Finding Formula 1's next owner

Last week this column related how F1's three primary factions - the Formula One Teams Association (FOTA), the FIA and Bernie Ecclestone - are squaring up to negotiate a renewed Concorde Agreement, the covenant which governs this most complex and expensive of sports. If it erred in any way it was in underestimating the full extent of the politics raging between the FIA and the Formula 1 commercial rights holder.

No sooner had this column predicted an escalation in hostilities than Ecclestone reportedly referred to the FIA as "a joke".

He went further, suggesting FIA president Jean Todt, previously the architect of Ferrari's recent F1 domination and of Peugeot's success in rallying and sportscars, was "a poor man's Max [Mosley]". He also said Todt's initiatives had "not had a positive effect on Formula 1."

Besides Red Bull Racing's utter domination of the Australian Grand Prix, the question of how much longer Todt would stand for such accusations was one of the main talking points of the Melbourne paddock. There was even speculation over what it would take for the FIA's World Motor Sport Council to bring charges against Ecclestone - a member by right of the WMSC - for bringing both the sport and governing body into disrepute.

Meanwhile the Formula One Teams' Association seems set on adding a third dimension to its Concorde negotiations. Whispers from inside FOTA suggest that increased team income (up from the present 50 per cent of underlying revenues to a minimum of 75 per cent) and retention of an equitable level of governance (as negotiated for the 2010-2012 covenant) will no longer suffice to persuade the 12 team bosses to commit pen to paper.

During its inaugural media conference in March 2009 FOTA outlined four objectives: stability, sustainability, the show, and technical competition and research. It is clear the current Concorde predominantly covers the first two points via governance and revenue clauses.

Formula 1's 'show' is coming under increasing pressure from the worldwide media revolution, hence the knee-jerk introduction of gimmicks such as adjustable rear wings, and enforced pit stops via degrading rubber compounds. FOTA and its stakeholders are pushing for this aspect to be fully addressed.

On the technical front, 'frozen' engines, 'lifed' transmissions, a dearth of in-season testing, and control tyres are hardly the stuff of dreams for budding engineers; and while it is true FOTA initiated many of these, the bottom line is the teams' association did so through necessity. The dozen teams collectively share 50 per cent of F1's annual income, while private equity fund CVC, to whom Ecclestone sold out after gaining the rights to the sport for 113 years, takes the rest.

CVC's (mainly) institutional investors funded that purchase, and the equity house later borrowed almost £2bn against F1's future earnings to reimburse investors (and itself). Thus large chunks of income regularly leave F1 while the teams survive on relative scraps, plus commercial sponsorship.

Imagine how improved the spectacle would be if teams were able to share, say, 75 per cent of the revenues, which would make an additional £250m available to them.

Now comes news that CVC is allegedly evaluating its future F1 involvement, with Reuters suggesting the entity is seeking to 're-fi' (refinance the debt), list on the stock exchange, or sell all or part of its interest to sovereign wealth funds or media organisations.

Although the news agency quotes two sources, the operative word appears to be 'allegedly'. However, the suggestion comes as no surprise, for CVC's enthusiasm for F1 seems to have cooled after the arrest of a banker who played a role in the sale of the rights. The subject of a recent column, Gerhard Gribkowsky is presently languishing in a Munich detention centre after failing to adequately explain the source of £35m which arrived in bank accounts controlled by him at around the time the deal was done.

Given that the last Concorde took almost five years to negotiate, and was only agreed after a breakaway series was all but floated, CVC could be excused for feeling rather nervous over negotiations which are hardly likely to be beneficial. After all, the last round saw CVC's annual income cut by 25 per cent (£200m per annum for three years), and it is highly unlikely to get better this time around, particularly due to factors outlined here.

Then there is the question of succession - CVC has relied fully on the 80-year-old Ecclestone to run the business, and so far the only word on the Formula One Group's executive future came from Ecclestone himself, when he suggested opaquely that the next CEO could be a woman. If the teams see this lack of an anointed successor to Mr F1 as a threat (and certain team principals are becoming increasingly vocal about the issue), imagine how CVC sees it.

