for Bernie Ecclestone, who wants the job to go to his longtime legal advisor Sacha Woodward Hill. It is a blow for the company owner, CVC Capital Partners, which is trying to find someone to take over from Nestlé chairman Peter Brabeck-Letmathe, who is standing down.

What is clear is that in these difficult times, the sport needs a chairman with energy and vision, rather than a safe pair of hands. There is much that could be done to solve the sport’s complex problems and drive revenues forward, by means other than simply squeezing more money from existing customers and trying to add more and more races. Ecclestone is a master at doing the kind of deals that he does, but there are other areas of the business that are underdeveloped. It seems that CVC does not have the gumption (or perhaps the ability) to move Ecclestone aside, more than it already has, despite the fact that he has even admitted that he cannot fix the problems. One wonders if anyone can without breaking the current system completely.

The FIA has removed itself from any right to a voice (and any real relevance beyond safety and policing) by accepting money in exchange for concessions in terms of governance. In essence, therefore, one can view the business as something of a runaway train in search of a Casey Jones.

Ecclestone is trying to fix the problems with proposals to return to how things used to be, but this is unlikely to work either way. Going back to find a future is never a good policy and getting an agreement on the idea will be tough.

The agreements in place limit Ecclestone’s power but he is obviously keen to have a chairman who will not make his life any more difficult than it is. The fact that it is proving difficult to find a suitable candidate willing to do the job is in itself worrying, although it is understandable that no-one wants to go into a job that will inevitably put them into conflict with the man who built the business and clearly has no desire to stop and on the surface at least seems to be healthy.

CVC also seems to be having trouble finding a buyer (at the right price) but it also knows that any stock exchange is going to be wary of a company led by a man with Ecclestone’s record, his distaste for the transparency and the lack of a clear succession plan. In any case, The IPO is not likely to get off the ground with the European Commission sniffing around the business.

This means that CVC is stuck unless it is willing to make some hard choices, which currently does not seem to be the case.

It is hard to imagine that CVC will find much sympathy within the F1 business as its activities, stacking the business with debt and not taking decisive action mean that the teams see it as taking more than it deserves but yet having no real teeth.

More changes at Ferrari

Ferrari has announced a new management structure with one or two faces missing. James Allison has been confirmed as Technical Director with Chief Designer Simone Resta and Power Unit Director Mattia Binotto supporting him. The latter will have Lorenzo Sassi as his Chief Designer Power Unit. Allison will also oversee the track engineering for the moment as the team has confirmed a split with Pat Fry. Massimo Rivola remains as the team manager with the Ferrari Driver Academy still being managed by Luca Baldisserri. The team is to create a Commercial Department with the current head of communications Renato Bisignani becoming the manager of Marketing and Acquisitions while the media will in future be looked after by Alberto Antonini, a longtime F1 journalist.

The former chief designer Nikolas Tombazis will leave the team.

Ferrari is a team in a considerable state of flux at the moment. The team principal for the last eight years, Stefano Domenicali, resigned in April after a poor start to the season for the team. This seems to have been caused (at least in part) by remarks made by Ferrari chairman Luca Montezemolo about the need to change the rules. As a replacement Ferrari picked ace salesman Marco Mattiacci, the former CEO of Ferrari North America. According to Montezemolo, the decision was made in full agreement with Ferrari parent Fiat’s CEO Sergio Marchionne, although it was a very odd decision as Mattiacci knew almost nothing about running racing teams. Mattiacci did not have much time but seemed to be doing a fairly decent job, hiring new staff, turning to Sebastian Vettel rather than trying to go on working with Fernando Alonso, who seems to have had some fairly extreme demands. This did not happen until Montezemolo was shovelled out of the way by Fiat boss Sergio Marchionne in September. But then, a few days after the end of the season, Mattiacci was blown out as well and tobacco executive Maurizio Arrivebene was put in charge. This was as odd an appointment as that of Mattiacci. Arrivabene may have been the paymaster for the F1 team for many years, but he had no experience running any racing teams and is not known for his easy character. He was an odd choice for what is a very public role. There was, inevitably, much speculation about why one would appoint a character such as Arrivabene but Marchionne explained it to the Ferrari staff in a letter, saying that “Maurizio brings a unique set of experiences with him. In addition to his long-standing relationship with our team, he has also served on the F1 Commission and is already keenly aware of the challenges we face. He has a thorough understanding of the governance mechanisms and requirements of the sport, the level of competition and the challenges of the circuit. He has also been a constant source of innovative ideas for the revitalisation of F1.”

