Why CVC has a problem in F1

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.

46 thoughts on “Why CVC has a problem in F1

  1. How on earth can football, surely the most boring sport ever invented by mankind be worth that kind of money ?

    I hope that Bernie has the guts to take a big step forward and pass ownership to a Trust that can be owned by those who participate in F1.

    1. 60,000 people paying £50 a fortnight for 3/4 of a year, plus millions more paying £60 a month to watch it on television.

      Just because you don’t like it doesn’t mean it isn’t profitable and that is what these state run investment firms want.

      The days of personality owning teams ended a long time ago.

        1. Football has maintained itself as sport, despite the corruption and prima-donna players, in as much as the ”90 minute” part has not been ‘sexed up’. It is what it is.

          Football fans seem to except games will sometime be boring, because the fundamentals means a good one is never far away. F1 needs fundamentals like that, whilst remaining sport.

          Many of those who slate F1 for being boring want entertainment. There are plenty of outlets for that, some within motorsport. They should switch to those, and leave F1 to remain sport, albeit with better fundamentals.

      1. “I hope that Bernie has the guts to take a big step forward and pass ownership to a Trust that can be owned by those who participate in F1.”

        Hell will probably freeze over first, whilst elephants fly past your window, and ducks fly backwards over Ilkley Moor. All at the same time.

    2. @Glyn

      I wish more people would say that about football. There’s just too much of it on TV – I’m totally suffocated!

  2. And why on earth would FOM’s bond and bank creditors accept equity for debt? That’s something creditors do when a business is about to go belly-up and the business can’t cover its cash costs (including interest payments) from operating cash flow. That is not even close to the situation in which FOM finds itself. Fixed income investors and banks are not equity investors unless they have little choice. Heck, it’s not even the same bankers/investors (individuals) that manage the stake once it flips from debt to equity.

    1. They will do it if they think it’s the most profitable way to go IF the risk level is one they are willing to live with.

  3. Fascinating background insight, Joe. Thanks for keeping us up to speed with the intriguing business in the background.

  4. Joe, firstly just to say huge thanks on your year upon year of firstclass track side reporting. Your depth and breadth of knowledge twinned with your confidence to state your opinion come what may puts you in a ‘premier league’.

    My naïveté may make me look a little stupid here but, how the hell have CVC managed to rack up $5bl in debt?!? And by doing so the point or purpose is or was what? Simply because they could? Is it as simple as that? It hasn’t been used for any particular purpose other than lining their pockets?

    Normal business rules or business sense just doesn’t seem to apply to them does it?

    1. Correct me if I’m wrong, Joe, but CVC took out loans to by F1. Then dumped the loans into their F1 business. So the business and not CVC is in debt. This means the business pays the debts and CVC keeps the profits. It’s similar to the Glazers at Man Utd.

    2. Lenders will allow investors to refinance and use debt to repay equity. This boosts IRR and other performance metrics. It also means that investors have less equity left in the investment should it go bad, which is what Joe is referring to.

  5. “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.”

    Maybe Ross et al are choking/chafing at some of the covenants being demanded by their sources of financing, ‘cause they’re all reading about how the tv viewership #s are tanking & even the BBC wants relief, and they’re not very sanguine about the future.

    “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.”

    And the SGX listing won’t happen with Ecclestone in the picture.

    “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.”

    In the U.S. NBC’s Sports Group has reached viewership levels of 500,000 +/-10% per race for 2015. Thanksgiving night the NFL game had nearly 28 million viewers.

  6. How will they ever be able to reconcile the conflicting interests between the teams, the F1 group & the manufacturers? Manufacturers need a global growing audience to demonstrate marketing ROI, and that goes againts pay TV and Azerbaidjan-like races. Ans that is just one example.

  7. The funny thing about CVC is that I live with someone who does business with CVC on occasion. And by all accounts, they are lovely people to work with, F1 motives notwithstanding. It’s difficult to square that with the firm’s reputation in F1, but perhaps we all show different faces to the world. Where you stand depends on where you sit, I suppose.

    1. Having a very short term and self centred view of a business does not make them unpleasant people. It does make the unsuitable investors in a sports organiser.

  8. So a simple logical person like me would think “Its worth $8.5Bn but it has $5.0Bn of debt, therefore its really only worth $3.5Bn”.
    If they try and swap debt for equity we shall end up with banks owning F1 again and the shares diluted.

    Mind you, these banks were gullible enough to give loans which were passed straight out to shareholders as dividends or bonuses or both, so there must have been either a cast iron guarantee or a very lucrative rate of interest. Rates were low and still are in banking, but corporate bonds are very different with rates many times higher. (though there is a crisis approaching in that market too)

    However while banks used to be very staid, cautious and straight, the scandals in all areas of banking now leave the impression that they are instead, major gambling institutions, chucking billions into markets willy nilly. Now even the forex market (the largest in the world) seems to have been got at in an underhanded way.

