Irrational behaviour is common among human beings. We smoke cigarettes, we drink alcohol, we eat unhealthy foods, we support useless football teams and we don’t floss. We all seem to have a compelling reason – conscious or subconscious – to justify what we are doing. We smoke because we want to be cool, we don’t floss because we cannot be bothered, we drink because we want people to like us, we eat bad food because it is easier and we support bad football teams because our friends do. There is twisted rationality in all things irrational… which brings me on to Bernie Ecclestone.
The reason I write about the rational and the irrational, is that Formula 1 is in a phase where very little seems to make sense. There is rampant negativity at a time when there is much to look forward to. F1 decision-makers want to change qualifying when qualifying does not need changing, they wants to cut costs but wants new cars that will push costs up, they want to waste energy on noise when the industrial relevance of the sport is in saving energy, they says the sport is rubbish and would not buy tickets, when they wants people to buy tickets and to subscribe to payTV. What is going on? Where is the rational thinking behind the irrational moves?
I think it is fair to say that some of the recent confusion is to do with misdirection and diversionary tactics. If you light a firework off to the left, everyone looks in that direction and you can get away with all kinds of things on the right.
Misdirection is at the very heart of most magic tricks, which rely on the fact that the human brain has a limited amount of attention and focussing on one thing can make one oblivious to others that should be patently obvious. There is a lovely example of this from the University of Illinois at Urbana-Champaign, where in 1999 psychologists made a video of six people in a circle bouncing two basketballs between them. Viewers were asked to count the number of bounces and around half of them failed to notice a man in a gorilla suit walking through the middle of the game, beating his chest.
So if Bernie Ecclestone is saying the sport is rubbish and he wouldn’t buy tickets to watch it, what is he really doing? He is, after all, the series promoter, the man charged with making the sport bigger and better. Some think that it is Mr E trying to drive down the value of the business so he can buy it back from the investment types because he has had enough of them ripping money out. This theory makes no sense at all to me. Bernie is an employee and while he and the family trust (over which, of course, he has no possible means of influence because it is all in the hands of trustees) do own some shares but they do not have control. Or do they?
Are there shareholder agreements that mean that CVC Capital Partners have to do whatever its employee wants them to do? That would be odd, wouldn’t it? And what would CVC’s investors think of such a bizarre arrangement? Some say that maybe Bernie funded the CVC Fund and so is secretly the boss, but there seems to be no evidence that this is true. CVC’s Fund IV was raised in 2005 and had a value of $7.26 billion. According to Forbes, Bernie is not worth that much… but then is Forbes reliable?
There is another argument that Bernie has simply gone bonkers from old age and is just making it up as he goes along. I don’t believe that one for a minute.
Conspiracy theorists will tell you that CVC has to do what Bernie tells them to do, because he has videos or dark nasty secrets about the shining white knights at the private equity firm, but let us reject all that and ask why might CVC accept Bernie’s actions, thinking they will lead to the potential to make more money. This, remember, is their only goal in F1, unless one adds that they wish to avoid embarrassment, which is a goal of sorts.
CVC knows that, no matter what they say, they want to sell the business but, despite the best efforts of their sycophants getting front page stories saying that the whole thing is worth more than $8 billion, CVC knows that the Formula One group is not going to be sold at a price it wants. It was all supposed to be done before Christmas, yet it’s been quieter than a Trappist mouse ever since. The price is clearly too high, no matter what the glossary of the Idiot’s Guide to Investment says about enterprise value.
CVC could sell the business for less but there are a couple of things that get in the way with that theory: ego is the first, as PE types generally have fairly sizeable egos and they don’t like to be seen to lose; secondly, there is the question of debt. They have at least $4 billion of it, probably more. In the usual run of things, the debts are paid by the seller from the money delivered by the buyer. The money left over after that is then divided between the other shareholders. And therein lies the problem because a lot of these people signed up for shares prior to the Singapore IPO that never was and they were only doing that because they were promised a decent return on their investment. When the IPO was called off, they were left holding shares that they did not really want. To keep them happy CVC has been sweating the assets and providing regular dividends, often by adding more debt. They may hope that the situation will get better and the value of the business will rise, but there is no sign of that happening. The current commercial rights deals struck between the teams and the rights holder required some fairly serious concessions, both financially and in terms of power. The car manufacturers and the big teams are now in a powerful position and as the sport looks ahead to negotiating new commercial deals from 2021-2030, this group is going to be pushing for yet more money and power. If they don’t get it, they will refuse to stay involved and, so the theory goes, the Formula One group will be unable to fulfil its undertakings to the FIA and their 100-year deal will be broken. Then the teams and the FIA can start a new Premier League-style FIA Formula 1 World Championship without the middle men, or with a promoter who will accept a more restrained percent of the take, rather than the 40-odd percent of today. The problem here is that the debt needs to be paid, or at least serviced, and if the interest payments are more than the revenues the rights holder will not be able to meet its obligations. Borrowing more money will be hard and will not really help, while paying off debt would mean fewer dividends for the investors.
This means that the best option is to try to break up the alliances of those who are now powerful and perhaps try to get rid of the manufacturers and so isolate the non-affiliated teams so that they run to Uncle Bernie for protection. The CRH also wants to make sure that no new players arrive, like reinforcements in a battle, to bolster the ranks of the manufacturers. They don’t want to see Alfa Romeo buying Toro Rosso, or Aston Martin acquiring Force India. They don’t want Volkswagen at all.
In the old days, under different management, Ferrari always played along with the teams and then switched sides when they got the deal they wanted. But now there is a new boss and different ambitions. Perhaps Sergio Marchionne even sees himself as a future commercial boss of F1 after his Fiat days are done. He is trying to get more manufacturers to join the game, to pick off more of the teams and strengthen the position of the players against the promoter. The FIA is sitting back, waiting and watching and will then jump one way or the other when the dealings are done. It would probably prefer to go with the manufacturers because that would allow new deals, far better for the federation than what was agreed by the previous management at the federation.
The last thing that CVC wants is stronger opposition and thus chaos is a better option.
The man from VW said it last week.
“The situation is not predictable enough to make the kind of investment required. On the regulations front, there are a lot of rumours around the engine side and the supporting technology side. Before you commit the kind of money needed you must see five years of rules stability – there can’t be the possibility of rules changes, of more or less engine cylinders coming in, or the hybrid system changing away from technology you are developing on road cars. On the ownership side, there are also big questions the sport must answer. If you are a big business making a big investment you expect to have some influence on the set-up, with an assurance the present ownership will last. In F1, it seems the owners will not be there forever and that creates some instability.”
So, if chaos is the game we are playing, the thing that is required is not only unity and solidarity between the teams but also no daft ideas that will help those who seek to divide and conquer. But then, all these supposed new regulations and the talk surrounding them may all just be delaying tactics to help the clock move onwards towards 2020. In the past the team alliances have always been broken by the rights holder, usually working with the FIA, but this time things are a little different.
Rational irrationality is the order of the day…