Analysing News Corp's interest in F1

Despite the drizzle hanging about the Istanbul track on Friday, there was an awful lot of hot air blowing about the place. With Red Bull Racing having perfected their exhaust-blown diffuser and Renault getting the maximum out of their ingenuous front-exiting system, the likes of Ferrari, Sauber, Williams and Virgin were working at measuring hot air flow across and under the rear ends of their cars.

Still, most of the hot air was evident in the paddock, with virtually every pass-holder having an opinion on the possible takeover of the lease over Formula 1's commercial rights by the News Corp/Exor syndicate.

Not surprisingly, said opinions changed throughout the weekend, being influenced by various factors, including, not surprisingly, with whom individuals had last spoken with. Some folk performed abrupt about-turns every five minutes or so as they worked the paddock...

At the heart of the confusion lay three issues: whether or not CVC Capital Partners, present owners of the 100-year lease over the sport's commercial rights, are willing to sell this extremely valuable - and arguably under-realised - sport's property; whether its sale to a media conglomerate would result in F1 being broadcast purely on pay-TV to the detriment of teams' commercial partners; and whether the European Commission would even permit such a deal after some or other agreement was allegedly struck between the EC, the CRH and the FIA at the turn of the millennium.

There were other factors, mainly driven by ignorance, too, such as whether (or not) the current tripartite Concorde Agreement, which binds teams, CRH and FIA together, demands free-to-air TV; whether the term 'pay-per-view' as regularly bandied about the place referred to pay-TV per se, or more literally, a fee paid to broadcasters for individual broadcasts as in the US; and, finally, whether the affair spelt the end of FOTA, the currently rather brittle teams' organisation.

This column a fortnight ago dispelled the notion that Concorde demanded FTA TV. However, it is in any event doubtful whether any such a clause would have made a difference, for News Corp, while controlling the likes of Sky in Europe, equally owns a host of FTA stations. In addition, as the current owners manage to profitably cut FTA/pay-TV deals across the world, there exist no logical reasons as to why any potential owners could not do same - regardless of alleged possible vested interests.

While a deal with the EC was certainly struck a decade ago, the EC's Notice published pursuant to Article 19(3) of Council Regulation No 17 concerning Cases COMP/35.163. Notification of FIA Regulations, COMP/36.638. Notification by FIA/FOA of agreements relating to the FIA Formula One World Championship, COMP/36.776. GTR/FIA & others published at the time certainly does not prevent the sale of F1's commercial rights to media-driven organisations, with the following clauses pertaining to F1 broadcast contracts.

FOA (CRH signatory at the time) has removed from its standard form TV contract the provision whereby broadcasters were afforded a discount of the rights fee payable if they did not broadcast any other form of open wheeler racing and by letters dated 14 August, 2000 to the two broadcasters in the European Union whose contracts contained such a clause FOA unilaterally waived its rights in relation to it.

Where exclusive rights have been granted in relation to terrestrial television, FOA is now limiting the duration of these contracts to a maximum of five years in the case of host broadcasters, and to a maximum of three years in all other cases.

FOA undertakes to notify comparable rival broadcasters when exclusive free-to-air broadcasting arrangements for a given territory expire and to invite them to apply. FOA has agreed to consider (emphasis added) applications for broadcast rights on a non-discriminatory basis.

Thus the CRH - be it CVC or News Crop/Exor - need only comply with those provisions, in particular the word 'consider', to satisfy the EC. More saliently, the agreement differentiates between 'free-to-air' and 'terrestrial' television' - the latter a term also used at the time for FTA broadcasts - and 'all other cases', implying other broadcasters (PPV, Pay-TV, and suchlike) are exempt.

However, should there exist doubt as to whether Pay-TV in whatever form was included in an official notice issued a exactly decade ago, consider that not only had Bernie Ecclestone, then as now the de facto CRH, introduced his digital PPV service, but the likes of Premiere in Germany and others offered P-TV, while Eurosport until the mid-nineties broadcast F1 purely on a subscription basis.

Thus both the letter and intention of the EC notice are abundantly clear.

None of this, though, suggests CVC will be a willing seller, and that is, of course, the venture fund's prerogative as present majority owner of the 100-year lease. Nor, for that matter does it guarantee News Corp/Exor will actually hit the 'Go' button should CVC even agree to a sale on acceptable terms.

The first question needing an answer is why, if at all, CVC should wish to cash out of F1 - here there are manifold reasons why the investment fund may elect to, with the key laying in the word 'investment': having paid around $1,6bn for its two-third share in Delta Topco, the ultimate holding company, CVC would be failing in its duty towards investors if it did not at least consider offers, particularly as it virtually recouped its outlay since setting up Delta Topco with the likes of JP Morgan Lehman Brothers and Ecclestone's family trust in 2006.

CVC, after all, knows one-quarter of zero about running F1, and with no clear succession plan in place for an organisation run by an 80-year-old with a history of heart operations and no obvious heir - apparent or biologically - must surely be wondering 'what/if?' Thus there exist two reasons to at least listen to what Messrs J Murdoch and J Elkann - scion of News Corporation founder Rupert and Angelli heir respectively - have to say when they get around to verbalising it.

TV camera © LAT

However, what do these two wizz-kids perceive in F1 that others don't? Further, why did they last week take the unusual step of announcing they were investigating the purchase of the 100-year rights when F1 is not a publicly-owned entity? Equally, why did CVC make only half-hearted attempts at denial when either total silence or robust rebuttal would ultimately have proved more effective?

