A new twist for the Formula One group

Financial rumours are always to be treated with care because one never knows why the news is being leaked and who gains the most from such leaks. Quite often such stories are not at all what they seem to be. The word, however, is that US media billionaire John Malone, who is in the middle of a major expansion into European markets, is looking to buy control of Delta Topco, the parent company of the Formula One group, in order to be in a position to decide which TV channels would be buying the media rights to F1 racing, so as to either boost the revenues of other companies in his empire, or to charge his rivals more for the same privilege.

In recent months Malone has bought British cable company Virgin Media, which added 25 million customers in 12 European countries, plus the Dutch cable company Ziggo, Belgium’s Telenet, Germany’s Unitymedia and, in the last couple of days, Eurosport, of which he now controls 51 percent with a put option to acquire the remaining 49 percent. A put option gives the owner (Eurosport in this case) the right, but not the obligation, to sell the shares at a specified price on a specified date.

The goal of all of these moves is to create growth for his companies by acquiring new programming and new channels.

The word is that he wants to acquire the Formula One shares currently controlled by CVC Capital Partners, which wants to cash out in F1 because its plans for a stock market flotation have been blocked by the legal troubles surrounding F1 boss Bernie Ecclestone.

It is entirely possible that such stories may have been leaked to try to inflate the value of the Formula One group for another buyer as the rumoured $9 billion price tag seems rather high in the circumstances. CVC bought control of the Formula One group for a fraction of that and has taken a great deal of money out of the sport, in terms of dividends and loans.

There is clearly an opportunity coming up for a change as another Formula One shareholder called LBI Group Inc, an entity which exists only to sell off the remaining assets of the defunct Lehmann Brothers, in order to generate as much money as possible for creditors, has said that it will sell its 12.3 percent share by the end of June, or hand over the equivalent money. If CVC Capital Partners adds its own 35.5 percent to the deal that will be close to the figure needed to buy a majority of the ordinary shares. There are other investors who would probably cash in as well (and may have to do so with tag-along, drag-along rights). CVC is believed to have some kind of veto over the sale of the LBI Group Inc shares, which means that it would buy the stock and then sell a bigger stake to a buyer.

However, this does not necessarily mean that a buyer would actually control the Formula One empire because this appears to influenced by a parallel company called Delta Prefco, which has some of the same shareholders as Delta Topco. These investors get a different (and preferential) deal to those involved in Topco. It is understood that rather than getting a dividend based on annual profits, Prefco shareholders get pre-determined sums. In exchange for this benefit, the Prefco shareholders seem to have agreed to allow Bernie Ecclestone to have the right to veto all Delta Prefco decisions if he chooses to do so, so the acquisition of the Topco shares would not necessarily give a buyer control of the empire and purchasing the golden share from Ecclestone would, no doubt, be wildly expensive, unless there was a way in which it could be annulled. Much of this is information is covered by confidentiality agreements so it is hard to know exactly what is going on.

The last sale of shares in Delta Topco was in October 2012 and this valued the business at $6.6 billion. That deal was for three percent, which had been held by LBI Group Inc, which was acquired by the Teachers Retirement System of Texas (TRS) for $200 million. The Formula One group had previously been valued at $7.6 billion after CVC offloaded 21 percent of the business in May 2012 for $1.6 billion.

It is hard to imagine that Malone would want to buy the company just as a financial investment, as the private equity and pension fund people do. He is more interested in exploiting the media rights to the sport in a different way.