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.
joeblogsf1 
Such a shame Bernie sold his shares to CVC.
Had he not his daughters could have inherited and gone on to run the sport.
That’s a joke, right?
Either What???? or Very funny.
PMSL! Oh yeah, or should I say yah. Says it all that BE’s first daughter was a good ol’ Debbie, 30 years and several million$$$ later it’s Tamara and Petra. I’d love to see them run the sport, their version would probably involve lots of ponies (“pit ponies”? Hahaha – sorry – 1970’s miners joke there) and designer handbags, probably with very small pet dogs in them.
Joe, you are usually on the mark but I dont ‘get’ this article. My first query is with your point that if Ecclestone ends up getting into legal trouble in Germany “the all-important 100-year rights contract could be cancelled” because the FIA could refer the matter to its recently-formed Ethics Committee.
If Ecclestone gets into legal trouble surely he will be fired out of the job meaning that there is no matter to refer to the ethics lot? If F1 itself has an ethics committee (most big cos do nowadays) then they would be responsible for getting him ousted. What is the likelihood of this happening?
Second red flag for me was your point that “Without him at the controls, the value of F1 will drop.” If he is in legal trouble surely the opposite is true?
There are also many points which stand in need of explanation. How do we know that the CVC tried to buy Lehman Brothers shares in 2008 and how do we know that it has to sell by 2014? Why then? That sounds like an arbitrary date to me.
Finally your comment that “that the sport is pulling in $1 billion a year in revenues” is out of whak with a report I read on James Allens website referring to the Financial Times. He said 1.5 billion I think and 1 billion does sound low.
I think it really depends on whether or not the FIA considers dealings to have been unethical and/or damaging to the sport.
With regard to the second point, yes, in theory it would not be good to have him at the controls if there is legal trouble, but from a practical point of view, who is going to herd the F1 cats? Your third point is all explained in legal papers filed in New York. Finally, yes the figure is higher. However the point is just as valid.
How can it be unethical for F1 if the person who was being unethical is fired out of his job? I have done some sleuthing and found that F1 itself has an ethic committee so Ecclestone is bound to be booted if he is found guilty:
http://www.telegraph.co.uk/finance/yourbusiness/bribery-act/8672686/F1-boss-Bernie-Ecclestone-unveils-rules-to-help-teams-with-Bribery-Act.html
If Ecclestone is shown the door then F1 and its money men would presumably want to distance themselves from him so you would think that the new cat herder would be welcomed with open arms.
Where are these New York papers? It doesn’t make any sense that Lehman Brothers receivers need to sell anything by June 2014. That sounds like an old wives tale. Its an arbitrary date! The receivers want as much money as possible so you can bet your bottom dollar that if the value of F1 crashes over the next year there is no way they will sell by June 2014.
PWC for the creditors of Lehman’s UK intl ops, are thinking they’ll get close to 100 pennies in the pound back. They must be doing a very good job, in which case. I wonder what that bodes for Bernie?
As far as I’m aware Cster, Lehman set a 5 year repayment deadline to its creditors as part of bankruptcy proceedings. 5 years back from June 2014 would be 9 months post bankruptcy, so maybe this is when the deadline was set and the only was to repay is to have sold the assets by then.
Are there any other sports commercial rights holders which are publicly listed? I can’t find any with a quick search on Google.
I think the ideal solution is a Premier League like structure where the teams own the rights and have a vote each. At the end of the day it makes no difference to fans as whoever owns the sport will squeeze every last penny from the punters and tracks.
I have not looked into the subject, but I am sure that there are some.
Joe,
Thanks for writing one of the most informative articles I have read on F1 finances in a long time. Unlike the writings of he-whose-name-will-not-be-spoken, I don’t have to think twice about veracity of what I’m reading. It’s why Joe No Bullshit Saward is my first F1 stop on the internet.
In response to Andrew: publicly traded sports leagues are usually a highly risky proposition, especially in the US where the public reporting requirements are onerous to say the least. The NFL and NBA have looked into public floats multiple times, each time deciding against such a move because it would seriously disrupt the negotiation and management of existing revenue sharing schemes, team bailouts, public financing of stadia, and salary cap issues. A float wouldn’t necessarily preclude a league from engaging in such “balancing” and financing activities, but it would make them far more difficult to negotiate, as such negotiations tend to produce asymmetrical outcomes for the team owners, players, and broadcast rights owners. In short, the sports are ruled somewhat unfairly, but the point is they work, generating insane amounts of revenue for all involved. There’s a saying in the States: everybody wants sausage but nobody wants to see how the sausage is made. It’s usually not a pretty sight.
