The story behind F1's financial structure

The essence of sport is equality - equality of chance, equality of opportunity, equality of eligibility, equality of regulation and equal competition. Remove equality from the equation, and the entire spirit of sport is destroyed - namely going further, higher, faster than the rest under equal conditions

There will, of course, always be differences, but sporting regulations exist to ensure that equality exists, and it cannot be coincidental that deleting "e" from "equality" leaves "quality" - and those are the two essential ingredients every global sport should embrace. Remove equality from competition, and it is reduced to handicap racing.

In all walks of life parties are remunerated at different levels, and that applies equally in sport: Roger Federer may earn more (or less) than Novak Djokovic over a year, or one member of a football team earn more than a team-mate, but in tennis sports fiscal power does not influence sporting power - whereas in F1 an advantage of up to $50m equates to an enormous difference in lap times.

Ecclestone used to negotiate on behalf of the teams in the 1980s-90s © LAT

Commercial equality in F1 existed while now-F1 tsar Bernie Ecclestone, then a team owner who headed the team alliance FOCA from 1982-1997, negotiated commercial terms on a group basis on behalf of all competing teams.

Then, he wrested control of Formula 1's finances by taking control of FOCA in the nineties by transforming it into Formula One Management, and running it, first for his family's account, then later on behalf of sundry financiers.

However, in 1997, after persuading the FIA to sell him F1's commercial rights, he negotiated with Ferrari, offering it an additional five per cent - contributed to equally by FOM and the share of F1's revenues allocated to the teams, overall a paltry 23 per cent of the sport's underlying revenues. Thus the teams indirectly subsidised a major competitor.

Not only did this deal run until end-2007 - before a two-year extension was agreed in the absence of an acceptable replacement, although the revenue share was upped to 50 per cent - but Ferrari was granted right of veto over both sporting and technical regulations. Hence, when Toyota wished to go with V12s and Ferrari had just designed a V10, the latter architecture won.

The most disturbing single aspect of the agreement was that the FIA ratified the deal.

Thus the rot set in, and continued through the sale of FOM's majority shares to EM-TV, which ceded control to Kirch Media after struggling to pay for them. Kirch found itself on its knees due to the deal, resulting in 75 per cent of F1's rights ending up with a trio of banks, who eventually sold them to a consortium headed by CVC Capital Partners.

CVC's Fund IV acquired two-thirds of the shares and 100 per cent control of F1's rights at a time (2006) when F1 was arguably at its most acrimonious over its revenue structure and governance, precipitating threats of breakaway series (in June 2009) and the eventual departure from office of FIA president Max Mosley, whose administration had granted the 113-year rights to his long-standing friend Ecclestone.

Hopes that a bunch of hardnosed financiers would introduce equality to F1 were shattered when the 2010-12 Concorde Agreement - the last of the official covenants that governed the sport's commercial, sporting and technical aspects - was signed, for Ferrari continued enjoying premium payments and veto rights until end-2012.

F1's big teams were given refreshed deals in 2012 to get them to commit © LAT

CVC's executives, though, had their eyes on the big prize: listing F1 on the Singapore Stock Exchange by replicating their Samsonite model - the capital fund acquired the luggage manufacturer in 2007 via RBS financing, then restructured the company ahead of an IPO on Hong Kong's Stock Exchange.

Two years after Samsonite's 2011 listing, CVC exited totally via three sell-downs, and whether the world's largest baggage company Samsonite sinks or swims in future is of no concern whatsoever to CVC. This is particularly salient, for F1 is likely to suffer similar orphaning in future - and likely would have by now, had fate not intervened in the shape of embezzlement charges brought by a Munich court against Ecclestone.

CVC, still the sport's controlling shareholder despite reducing its slice to 35.5 per cent, may protest the implications, but, in terms of its fund covenants, it committed to exiting F1 by 2017, while its historic portfolio (220 companies) is currently over three times longer than its current list of assets (60) - see here - and will obviously grow in future.

In order to ensure maximum IPO return, CVC desperately needed long-term contracts - beyond 2017, at least - committing F1's biggest names - Red Bull, Ferrari, McLaren, and, to lesser degrees, Mercedes and Williams - to F1.

In March 2012, FOM offered said teams signing fees and premium payments (of varying levels), plus their usual shares of revenues based on on-track performance, effective 2013-2020.

In addition, the favoured teams were granted membership of F1's new Strategy Group, which would frame and vote on all future regulation changes - on a six-each basis for FOM, FIA and the five teams, plus the highest-placed non-SG team in the previous season's championship - before escalating them to the FIA's World Motor Sport Council for ratification.

The original concept excluded an interim process involving the F1 Commission before regulations are escalated to the WMSC, but this was amended in October 2012 at the insistence of the FIA.

In the process F1 lost all pretence of sporting equality, for not only could franchised teams exercise regulatory control over their competition - particularly where cost issues are concerned - but they also receive substantial financial fire power to destroy them on-track. How substantial? That question is answered following exhaustive analysis by this writer in various tables/graphs below.

