The big news in sports business today is that the China Media Capital (CMC) company has spent $400 million to by a 13 percent share of City Football Group (CFG), the parent company of Manchester City football club. The deal values the business at $3 billion. CFG is owned by the Abu Dhabi United Group, a United Arab Emirates private equity company owned by Sheikh Mansour bin Zayed Al Nahyan, a member of the Abu Dhabi royal family and a UAE government minister. The deal is based on the logic that Premier League teams could soon enjoy a huge cash boost with new TV deals worth more than $1.5 billion a year for the period 2016-2019 from the sale of the overseas TV rights. The hope is that Chinese involvement in Manchester City will lead to massive merchandising revenues from China’s 170 million Premier League fans and, in the longer term, from the expected switch to pay-TV in China.
These kinds of numbers make F1’s TV deals look rather less impressive than they do from inside the sport.
It is worth also worth noting that CMC was tipped as a possible investor in Stephen Ross’s bid to buy control of the Formula One group which would, if it goes ahead, value the Formula One group at $8.5 billion. That has gone rather quiet in recent weeks and it is not clear whether this is because the bid has gone away or whether the process of due diligence is still ongoing. One of the problems with a sale is that any deal must include taking on $5 billion of debt. This is a drain on the business. It might be cleared if the creditors agreed to exchange debt for equity, but that would require new owners giving away part of their stakes, either by diluting the value by issuing new shares or by handing over shares directly.
The valuation of Formula One is important because CVC’s reputation is at stake. While it has made a fortune out of the investment, it convinced Waddell & Reed, Blackrock and Norges Bank to invest in the business in 2012 as a precursor to a stock market listing in Singapore. This never happened and the quick profit these firms expected to make on the IPO disappeared. Selling at a lower valuation would be a setback for the investors and, in consequence, for CVC’s reputation as well.
An attempt by John Malone’s Liberty Global and Discovery Communications to buy 49 percent of the business for $4 billion was called off because CVC wanted more, presumably because it did not want to disappoint the investors. Most people in F1 believe that the sport can make a great deal more money than it does, if it changes its business model but this would require investment in new revenue streams. CVC does not want to invest and simply wants to get out with as much money as possible. There is a level of urgency as a larger problem is looming as new commercial deals need to be negotiated for 2020 and beyond. The F1 teams feel that the Formula One group takes too much for what it does and they will want an even bigger share of the revenues. They are unlikely to compromise. Unity has always been a problem – usually Ferrari splits away from the others – but things have changed and the big manufacturers are sticking together at the moment and are quietly belligerent, so it will be tough for the Formula One group to maintain its current share of the revenues, which creates big problems for CVC and those who jumped on the bandwagon with them in 2012.
CVC itself will not lose out in the overall scheme of things because it has taken so much already, but it may disappoint big investors and that is not a good thing. The good news is that these firms may be willing to ally with buyers to get rid of CVC and get the money they wanted by joining in efforts to increase value in the F1 business in the longer-term.