The risks facing Liberty's F1 bid

Although there had been concern in certain quarters of the Formula 1 paddock over a distinct lack of action from Liberty Media Corporation after the media giant in September acquired its first tranche of shares in the championship's ultimate commercial rights holding-entity Delta Topco - some suggest this is down to chairman Chase Carey "feeling his way about what Liberty bought" - documents seen by Autosport suggest this is certainly not the case, with all being on track for completion of the Second Stock Purchase Agreement by June 30 2017.

Although Carey was appointed chairman of Delta's board on September 7 2016, the Securities and Exchange Commission draft reveals Liberty made initial contact with CVC Capital Partners, majority owner of F1's rights, in September 2013 "to explore a potential strategic transaction involving Formula 1. In connection with such discussions, [LMC] and CVC executed a Confidentiality Agreement on November 1 2013."

Since that date and April 7 2016 the two parties 'met' on numerous occasions - usually via teleconference - to discuss a potential transaction. As part of the deal CVC proposed that certain shareholders sell their shares as part of the transaction, plus have the right to appoint a director to the Liberty Media board. The proposal included renaming of Liberty to 'Formula One Group'.

Discussion ramped up thereafter, with at least seven rounds of talks held between early April and the end of August 2016. The final deal was hammered out on August 6 and ready for signing the next day. Clearly then CVC boss Donald Mackenzie's assertion to Autosport on September 4 that two other parties remained in the running was a smokescreen.

Being a public company - listed on the New York Stock Exchange - Liberty needs to put the final transaction and renaming to its shareholders, and, as such, it identified certain risk factors during its due diligence processes. These make for interesting reading, not only for revelations they contain that would more usually be kept confidential, but also for their insights into commercial aspects of F1.

It is telling, for example, that numerous risks, such as the difficulties F1 faces in expanding its calendar, had previously been analysed in these pages - only to be denied or decried by the power-that-be - while the document confirms various factors that previously could only be speculated upon.

The document makes clear that should the Second SPA - which would raise Liberty's holding to 35% and, crucially, provide control - not go ahead by June 30 2017 with no waivers granted, then Liberty holds only the minority share (marginally below 19%, without control) in Delta it acquired in the First SPA - which would negatively impact on LMC's stock price and financial results. So the pressure is on Liberty.

Various risks, including conflicts between Liberty's culture and F1; difficulties in co-ordination and alignment of business relationships between the two; diversion of management attention from operations; complexities associated with leveraging Liberty's expertise while supporting different business models; potential conflicts with F1 counterparties (teams, promoters, sponsors); and potential loss of key employees are all identified.

The teams, too, could disrupt the business by triggering rights contained in clauses in what is referred to as Current Concorde Arrangements (basically the 2009-12 Concorde Agreement, bilateral agreements between teams, Delta Topco subsidiary Formula One Management, and the Concorde Implementation Agreement between FOM and the FIA).

For example, the teams could block the number of events in a season exceeding 20 - "or 17 if the number of events that are held outside Europe, the US or Canada exceeds 60% or more of the total number of events in that season" - and "the introduction of new sporting and technical regulations applying to the world championship".

The document makes another revelation: "Also, under the 100-year agreements as amended by the 2013 Concorde Implementation Agreement, [F1] must obtain the FIA's approval to stage more than 25 events (or beginning in 2031, more than 17 events unless the FIA and Formula 1 make a new agreement on this point), and there is no assurance such approval will be obtained".

Much has been made of Liberty executives' desire to increase F1's calendar - with three US races mooted - yet the draft acknowledges that such expansion could easily falter:

"Additionally, [F1] may have difficulties entering into agreements with race promoters that have the necessary resources and experience to obtain all the necessary FIA, governmental and sporting approvals and successfully stage an event. Events in new markets also require significant investments in circuit infrastructure and other administrative costs by Formula 1's race promoters which may not be recouped, and may generate fees below those received from Formula 1's events staged in more developed markets."

And Bernie Ecclestone certainly needs to keep the red team sweet if he wishes to remain as FOM CEO: "Also, under the Current Concorde Arrangements, the Longest Standing Team [Ferrari] has a consent right over certain nominees for appointment as a new chief executive of Formula 1, and certain rights with respect to the termination of the current chief executive of Formula 1."

The document further states "Team agreements with McLaren and Mercedes grant the corporate parent of each of those teams (McLaren Group Limited and Daimler AG, respectively) the right to appoint a director of Delta Topco until December 31, 2020 or the termination of the relevant team agreement, if earlier, and Ferrari has an equivalent right, pursuant to a provision contained in all of the team agreements granting that right to [Ferrari]". That veto...

Under 'risk factors' Liberty correctly identifies that the commercial success of F1 depends primarily upon its popularity among fans, and therefore its ability to raise revenues via race hosting fees, broadcast contracts, signage and hospitality packages, and advertisers/sponsors.