Back, though, to the point. In Istanbul numerous paddock inhabitants professed to having met either or both of suitors, and without exception they were extremely highly spoken of. One said he considered James the perfect heir to Murdoch Snr., with sister Elizabeth able to do an equally outstanding job.

Another source, who knows John Elkann from way back when, rejected suggestions that the 35-year-old Italo-American was appointed president of FIAT only through familial connections: "Look, when (Giovanni) Agnelli died they made (Luca) di Montezemolo president (of FIAT), but the minute John proved he was ready he was installed. You could argue he would not have got the job had he not been an Agnelli, but you can't argue he has not been successful at FIAT. Look at the share price..."

Both heirs are said to be highly capable and 'savvy'; the latter term being further applied in conjunction with 'media'. Indeed, J. Murdoch has overseen record labels, internet sites, news titles, and various FTA and PPV/PTV broadcasters, for News Corp, and sits on many of the company's boards. And, what is F1 if not a global sports media property?

Against that background the potential is incredible, particularly given the (barmy) 100-year lease, which kicked in on 1 January this year, granted by the FIA's previous regime to an outside entity. Thirty years ago PPV/PTV were unknown terms, 20 years ago the internet linked a few university computers together through unwieldy programmes, and ten years ago 'new media' referred to flashing telephone modems.

Presently News Corp covers the full media spectrum - from movies through internet and FTA/PPV/P-TV broadcasting to print/electronic newspapers and mobile media. Reflect upon where 'new media' an cross-platform it will be in ten years time, let alone a century, and don't bet against News Corp being at the forefront of this brave new media world.

On the other hand Exor is headed by Elkann, chairman of FIAT, which owns the (now profitable) FIAT, Alfa Romeo, Lancia, Maserati, and Ferrari marques, plus in 2009 took (recently exercised ) options on Chrysler, which owns Jeep, Dodge, Ram and Mopar brands - all in the black after rough pre-FIAT years.

Above all, Elkann, whose mother Margherita was the daughter of Giovanni, is chairman of Exor, one of Europe's largest industrial holding investment companies, which owns Juventus F.C. Talk to insiders, and they point to Elkann as the man who took all the right strategic decisions to turn these entities around. Cars, money, sport - the essence of F1.

Still, even if the sale goes ahead - and this column's sources are adamant the chances remain 60/40 in favour - the syndicate needs first get the teams and FIA on side. Or does it?

The infamous 'Don King Clause' in the rights' lease agreement, which grants the FIA power of veto over an change of control of the CRH, means FIA approval will be required. By the same token, the current FIA president has openly criticised the (financial) terms of the lease, and in Istanbul there were suggestions the FIA would be favourably inclined to any proposal from the syndicate as long as the terms went some way towards redressing the commercial imbalance.

Two down, one to go - albeit, after persuading CVC to sell, the thorniest remains, for the current Concorde expires at end-2012 and teams are pushing for 75% of underlying revenues (from the current 50%), at which point CVC's retained gross is at breaking point.

However, media analysts are of the firm opinion F1 has not even scratched on the surface of its potential - relying instead on a tired, two-decade old business model - and that it needs visionary new owners to realise its prospects.

Under those circumstances the untapped income is such the (new) CRH could easily afford 75% whilst still netting exceptional returns. That should get the teams' attention, regardless of whether a new Concorde is agreed before or after any deal. In fact, it would likely expedite the matter.

However, any deal faces competition from various, predominantly Middle Eastern, sovereign wealth funds, most whom have links to, or investments in, F1: Aabar (Abu Dhabi, Mercedes); Mubadala (Abu Dhabi, Ferrari, circuit); Mumtalakat (Bahrain, McLaren Group, McLaren Automotive, circuit), with Qatar's soveriegn fund, now linked to Williams, also believed to be sniffing about. Red Bull's billionaire owner Diedrich Mateschitz is also rumoured to have expressed interest in joining such a 'club'. In such a scenario Ferrari is sitting pretty, for it has feet in both camps via Exor and Mubadal...

John Elkann, Luca di Montezemolo © sutton-images.com

By the same token, certain teams reckon they should have a slice of the sport, so could equally mount a bid for a shareholding as first suggested here and confirmed during a FOTA media briefing on Friday in McLaren's palatial hospitality facility. Given that teams at the blunt end of the grid are extremely cash-strapped at present, one wonders how suggestions that the haves may in future commercially lord it over have-nots went down at the far end of the paddock...

One source 'down there' also questioned why it had to be either FTA or P-TV/PPV - saying the solution lay 'somewhere in the middle - FTA hitting the mass market and P-TV offering premium content for true petrolheads', while voicing his belief that the value of TV is overstated as a sponsor vehicle. "It's part of the overall communications mix," he said, "but we got just 42 seconds of TV time in China and you can't sell sponsorship on that."

Two team sources indicated their concern over the takeover, particularly should the bigger teams (or their holding companies) be involved. One went as far as saying: "It will be the end of FOTA, but they (FOTA) have always looked after the interests of the big teams; this proves it..."

That would be the irony of the situation: Where the CRH has spent enormous time and effort in attempting to split FOTA, a hostile take-over bid seems on-track to achieve precisely that...