Formula One’s financial performance

I used to read and analyse the company returns in Formula 1 a great deal until one day it was explained to me by a friend who works as a corporate accountant in a high-faluting business that I was really wasting my time because a company’s financial returns really only tell you what the accountants want you to know and thus prognosticating at length on the whys and wherefores of the business is not a great idea as one does not know the real story. All you can get is a basic picture.

CVC Capital Partners has recently filed the 2008 accounts for its Delta 3 (UK) Ltd subsidiary, the parent company of the Formula One group, and these underline what my friend was saying. On paper the bottom line is that the company lost $518m. This is what was reported. That does not look great. However when one looks closer you see that there were some good signs. Revenues were up $120m to $1.06bn, an increase of 13%. Given that race promoters all have contracts that include an annual 10% hike in price this is not surprising. The 18 races in 2008 generated an average income of $47.9m, which was a slight improvement over 2007 due to the fact that new race promoters in Singapore and Valencia are paying higher fees and because of new TV rights deals.

So what happened to all that lovely money? Spending a billion and then losing an additional $518m means that the company actually ate through $1.5bn. So where did it go?

Well, the company’s costs were up to $30m in salaries, which is quite a lot for 250 people, but not surprising given that a few of them are fairly high earners. The company had to write off $22m as a result of the termination of its agreement with the promoter of the Canadian GP, which was a painful experience. Delta 3 remains heavily in debt as a result of the $2.45bn loan which was taken out in December 2006 so that those involved could get a quick return on their investment. Since then the F1 circus has been paying for that. The full amount of the loan must be cleared by the end of June 2014 and in the course of last year Delta 3 paid $624m towards clearing the debt. This means that at the end of last year it was down to $1.8bn and three more years at similar rates of repayment will have it sorted out by the end of 2011, three years ahead of schedule. The aim then is for CVC to strike a new deal with the teams and once that is sorted and a new Concorde Agreement is in place for 2013 and beyond, it is likely that a new loan will be taken out and the folk at CVC will be able to afford a few more cases of Krug, polo ponies, hair transplants and so on. They will then go into another aggressive repayment phase and clear as much debt as possible before attempting to sell the company in 2014 or 2015, thus cashing in for a third time. This is all dependent on being able to negotiate a decent deal with the teams, which currently get 50% of the money. They have already made it clear that they want a higher percentage from 2013 onwards and if they do not get it they will start their own championship. The value of the team’s union FOTA can thus be seen very clearly. If the teams stick together then they are in a far better negotiating position. Similarly it is in the interest of CVC that FOTA fall apart so that the teams are weaker.

The debt repayments were deemed by the directors of Delta 3 to be “satisfactory”.

The company was due to pay out $521m to the teams, an increase of $179m over 2007, but not all of this money was paid out because of the then ongoing discussions about a new Concorde Agreement. It still ate up another big chunk of the money.

Delta 3 also booked a “payment in kind” of $573m to its parent company Alpha D1 Sarl. This is where things start to get rather fuzzy. Apparently in 2006 Alpha D1 Sarl issued $2.8bn of loan notes to its immediate parent Delta 2 (Lux) Sarl (see what I mean) and interest on these loan notes – at a stonking 15% – means that there is $1bn that needs to be paid by Delta 3 to one or more of the plethora of Alpha, Beta, Gamma, Delta or Epsilon companies in the group.

The good news is that we have not yet got into Zetas, Etas and Thetas.

It says in the small print that Delta 3’s “immediate parent company is Alpha D1 Sarl which is incorporated in Luxembourg and for which financial statements are not publicly available” and adds that “Alpha D1 Sarl is owned by wholly owned subsidiaries of Delta Topco Ltd, a company incorporated in the Channel Islands and for which financial statements are not publicly available”.

As I said, trying to analyse it all when we do not have the full facts is a dangerous business.

13 thoughts on “Formula One’s financial performance

  1. Fascinating but confusing.

    Was the initial £2.45bn loan for the purchase of F1? Or had F1 already been purchased for cash (so to speak) and was just being used as collateral to obtain this massive loan?

    I am no accountant and this is probably another extremely naive question but here goes: After they pay the loan off why would they take another one? They would have a regular and substantial income from F1 anyway. Do they need another short term gain?

    Wouldn’t it be better to treat F1 as a long term investment, negotiating a decent deal for all concerned so everyone is happy? (If the teams walked away, they would have nothng to sell in any term, short or long). Then they could just sit back with a stable (or even flourishing) sport and watch the profits roll in for years to come. After all, there is only so much Krug one can buy in the short term!

    Also I am very curious to know what was this ‘payment in kind’ to Alpha D1 sarl. £573m is a lot of ‘kind’ and that word implies it wasn’t hard cash. Did they give them Bernie perhaps?

  2. I think what really interests us is the revenue generated by the races held rather than the rather self determined spending of the group (we all know why Bernie wants this & Bernie wants that and it ‘aint for the fans back home…).

    Joe,

    Does the average revenue generated by the races include the Monaco GP? I know this is the only race that does not really make a contribution, or a very minimal one at least and also keep their advertising revenues to themselves?

    Damn, I would love to work in a company where the average wage is $120,000!

  3. I however feel much enlightened. Even an incomplete picture is better than non at all. In this light I feel less likely to arbitrarily critisise FOTA as some sort of short term anti-Mosely faction that will fall apart the moment a half decent dissagreement comes along.
    It is clearly in F1s interest (well ok, the TEAMS best interests) to stick together and make FOTA work and not to implode over the next round of technical changes. I also feel that they are more able to do this without too many weak willed (shall we stay, shall we go?) manufacturers having too large a stake in the sport.

    good work.

  4. A really good post James,

    Working in the investment field I come across such structures when analyzing whether to seed an investment or not and our legal rights.

    It is fair to say that sometimes even the most skillful of the lot fail to see the point of certain ownership “steps” in the structure and how the relationship is really working between the different entities.

    Indeed no one really knows the exact factual happenings on Formula 1 within CVC but themselves.

  5. Bottom line is that as those Indian chaps said, it’s a “commercial initiative” which for some people is a sport in itself to the exclusion of all others.

  6. Better qualified observers than I will no doubt comment but it seems to me that Delta UK is racking up very large and potentially valuable tax losses. In effect the UK taxpayer is subsidising Delta UK to the annual tune, I think, of around $250 million: that is a quarter of a billion and as an American once said, a billion here and a billion there soon adds up to money.

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  8. Joe, where are you? I mean it is great to see you are interested in F1 as well as France, History and Acccountancy, but a sober comment of a very seasoned writer is very much in need here regarding the newest Renault Revelations? Just looks what Pat Symonds apparently has said….

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