In the world of finance a company is as valuable as its last share sale. In October last year, the Teachers Retirement System of Texas (TRS) invested $200 million in buying a three percent share of Delta Topco Limited, the holding company for Formula One Group. The shares were previously owned by Lehman Brothers Inc (LBI), a company that exists only to sell the assets of the bankrupt Lehman Brothers Holdings Inc, in order to pay the creditors involved. When Lehman Brothers crashed in September 2008, CVC Capital Partners tried to get hold of the Lehman F1 shares, on the basis that it had first right to buy the shares off any shareholder that became insolvent. The courts rejected this argument and a deal was struck by which Lehman Brothers can sell the shares in order to repay creditors, but has to do so before June 2014. CVC is also believed to have some kind of veto on the sale of the Lehman shares, but agreed to the TRS deal on the basis that the Texas pension fund had previously invested more than $1.1 billion in different CVC funds, including $126 million in the CVC European Equity Partners IV Fund, which was the fund that bought into F1 in 2005. In other words, it was a mate’s deal.
The downside of that deal, which effectively put those shares back under CVC’s control, was that the overall valuation of the Formula One group dropped to $6.6 billion, having previously been $7.6 billion after the previous sale of shares, when CVC offloaded 21 percent of the business in May last year for $1.6 billion to asset manager Waddell & Reed, Norges Bank Investment Management and Blackrock. That was after CVC’s helter-skelter attempt to float the Formula One business on the Singapore stock exchange was called off, officially because of market conditions, but more likely because there were far too many risk factors involved to get a sufficient number of investors at the right price.
All of this means that the shareholding of the Formula One group is now spread between 16 different entities, if one ignores the different CVC Funds involved. Overall the CVC funds together hold around 42.3 percent of the business. Waddell & Reed owns 14.4 percent; LBI controls 12.3 percent, but must sell this and, in effect, this share is still under CVC control because of its veto; Bambino Holdings, an Ecclestone Family Trust company owns 8.5 percent; Bernie Ecclestone himself owns 5.3; Norges Bank owns 3.9; the Teachers Retirement System of Texas and JP Morgan Whitefriars Inc both own around three percent with BlackRock owning 2.6; Patrick McNally still owns 1 percent, while other shareholders are employees Duncan Llowarch and Sacha Woodward Hill (0.8 percent each), Churchill Capital Ltd (0.7 percent), Judith Griggs (0.5 percent) and non-executive directors Peter Brabeck-Letmathe and Sir Martin Sorrell who each own 0.25 percent.
The numbers I have calculated come out at just over 100 percent, but it is not clear the exact numbers in some of the transactions.
CVC has been hoping to sell its equity with a valuation of $10 billion for the whole company. If it sold all of its shares it would thus add $4.2 billion to the piles of money it has already stripped out of F1 in the last eight years, with its complicated loans, secured on future revenues, and annual profits. It is hard to say what the final profit will be from the investment, but it will be at least a multiple of five.
The only problem is that in order for CVC to float the Formula One business, there needs to be a solid legal structure for a number of years in the future, and without a Concorde Agreement that is not going to be the case. There is little incentive in F1 circles to help CVC make more money and there is also a certain amount of distaste at the idea of Formula One being floated and having to answer to shareholders. There are also outstanding questions about the 100-year contract between the FIA and the Formula One group, if Formula One CEO Bernie Ecclestone ends up getting into legal trouble in Germany and the FIA chooses to refer this question to its recently-formed Ethics Committee. In theory, the all-important 100-year rights contract could be cancelled. In other words, any attempt at a stock market flotation is unlikely to happen before the German investigations are settled one way or another. The Concorde Agreement problem could probably be solved by CVC paying out more money to the parties involved, but that would reduce the value of the shares on offer.
The option is for CVC to give up on a flotation and go for a private sale. With 42.3 percent available to be sold and effective control over another 12.3 percent, CVC could claim a price tag of $3.5 billion, based on the last valuation of the business, although it would be probably be looking at $5 billion to meet its aspirations.
All things considered, it might be a good moment for the city slickers at CVC to unfurl their golden parachutes and jump, even though they may prove themselves to be more murine and not jump until the ship is definitely sinking and it is time for the rats to leave. If things are allowed to amble onwards there there is a risk that the value will fall because there is no real investment going into the company and, let us not forget, Bernie Ecclestone is 82 years of age and is unlikely to make it until the end of the 100-year FIA-FOM deal. Without him at the controls, the value of F1 will drop, unless there is a structure in place to reassure the stakeholders and investors that the future is rosy.
One obvious suggestion would be for the teams to get together and put the business side of the sport into some form of a trust fund. This would be an independently-operated organisation created in order to run the financial side of the business, negotiating the deals, developing the business and rewarding the teams with a clearly defined payment structure. There would need to be suitable qualifications to become a beneficiary of such a trust. In order to do this, however, a trust would need to be established and loans would need to be found to get rid of CVC. These loans could be secured with the future revenues of the sport. The FIA would have to agree to the new structure, as it would constitute “a change of control” but that would be largely a financial negotiation, as the structure would be much better for the sport. Some of the teams think this would be a good idea, but thus far no-one has picked up the ball and run with it. Given that the sport is pulling in $1 billion a year in revenues, with pretty high profit margins, raising $3.5 billion for such a deal would not be impossible.
A second option would be for the business to be sold to some kind of consortium, involving big media companies and, perhaps, some of the players in the business, such as the FIAT holding companies. They can borrow money as well as anyone.
The third option might be more radical but someone like Red Bull might see the value in buying the promotional side of the sport, in order to run it as a business to promote fizzy drinks. Mateschitz, let us not forget, has already acquired the promotional rights to the FIA World Rally Championship. Becoming the championship promoter might be better business model than running two expensive F1 racing teams. However, it would mean that Red Bull would have to sell the two operations.
One way or another these are very interesting times in the world of F1 finance.