    So who would want to do new deals with FOM, I would rather wait until I knew who was going to own it in future.

    1. Correct Rpaco….and is it even worth $3.5B with it’s current issues? Problem is this means it’s not sellable without massive investment in new revenue streams and at least a medium term timeline or, as Joe stated, lenders taking a huge loss on their loans….

      1. Indeed, at this point CVC have pushed F1 past a point where they could get full value from a sale of F1, its not sell-able at 8.5 billion because there isn’t 8.5 billion in value there is just 3.5 billion + 5 billion in debt. We have all seen this many times, no one will be able to justify a buy of F1, they will only be able to solve this problem by going into bankruptcy, washing away the debt, (screwing the bond holders) and emerging with a new way of doing business. It will be at least five years before they can get a bank to look at them again for a loan or bond issue, and only then will they be able to try to sell themselves again.

    2. The hedge fund industry is filled with former bankers that wanted to take more risk and get more income. These people saw what others were doing and they thought they could do that too, most of they failed, they were after all, just bankers. Part of the problem regarding due diligence by banks on companies like CVC comes from the fact that CVC gets loans from the vary banks the folks who run CVC once worked at.

  9. “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”

    But aren’t we always saying that, right up until the point they split?

  10. Very interesting insights Joe. One comment though, which may seem pedantic: ADUG, who own CFG, is not a private equity firm in the strictest sense of the term. Its a strategic investment vehicle. Three key things things differentiate it from a typical PE operation: its aims are strategic as well as making a profit; it does not have a prescriptive time horizon to exit; and it does not have a fund type structure with multiple investor participation.

    From the perspective of a sports team, or commercial rights holders of a sport, the likes of ADUG would make far more attractive bedfellows than CVC and their private equity brethren…

  11. Buy widget for £1, you then immediately borrow the £1 with the widget as a guarantor to get your money back. Charge fees for using the widget for has long as you can get away with not doing any maintenance, so pocket another £5 (but strangely none of that pays back the £1 borrowed). Then you sell the widget for £2 but only on the condition that the new buyer has to take over the debt of £1. So for £0 outlay you’ve made £7 and left the widget in a barely useable condition for the new owner.

    Isn’t that just asset stripping on a mega scale?

  12. Yesterday I received a questionaire from Sky asking about my viewing habits and what I was paying for and what I’m prepared to pay for. It was obvious that Sky are feeling the pinch from Amazon and Netflix, who are taking film viewers away from them. Also BT Sport who have been buying all kinds of sports in the last couple of years. They even asked if I watched sport via a pirate website.

    I think Sky are feeling the pinch. They have recently increased their charges across the board, especially phone costs. It’s believed they are struggling to pay the huge football contract. I would not be surprised to hear that they will also be asking FOM to cut their contract cost, possibly dropping F1 all together. Sky have less than half a million F1 viewers and even if the BBC were to drop F1, there’s no reason to believe they will pick up a lot of extra customers from there.

    1. Jonno, I also received the same questionnaire from SKY and thought exactly the same thing.

      I think it is widely felt that SKY over paid for the Premier League football and that money got to come from somewhere. I can see F1 being picked up by BTSport at the next contract (No BBC, No Sky).

      I hope no-one was dumb enough to tick the pirate website box.

      1. Do the veiwing figures for Sky include those using Sky Go to watch F1 ? Thats how I watch it as another family member has a Sky Account. I know at least ten of my freinds do the same.

    2. I think the bbc is locked in for the next two years else Bernie will sue their arse off. However if what you suggest actually happens I can tell you that ITV has just signed up until 2022 for the BTCC (a very watchable series) So they are unlikely to take on the very expensive F1 tv contract. No doubt RTL would gain extra online or southern satellite viewers.

      It is very clear that those now in charge of the bbc have no inkling of the F1 set-up or that the UK is the European home of racing. I would just fire the 100 highest paid in the bbc organisation a solution which would sit equally well in many district councils and government departments, reducing the operation down to the people who do the actual running and are not isolated in their ivory towers or held aloof by their delusions of grandeur. (It might be as well to ban from government, all those who attended Eaton or Harrow too.)

      1. The BBC were locked into a contract last time, but they were still able to extricate themselves from it, with Sky’s helping. And I’m sure Sky would be more than willing to take the rest of the contract off them, limiting them to the British GP and highlights.

        As for Sky struggling, I can well believe it. The F1 channel costs more and there aren’t that many die-hard F1 fans prepared to pay the fees (although you’ll have more if the BBC drop out entirely).

        The BTCC contract is long, which tends to imply that the series promoter is struggling a bit and needs the stability.