The outcome of our investigation into F1's prevailing finances is shocking, and proves how inequitable F1 has become - where once Ferrari received a five per cent advantage, variances as much as 100 per cent amongst the enfranchised teams, and potentially up to 200 per cent between the most privileged (Ferrari and Red Bull) and top-placed non-franchised team (Force India) - for equal results!

Where, one asks, does the FIA stand in all this? Effectively neutered: in terms of agreements struck between the EU Commission, FOM and Mosley's FIA, motorsport's world governing body must separate commercial and sporting powers, while its income from the sale of the 113-year rights (for an effective three per cent of intrinsic value) is vested in the London-based (ring-fenced) FIA Foundation charity devised at the time.

However, before divulging the full extent of the structure, some background: Basic payments are made according to the provisions of Schedule 10 of the 2010-12 Concorde, which lists three revenue columns, one of which - Column 3, provides for payments (by FOM) of maximum $10m to teams finishing outside the top 10 in a year under review.

Haas joining the grid will mean the return of 'Column 3' to the payment structure © LAT

This was rendered obsolete by Caterham's demise, but the arrival of Haas F1 Team in 2016 will likely see Column 3 being reintroduced.

The calculations for Column 1 and 2 payouts were exclusively detailed here, but are recapped for convenience:

The teams' collective share is calculated on a complex basis, using constructors' championship standings over the past three years as base (Column 1) in addition to actual performance in the previous season (Column 2).

Each "Column" is made up of 50 per cent of the "pot", which amounts to approximately 50 per cent of the sport's underlying revenues (earnings after expenses, but before interest, taxes, depreciations and amortisation - also known as EBITDA), which, for 2014, totalled approximately $1.27bn, with the Column 1/2 "pot" being $635m.

Note: All values are calculated in US Dollars - not only is that F1's universal currency, but it allows for historic comparisons unaffected by exchange fluctuations.

Thus teams that finished in the top ten at least twice in the past three years share Column 1's proceeds equally, with Column 2 split as follows:

So far, so good, for all seems equitable, being based on a mixture of historic performance over three years, and classification in the season immediately past. Then, though, the equality stops, for in addition to the 50 per cent - $635m for 2014 - shared by all teams, CVC allocated a further $250m to the five franchised operations, with Ferrari receiving a whopping $98m of that.

Thus, where the Italian team last year qualified for just $66m in Column 1/2 revenues on the basis of its poor performance (fourth place after just two podium finishes) - which is the amount Lotus, Force India or Sauber qualifies for on an equal results basis - under its bilateral deal with FOM, Maranello pockets $164m!

By the same token, Williams, despite being one of the privileged five and drawing on an illustrious history, received $83m for third place - effectively half Ferrari's pay-out despite beating the red cars hands down. Put differently, were the full amount paid to the teams ($883m) spread equally amongst the ten participants, Williams would receive a greater share ($88m) than it does for third place.

There are other anomalies, too - McLaren receives $98m for fifth place, which is $15m more than Williams in third, and nearly $40m more than Force India in sixth. Expressed on a per point basis, Ferrari received $760k per point scored in 2014, McLaren 540k, Red Bull Racing $385k, Williams $260k and Force India $388k.

Any wonder Ferrari and McLaren actively campaign against cost-cutting, while disenfranchised teams battle with bills? Given these figures there is absolutely no reason for the likes of Force India, Sauber or Lotus (and Manor) to feel ashamed about their financial predicaments.

The full payment 2014 schedule, disbursed in 10 instalments:

This, then, is the structure CVC saddled F1 with as part of its exit plan, but the Ecclestone court case (and a bearish market) scuppered that by making F1's IPO a no-go, where after it reduced its stake from over 60 per cent to a little over half that. Still, as major shareholder, it bears the full brunt of a model it planned to exit sooner rather than later.

However, it gets worse: according to sources, Mercedes, which in 2012 was offered a lesser sweetener due to modest performances at the time, negotiated substantial double-champion bonuses should such success come to pass - as now seems highly likely.

Ferrari didn't suffer much financially for its poor 2014 performance © LAT

Although a senior Mercedes figure in Spain conceded the existence of such a bonus, he refused to divulge details - but the indications are that it is in the vicinity of an incremental $40m per season, upping the team's premium income from $125m to Ferrari and Red Bull levels. More concerning - for CVC, that is - is that the amount comes out of the ever-reducing shares destined for investors in the rights.

As outlined here, this leaves FOM increasingly unable to redress the extremely serious situation facing the disenfranchised teams, for - in a nutshell - after disbursements to teams plus repayments on loans CVC entered into in order to purchase the rights and pay upfront dividends to shareholders, precious little remains. Despite turnover of more than $1.6bn and underlying revenues of $1.2bn.

The absolutely crazy aspect is that the amounts disbursed to all teams amount to almost $1bn per annum - average $100m per team - yet half the grid struggles to pay salary bills, being forced to run finded drivers, many of whom would not be on the grid on merit.

Any wonder that in many markets last week's Spanish Grand Prix marked the lowest viewing figures in almost decade, or that Donald Mackenzie - CVC co-founder and -chairman - will attend Thursday's (May 14) session of the Strategy Group?