"The popularity of [F1], globally and in particular countries and regions, may be influenced by competition from any rival championship and other forms of motorsport or similar entertainment which challenge [F1's] position and reputation as the pinnacle of world motorsport, the continued participation of the leading teams, the perceived entertainment value of the world championship, changes in societal views on automobiles more generally and an unfavourable economic climate which may discourage fans from attending events or make it more difficult to expand into new markets, all of which could change rapidly and cannot be predicted."

Then there is the threat of other live sporting events, whether in terms of attendance or "delivered over television networks, radio, the internet and online services, mobile applications and other alternative sources, as well as from the availability of alternative forms of entertainment and leisure activities".

A scandal or fatal accident - the recent Jules Bianchi tragedy, plus the deaths of two marshals since 1994 are specifically referred to - could also affect F1's popularity, the draft states, adding "the popularity of the world championship varies depending upon the participation and performance of drivers and teams from that region".

The threat of teams not extending or even terminating their existing commitments - whether by breach or by exercising certain termination rights under their agreements - to participate in the F1 world championship is also identified.

"Formula 1 cannot provide assurance that any of the teams will commit to participate in the world championship beyond 2020, or that the FIA will renew the current Concorde Arrangements under the 2013 Concorde Implementation Agreement beyond 2030," Liberty states. Note the second clause.

Liberty warns that the commercial rights granted by the FIA could be terminated if "[F1] materially breaches relevant agreements (with certain of such breaches subject to certain cure rights), undergoes an unpermitted change of control, interferes with certain of the FIA's rights under the 100-year agreements or experiences certain insolvency events", all of which could hold dire consequences for the renamed Formula One Group.

As CEO of FOM - and therefore CEO-designate of the Formula One Group - Bernie Ecclestone's various legal travails are outlined, including his current dispute with Her Majesty's Revenue and Customs over his tax affairs, and the infamous Munich trial, in which he settled a $40million bribery allegation by way of a $100m payment.

"Criminal proceedings in Germany against Mr Ecclestone were abandoned without a finding of guilt following the payment by him of sizeable amounts to the relevant state and a charity. Civil proceedings brought against him in the UK were dismissed, although the Judge made an adverse finding about some aspects of Mr Ecclestone's conduct," the document tells shareholders.

Shareholders are also advised of the threat of enforcement actions under competition laws, with the two "comfort letters" issued by the EU in October 2011 that granted F1 certain clearances subject to specific terms and conditions being mentioned (more information here).

However, Liberty acknowledges that "Comfort letters are not binding on the [European Commission] and if it believes there has been a material change in circumstances, it could take further enforcement action", adding that, due to the uncertainties of law, and the possibility of third parties instigating action, "there is a risk of further [European Commission] investigations, challenges or proceedings against [F1]", before tabling the complaints brought by Force India and Sauber:

"For example, two teams made a complaint against [F1] to the [EU] in September 2015 regarding the distribution of the prize fund and current sporting governance arrangements (though [F1] rejects the complaint as being without merit and believes it is in any event, a commercial dispute and not one that involves any breach of competition law). For the reasons set out above, no assurance can be given that there will be no further investigation, challenge or proceeding."

Strange that Ecclestone at times seemed to welcome the EU action...

Under the heading "Formula 1 depends on trademarks, copyrights and intellectual property" Liberty identifies the threats to F1 of legal challenges to its intellectual properties, including increased threat of piracy and other illegal broadcast activity now that the championship is no longer widely available on free-to-air channels - which, of course, reduced the need for "ripping".

"New technologies such as the convergence of computing, communication, and entertainment devices, the falling prices of devices incorporating such technologies, increased broadband internet speed and penetration and increased availability and speed of mobile data transmission have made the unauthorised digital pirating and distribution of televised sporting events easier and faster and enforcement of intellectual property rights more challenging" the document warns.

An idea of the breadth and depth of the draft filing can be obtained from its size - no fewer than 389 pages, of which Risk Factors and Chronology make up just 10% combined - and therefore only the most diligent stock analysts are likely to devour every clause, many of which are in any event expressed in US-legalese.

That said, even a cursory reading leaves no doubts as the challenges faced by Liberty if it wishes to gain shareholder approval and, crucially, complete the Second SPA by June 30 2017 - failing which, it faces severe consequences. The document also provides good reason for Carey's low profile to date - although he is chairman, until the Second SPA is completed Liberty is but a bit player in F1.

The critical questions, then, are: Will Liberty be able to able to complete by the due date, or could Ecclestone, who has been all but enthusiastic about the deal, still scupper it? Think EM-TV, think Kirch Media: both were media giants who were brought to their knees by falling foul of Bernie...

In the final analysis, though, an even bigger question remains: given the extent of the risk factors - the list runs to over 10,000 words, or easily five times the word count of this column - why did Liberty target F1 at all?