So, assuming CVC does exit partially or even fully from Formula 1, how would the sport be affected?

First, it would depend entirely upon the nature of the fund's strategy. In Japan, for example, it literally lost its one-third share in the Skylark chain of restaurants in 2009 after failing to repay a bank loan. Imagine that situation hitting F1... However, that scenario seems unlikely, for in F1's instance CVC owns two thirds.

Jean Todt © Sutton

Then, it could seek an IPO. Here history is an excellent teacher: the American CART series went public, raising $100m at a time when F1's ten-year rights were valued at just three times that. CART was bankrupt within four years.

While it's possible to pick holes in several elements of CART's business strategy, the bottom line is that stock investors seek maximum returns on investment, while teams (the 'product') play the long game. Spot the potential for conflict?

However, were CVC to list over 50 per cent of stock, that would be deemed 'change of control', which the FIA could well veto; thus it is to be expected that, in the event of any listing, less than half the business would be up for grabs. Is split ownership really what F1 needs as it faces a highly competitive future?

There is, though, a potential upside to listing: teams could avail themselves of the opportunity to buy into the business they participate in.

Thus in the IPO scenario the FIA and FOTA could well become shareholders, although how the FIA would fund any shares is open to speculation, for the monies originally received from Ecclestone for the lease were donated by the FIA to the FIA Foundation - a registered charity.

Yes, the FIA could take out loans against future earnings (much as CVC did), but it would hardly be becoming of the federation to borrow bucks to buy a share in an entity it owns in any event!

Which leaves the 're-fi', resale and sovereign wealth fund options. Here the opinion of a knowledgeable motorsport business analyst was canvassed:

"A re-fi and/or IPO is unlikely, because there is not enough time before the expiration of the Concorde to interest lenders and/or investors.

"It is equally unlikely that another private equity or hedge fund would have much interest, not only because of the Concorde, but also because the ROI [return on investment] just wouldn't be there. Stated differently, CVC properly structured the deal five years ago, and the EBITDA [earnings before interest, taxes, depreciation, and amortisation] numbers are about the same then as now."

Then there is the question of sovereign wealth funds. One phrase leaps to mind: Jasmine Revolution, in the aftermath of which sovereign wealth funds across the world have been seized, with £25bn in Libyan funds being frozen just this week. Does F1 really need the associated risks, and would the FIA permit them?

Yes, Abu Dhabi has not been, and is unlikely to be, affected by the unrest sweeping across the Middle East; however, at present nothing can be taken for granted. F1 already has its fair share of Gulf interest, with over 50 per cent of the McLaren Group in the hands of Bahrain, while Williams is moving increasingly closer to Qatar, which is said to be punting for a grand prix to add to its FIFA scalp. In which case the Gulf would have three F1 events within a radius of 300 kilometres - if, that is, Bahrain makes a return.

Rumours are rife that the UAE's Mohammed bin Sulayem, now FIA vice president for sport and the man who played a vital role during Mosley's presidency, plans to run for the FIA presidency after Todt's first tenure ends in 2013.

Although sensitive, the question must be asked whether it would be healthy for a world championship to be so dominated by an emerging region which first embraced Formula 1 less than seven years ago, and then only after throwing vast sums at what has been deemed a 'vanity project' by Bahrain's protesting masses.

Still, does our expert see a sovereign wealth fund buying into F1? His take:

"Any serious purchaser of F1 would be looking upon an acquisition as a 'vanity' transaction which would raise the profile of the purchaser. That said, any entity buying F1 as a vanity acquisition knows that with the uncertainty of the Concorde Agreement it may be ten years before they were receiving a respectable ROI."

It seems that F1's commercial rights are going nowhere for the time being. Not because they cannot be sold, but simply because they cannot be sold profitably and/or expediently. Which means CVC faces a long, hard battle over its revenue streams in the very near future.