Be that as it may, one of the strengths of a good leader is to understand what the workforce is doing.

One thing is clear, Ferrari is not short of money. The company revealed a record turnover of $3.15 billion for 2013, with a pre-tax profit of $338.5 million and $1.87 billion in the bank. The firm is unique in that it never advertises its cars in any conventional sense but relies entirely on motorsport to spread the word and excite demand about the latest products. It is difficult to separate the F1 budget from the company results but its F1 operations including engines are reckoned to cost around $440 million (which is about the same level of spending as Mercedes). The company is committed to increasing its R&D spend each year until 2020 at which point it will be spending around $560 million per annum. Much of this is aimed at reducing emissions and thus F1 can be helpful.

Ferrari is the only F1 team that earns serious revenues from its merchandising operations, although the money earned directly from F1 merchandise is also hidden away in the earnings of the Ferrari Stores around the world. It is worth noting that its retail operations, including licensing and e-commerce, have been growing fast and are worth around $62 million a year.

In the past Ferrari used to sell the whole car to Philip Morris and the tobacco firm would then sell the space to others and recoup its investment. That may still happen to some extent as Philip Morris International (PMI) was reported to have agreed a three year deal to cover 2013, 2014 and 2015 at $160 million a year. Some of the other sponsorships may still go to PMI but there is no doubt that Ferrari still gains sizeable revenues from Shell, Santander, WeiChai Power, UPS, Kaspersky Lab and other smaller sponsors. The news that America
Móvil is to join the party with its Telmex, Telcel and Claro brands will add to the pot. Inevitably such a deal will lead to claims that Ferrari has accepted Esteban Gutiérrez as a pay-driver, but in reality the company is not short of cash. In addition to the sponsorships (which are worth between $160 million and $200 million), the team has an advantageous relationship with the Formula One group that brings a minimum of $120 million before any money is paid from the F1 prize fund. The prize money adds another $80-odd million so with special payments and sponsorships the total revenues – without any Ferrari input – is in the region of $350 – $400 million, without including the revenues that comes from customer teams. Although PMI is no longer allowed to have tobacco branding on the cars, it is allowed to enjoy residual benefits from its former deals, which date back to 1997, although the Marlboro logo itself has not been seen since 2007. It can however use the Ferrari logo on its cigarettes and at points of sale and can use the sport for corporate hospitality purposes.

Ferrari is about to go to the stock market and so it does not want an expensive F1 programme dragging down the books, which remain strong. The July to September operating profit of the company was $110 million but these were affected by $17 million which was set aside as part of Montezemolo’s severance package. Fiat said recently that Montezemolo would receive a lump-sum payment $17 million in January in return for agreeing not to compete against Fiat until March 2017 and another $17.5 million payable over the next 20 years. From January to September Ferrari’s profit was reported as being $340 million, so by year’s end this will probably be over $500 million.

Scuderia Toro Rosso has announced the arrival of Graham Watson as the replacement for Steve Nielsen, who has moved to Williams. Watson will have the title team manager and joins the Italian team from Caterham. He has been working in motorsport since 1989 when he joined the Ford World Rally Team as a mechanic. He stayed in rallying until 1994 when he moved to Paul Stewart Racing in Formula 3000 before moving on up the ladder to join the Benetton F1 Team in 1996. That led to a switch to BAR Honda in 2001 and when it became Honda F1 in 2004 he was appointed Engineering Liaison Manager. After Honda dumped the team in 2009 the new Brawn F1 had to make cutbacks and Watson departed to work briefly in the World Touring Car Championship with RML’s Chevrolet team. By the end of 2010, however, he was back in F1 with the Lotus (soon to be Caterham) team as team manager and he has been there ever since. The demise of Caterham in recent months means that he will now head to Italy for a new chapter in a long career in F1.