As far as racing leagues go, I suggest reading up on CART’s float debacle. Unlike other leading sports leagues, CART always was terribly run and makes F1 look like a Harvard Business School case study. That said, the float was an unmitigated disaster for CART. It’s a bit apples to oranges when compared to F1, but it’s an instructive story nonetheless.
I failed to make an important point more explicit: in addition to onerous public financial, organizational, and anti-discrimination reporting, a publicly traded company opens itself up to activist shareholders. Of course every float is structured differently, but by going public you always run the risk of inviting to the table activist hedge fund raiders who like to yo-yo stocks (through aggressive shorting) for quick profit and vanity (see Bill Ackman and Carl Icahn for two great examples). It’s manageable, but it’s an extra layer of instability. The markets are the hand that feeds as well as bites back, and not every company has financial and organization fortitude to ride the stock market. That’s why there are so many hugely profitable private companies (and sports leagues).
Good to see you had time to put pen to paper on this. Would be great if we actually saw someone holding the ownership who cares about the sport for the future as much as for the bottom line.
Well I’ve started saving but not sure I’ll raise enough in time!
Great piece, Joe — and a gold star for describing the bankers as ‘murine’.
‘Murine’, had to look that one up myself. Always something new to learn here!
CVC have apparently made a £750M (U$1.1Bn) offer for BetFair. This offers a system of being the bookie or betting against a win in horse racing. It took a huge amount of business away from traditional betting shops and is said to be making a fortune. Some lesser blog sites offer links to online betting including on F1. (Some interesting odds being offered now at reasonable prices)
I’m a bit confused as to the remaining shares held by LBI who trumps who? The US justice/legal system or CVC?
Whilst the CA is not complete, Bernie has got most teams signed up plus the tracks (those still on their feet) and the tv companies. The CA is not mentioned in this year’s regs but ironically next year’s refer to the previous CA.
Meanwhile the huge high profile, “in yer face” media circus with 42 piece marching band, following Jean Todt’s campaign for re-election (Creep? Oh no that was Nixon and Watergate, 😉 ) continues to blast it’s message throughout the world as our silent hero tip-toes to the next venue. Is Todt finally making his presence felt in defying Bernie?
How can you float a company whose books you cannot disclose?
Who will hold the Delta Prefco shares and in what proportion?
You may be interested in this video presentation, Rpaco:
http://www.infoq.com/presentations/LMAX
it’s really not new stuff, just very rare for anyone to speak up about this kind of topic.
(LMAX is Betfair’s financial trading subsidiary, and if you watch that presentation, you might decide what value may exist in their technology or people)
Struggling with that. Both the presenters desperately need to be sent on an Otmar effective speaking course.
A bit like having a good car and two lousy drivers.
Learnt a new word today – ‘murine’ – thanks!
How about a fourth option – the major manufacturers involved in F1 decide that it’s no longer worth supporting as it’s had its day from a promotional perspective and decide to use the long-lasting 2014 engines as a base for ‘murinating’ into a more relevant formula, something along the lines of LMP1.
I’m sure also there’s use for both “supine” and “lupine” if one cares to rhyme . .
J Todt vs Max
I think it is fair to say CVC will want a return rather sooner than later but I’m pretty sure there is already a rough plan in place to deal with succession of Bernie and was it not you stating before that the Concorde agreement was done deal (without it actually being signed) as all teams agreed?
So whilst your 3 options are possible I think a fourth is perhaps also likelyy. CVC is/will be buying Bernie’s stake and anyone else (Like LBI they can), either directly or through mates. They then control what happens in terms of Concorde and leadership and most likely will end up floating as the books can also be opened (without Bernie). The court problems Bernie is having and his age and lack of natural succession is helping CVC in negotiating a deal with him and Bernie just wants a good deal. I suspect Bernie does not care much for happens after he leaves.
What an utter mess.
We always bang on about the teams taking some form of control of their own future. To me the structure would be to too complicated as it stands now only three teams have actually been under the same ownership for at least three decades the rest come and go or change owners.
Sorry not 100% factual on the three teams but I hope you get my point.
You are aware I hope that the current situation is as a result of teams who previously owned the rights asking Bernie to handle things for them because he was good at it and they were not.
An F1 rights ownership history piece please Joe, in order to quell some of the apparently logical arguments.
So what? Businesses are bought and sold or taken over all the time.
I would hope the teams would wise up and buy CVC out, not hoding my breath though. I wouldn’t be surprised if another investment fund bought CVC’s shares and things remained as they are until Mr. E moves on.