        1. “And I’m sure Sky would be more than willing to take the rest of the contract off them, limiting them to the British GP and highlights.”
          I am not so sure that Sky make any money from F1. Having spent a fortune on yet more football, they may not have the dosh to buy out the BBC’s remaining contract. Bernie knows that if it becomes sky only in the UK the viewing figures will fall even further. This reduced exposure in turn discourages team sponsors, a further exacerbation of the current situation and ultimately more teams at risk of financial collapse.

    3. Lee Mckenzie made a very interesting podcast on motorsport , where she alludes to the kind of viewing numbers that Sky have been able to attract , viewing figures that Sky have been loathe to reveal.

      Its easy to write Lee off as a typical know nothing journo .. but she’s connected to motorsports in greater ways that just reporting.

      She said something akin to “for her Sat morning FP3 session on Beeb2 ,the BBC got 8 million viewers ,and for the race Sky had 150 thousand” and that those figures were for 2014 ..

      So assuming that the Sky numbers had reduced due to the addition of F1 to the full sports package , their race viewer numbers could be under 100 thou for 2015.

      1. I’ve never been quite sure how The Man counts the viewers anyway and in the era of catch-up TV and hard disk recorders that goes double. About the only thing I watch on real time TV these days is the news.

  13. Its quite bizarre that the manufacturers have let Bernie get away with pay for view TV for mainstream F1 audiences (or any F1 audiences for that matter). There may be short term financial gain for the series but this is no long-term plan. Sky gets very small audiences for their TV coverage and if F1 becomes pay per view only then it will really marginalise the sport – which is already incredibly elitist and disrespectful of the public. Fans will be lost: there will be no handing down of the F1-fan baton from generation to generation, viewership will drop, track attendance will be down… and less cars will be sold by dealers. The whole thing is pretty pathetic and a sham.

  14. Plenty of suckers being born in Asia with no idea which timepiece they need to buy. F1 is ready to serve.

  15. If the manufactures want to maximise their investment in F1 then there has to be free to air TV. I for one will not pay to see adverts and/or rich men enjoying a way to become even richer. Have been around the world following F1, but enough is enough. Ditch Bernie and move on.

  16. I read today of Fairlaine’s financial problems and likely demise, this affects Bernie’s favourite target punter, the Rolex wearing set. (Entry level) It strikes me that F1 may now have an equivalent audience level to that of Ocean Racing, not a mass spectator event and rarely on tv. The one time I do remember it being on tv, it was on the news: the Fastnet race was abandoned due to un-sailable storms. We of course were on holiday in Cornwall watching the tops of waves being blown across the beach at us horizontally, worst weather since the war the locals said.
    (Sadly this was typical of our family holidays for many years)
    It may be Bernie’s dream to have an audience comprised solely of millionaires and above but there will be nothing to watch.

  17. Why do manufactures enter F1?
    How do you get maximum exposure for your brand?
    Does pay for view give maximum exposure?
    Do people pay to watch adverts?
    I’ve had enough of Bernie and his rich playboy friends.
    After many years and trotting around the world following F1 its time to call it a day!
    NOTE to CVC! Wake up, your golden goose is dyeing.

  18. Off Topic;

    Joe, what are thoughts on the story that Jaguar Land Rover are interested in buying Silverstone……..

  19. I buy a house for 150k (probably less than it is worth) with a 100% mortgage, take out a 500k loan on the house, use that to pay back the mortgage and fill my bank account, have sitting tennants whose rent is used to pay the interest on the debt and myself a nice salary, spend nothing on maintainance for the slowly decaying property for ten years, and then try to sell the house for 850k as long as the buyers also take on my 500k debt and keep the sitting tennants with fixed contracts until 2020. Any takers out there?

  20. Somewhat unrelated but could Toto Wolff be the problem Merc? If Lewis leaves Sky and the Beeb will lose a fortune as ratings will drop like a stone. And the sale price will drop dramatically because no sane person will buy into F1.
    Rosberg is nice enough but with his charisma bypass who will be glued to the telly? And if Lewis were to go some of the newspapers may start to rely on agency reports.
    Unless of course Ferrari pay off Kimi yet again and pair Lewisi with Seb. The German might not cherish the thought but might like the challenge. Also Arrivabene would sort Lewis out in five minutes. Just a thought.

  21. NBC just extended their EPL broadcast deal for a significant increase in fees. Every match is available on TV live. The league and clubs have done a great deal (preseason tours) to improve the fan base here and it’s paying off. Compare that with what F1 has done to nurture the series in North America. If Bernie/CVC stepped back from their business plan of milking venues/promoters out of as much as possible and realize that growing the sport here and attracting a larger TV following will pay off even better in the long-run. Ah, but investment first want return now with no investment. Oh well.

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