Political games

The upcoming F1 Strategy Group – illegal though perhaps it may one day be ruled – is currently the decision-making body of Formula 1. It consists of six teams and representatives from the FIA and from the Formula One group. Despite a rather poor attempt by some of the team principals to argue that this is a forum for discussion, it makes the key decisions. These are then sent on to the Formula 1 Commission which only has the right to accept or reject those decisions. Of course, if you want to know the membership of the Formula 1 Commission, there is no point in asking the FIA. The only rule that I can find says that “the Commission shall be constituted in
accordance with the Concorde Agreement (or any similar document which may replace it)”, which means that it is confidential. Nothing like a sport with transparent rules…

Traditionally, the F1 Commission has consisted on a member from the FOM, one from the FIA, a member from each competing team, six race promoters (three from Europe and three outside Europe) appointed by FOM, two circuit representatives (one from Europe and one from outside) appointed by the teams, plus representatives from Pirelli, the engine manufacturers and two sponsors (from different market sectors). This means that it has a membership of around 24 people (depending on the number of teams). However, it is not one vote per representative, as there are always 12 team votes – even if there are only nine teams. If the teams vote 5-4, the majority is able to add the additional three votes and so eight votes count one way and only four the other way. In other words if the top five teams stick together the smaller teams have virtually no voice at all. It does not take a rocket scientist to work out that the Formula One Group has a pretty dominant position in this set up as no race promoter wants to upset the people who decide who gets a race. The FIA has almost no power in this body.

The next step of the process is that a proposal then goes to the FIA World Motor Sport Council and is either accepted or rejected. One can see that this gives the FIA power to block things. The World Council tends to do what the FIA President wants because the members do not wish to lose the privileges that come with the position and it is very clear that Jean Todt does not like criticism, let alone opposition.

So if the Formula 1 Strategy Group meets and votes on Ecclestone’s idea of bringing back old engines, what will happen? Mercedes will, logically, oppose it. And if you are a Mercedes customer it would be best to vote with them. Thus Mercedes should have three team votes (its own, Williams and either Lotus or Force India, depending on who is included). The Formula One group has six votes and the FIA has six votes so if Jean Todt agreed to cancel the FIA’s new engine regulations then the teams and manufacturers would have to follow suit. Ferrari and Red Bull might follow Ecclestone because they are losing, but McLaren is in a new relationship with Honda and voting to cancel the new engines makes no sense at all. Thus the vote could be eight in favour and 10 against. The proposal would get no further. Any other outcome would likely result in at least one manufacturer walking away from the sport and the ensuing chaos that would come from that.

The view of the commercial people is that a dominant Mercedes is not good for the sport (although we didn’t hear a peep when Ferrari won in a string of titles in a row a few years back). The people who believe in sport say that if Mercedes has done a better job than the others, its rivals do not deserve a leg-up for their lack of similar competence.

The option exists for Mercedes to agree to supply its hybrid systems as standard to all the teams, in much the same way as McLaren now provides the electronic control units. However, the FIA is unlikely to be keen on that idea and could (if the testicular mass exists) block it at World Council level, if the others tried to force it through. If the federation were to back down on this, its relevance in the sport would be virtually gone as its clever engine regulations would have been thrown out and replaced by a right old botch-job.

If the FIA had not sold its right to make unilateral decisions – a disgraceful move in my opinion – then the federation could simply dictate that engine manufacturers be only allowed to supply engines at a fixed cost and thus the small teams would be able to survive. The sport would still be seen as cutting edge and everyone would be better off.

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