It’s not strictly correct to extrapolate a share sale on a linear basis, 3% sold for $200m doesn’t really mean that 100% is worth $6.7bn. The bigger a shareholding gets the more it’s worth as it carries more rights. The obvious one is the difference between a 49% and a 51% holding. A 49% shareholding might be worth £1m but a 51% holding could be worth £10m as it gives you control. There are smaller tipping points down the scale – for example a 20% holding might give you an element of control over dividend policy, seats on the board, control if the company goes bust etc.
Whatever, the fact that someone, a pension fund at that, traditionally (in the UK at least) very cautious investors, is prepared to part with such a sum for a small minority stake shows that some boffin somewhere is placing a very large value on the operation and as a result no wonder CVC are holding out for a $10bn valuation.
They may be speculating on an imminent floatation, which would invariably raise the value of their investment if the company goes public. Even if F1 PLC does a Facebook and nosedives afterwards the sellers walk away happy.
I understand that control and dividend allocation of Delta Topco is via Delta Prefco.
Just as “love is a many splendored thing”, so F1 ownership is many layered thing.
When the ‘ Bean Counters ‘ run the ‘ sport ‘ … the ‘ sport ‘ becomes an entertainment spectacle …… and with F1 we are well and good there … hence the emphasis on the spectacle and the rapid and steady degradation of the ‘ sport ‘ I made comment here in the US that there is something truly wrong when watching a bunch of guys -in funny pants – pushing a little white ball around somebodies yard with a stick ( the Master’s golf tournament ) was ten times more exciting than watching the most technologically advanced race cars on the planet – piloted by the very best drivers available – running around a track at speeds of 150 mph .
Which is to say … five years from now Bernie’s place in history won’t be looking so positive when all is said and done
I don’t think having the teams in control is necessarily the way to go. It didn’t work for C.A.R.T. in the 90s but they do need more involvement than they now have. Whether they can get themselves organised has yet to be seen. They have never been good at standing up to challenges in the past.
I’ve never seen the work “murine” before. I had to look it up in the dictionary. Thanks for that added education, Joe.
By the way, I didn’t watch the masters but I did think the Chinese GP was pretty exciting and don’t see how a watching a game of golf would match it.
Sir, thank you for illuminating this opaque and dark pool for sharks like Bernie Ecclestone to thrive in for so long. You are a brave man.
in regards to the succession issue and the replacement of Bernie Ecclestone which you quite rightly raise, it has been dealt with and published in the world business newspaper of record Financial Times USA edition in October of 2012 as I recall.
be well people and make sure you are protected as an embedded journalist when you reach this weekend’s circus event in Barhain sir.
I’m disappointed that nobody has made the obvious “heavier than a duck” joke.
Joe,
Is Patrick McNally the ex-Autosport Patrick McNally?
Yes.
Also Mr McNally of Allsport creation and fame. Paddock Club wouldn’t exist without his vision and drive.
As everybody knows, and BE has exploited the fact over many years, the teams will probably never agree on alternative strategy. Why else do Ferrari gain more prize money than anyone else? The scenario Joe refers to at the end is precisely why the business can’t be left in the hands of the ‘here today gone tomorrow’ teams. The only way out really is for the FIA to assume total control of the sport, sporting and regs. The FIA could have made life difficult for CVC in the past but have shown no willingness to do so – that’s out then. I’m convinced BE and CVC have planned for his eventual demise but being a private company we don’t know what that entails. In the meantime BE and CVC make the teams and the FIA look like rank amateurs.
Superb article and comment. Off topic: have any of you read a book called “Enzo Ferrari – A Life” by Richard Williams?
No, I have not, but I have a huge amount of time for Richard.
What do CVC actually own? The rights to F1 ? What if everyone Ferrari included decided that they didn’t want to be in it anymore? All the teams went away and invented an Intercontinental Formula that got ratified by the FIA how would that play? Are the teams contracted for the long term at the moment?
It is not quite that simple because the FIA is tied to the Formula One group by contract
But is there someone with the money and vision to do a Packer on Formula One? Is is theoretically possible? Surely where there is a will there is a way.
Terrific article. This is exactly why I read this blog.
It seems to me that CVC would benefit enormously from having a Concorde Agreement in place and if they had an agreement and a solid long term plan, their need for Bernie would be less pronounced. Do you think it likely that Bernie is holding up negotiations in order to protect his position?
Anyone who is willing to get a nicely-toned stomach can use this belt.