What could Liberty dollars mean for F1?

A year ago we analysed the chances of a sale of Formula 1's commercial rights by CVC Capital Partners, the venture fund that controls 35.5% of rights-holding entity Formula One Management (via FOM's parent company Delta Topco), but effectively controls 75% of the vote via a string of proxy deals it struck during its sell-off of share blocks to a string of investors.

The analysis included the following paragraph, which remains equally salient today:

The wheres, whys and whats of CVC's investment in Formula 1 have oft been analysed in these pages, and it is no secret that CVC generally works to seven-to-10-year acquisition cycles, with November this year [2015] marking exactly a decade since it acquired the rights in 2005.

Notwithstanding the interest then shown by Miami Dolphins owner Stephen Ross and the Qataris in June 2015, CVC remains very much in the saddle. And therefore it was no surprise when Sky TV announced last Friday that Liberty Media Corporation (a mass media company) and sister firm Liberty Global (cable-based entertainment) planned competing bids for F1's rights in a deal that would value the championship at around $8.4 billion.

While there exists confusion as to why two companies controlled by John Malone - who rose from electrical engineering to become arguably the globe's most influential media executive (and largest landowner in the USA, with 2.1 million acres, mainly in Maine) - would go head-to-head, the answer lies in their corporate structures, with both sets of shareholders eyeing a slice of F1's action.

Where previous speculation about the sale of the rights was met with cynicism, this time various team executives and paddock personalities were bullish that a deal could or would be struck. Although to a person they queried the alleged value, with one pointing out that $8.4bn (£6.5bn) represented a figure of approximately 17 times F1's projected 2016 earnings.

They have a point. Assuming F1 turns over $1.8bn in 2016, a deduction of FOM's overheads and running costs of around $500m would deliver underlying revenues of $1.3bn. As revealed here, in '15 the teams were paid $880m in 'Bernie Monies' - named after F1 tsar Bernie Ecclestone - leaving a bottom line of $420m for distribution to CVC and other shareholders.

Although F1's 2016 revenues are expected to increase off the back of the expansion to 21 races, the championship's retained revenues are unlikely to exceed $500m, making our unnamed source's projections largely accurate.

Still, having paid around $1.5bn for its (then) 66% share of the rights in 2005 and since creamed off an estimated $2bn in dividends and front-loaded loans, CVC could well afford to haggle on Sky's rumoured valuation - a figure that had also been punted about by the Wall Street Journal in early August, when the financial gazette first reported Liberty's interest.

The latest news had clearly been leaked to Sky in the hope of flushing out further parties before a deal is struck. Whatever, the cat is now firmly out of the bag, with a source in the loop claiming that "a deal could be done within three to four weeks". The key word in that sentence is "a" - said party believes the transaction will be completed in "two tranches", namely a minority purchase to enable Liberty (Media or Global) to get its foot/feet in the door while it attends to regulatory issues ahead of the final transaction.

With the Libertys being listed entities on the New York Stock Exchange with various subsidiaries, F1 could then be reversed on to the NYSE. Such a move would represent a far easier route to an IPO than CVC's tortuous Singapore strategy, which was ultimately aborted for various reasons that don't exclude Ecclestone's infamous Munich bribery trial and a global downturn in interest in stock listings.

Clearly the new owners would, though, need a heavy-hitter at the helm. One able to excite the markets while rebuilding a championship that has recently threatened to veer well out of control, commercially and politically. While 2017's calendar is expected to list 21 races - as per this year - it remains nip-and-tuck all the way through, with only the contractual obligations of various circuits ensuring they remained on the calendar.

Interlagos is known to be teetering off the back of Brazil's debt downgrading, while Silverstone has hit its spectator capacity and ticket-price limits, yet is believed to face steep (estimated at 10% a year) escalation clauses in its contract through to 2026. Just how is the circuit expected to grow revenues on that basis?

Tellingly Monza is understood to have just extended its contract for three years. "We do not know what the future holds for F1, so did not want to go longer," a party involved in the negotiations divulged, also stating that the circuit is paying £20m/£20m/£22m for each of its three races. Given a capacity of 100,000 spectators, Monza needs to sell its three-day tickets at £200/220 to break even - before promoter and circuit costs...

Germany's race is continuously under threat and Russia hosts the FIFA World Cup in 2018 - providing the country with an alternative prestige project - while Singapore is said to be agitated about its hosting fees. Of 10 new grands prix confirmed during the past decade, half have dropped off the calendar, while Kyalami recently spent £30m on upgrades, yet openly admits it cannot justify a South African GP.

This trend is expected to continue unless fees drop dramatically, which would, of course, hit FOM's bottom line. Hospitality sales have been hit by restrictive corporate compliance regulations that can only tighten in the years ahead, further reducing yet another of FOM's revenue streams.

Still, both Libertys obviously believe in the future of F1, so have clearly factored F1's third income stream, namely broadcast and media fees, into their equations. True, TV ratings are tanking, but this aspect does not seem to concern pay-per-view broadcasters, who are prepared to pay over the odds for the prestige of holding exclusive rights to a sport in their territories. And these are, of course, Liberty(s) customers.

Various cross-holdings link either or both the Libertys to News Corporation (owner of Sky TV and Fox Sports), Virgin Media and AT&T (Malone's first employer), providing tremendous synergies and placing the new owner(s) in the driving seat to exploit new media and the millennial market.

That said, as broadcasts of the Rio Olympics proved, the 18-39 age group remains an immature market, with less than 2% of US audiences consuming the Games online. Sport promoters have a long way to go to bridge the gap between TV switch-offs and iThing streaming.

However, according to a source with knowledge of the deal and Liberty's modus operandi, Malone is likely to try to woo experienced media executive Chase Carey from Fox, initially to work with Ecclestone before replacing him entirely. This would solve the questions of the 86-year-old's succession while placing a respected broadcaster at the helm with a brief to restructure the commercial aspects of F1.

"I know the way Malone works, and there will be no sacred cows," said a source. "Liberty will look at every aspect, from broadcast deals to weekend format, with the teams likely to benefit the most.

"They'll look at it from an American perspective, which means NFL-type treatment of franchises [teams] and salary [cost] caps. All in it's very good news for us teams, so for the fans as well."

A US-based sports consultant ventured that Fiat and Ferrari boss Sergio Marchionne and Mercedes CEO Dieter Zetsche would "stand no chance [against Carey], and Bernie will meet his match when push comes to shove". In fact, he opined that Ecclestone would be gone by the year's end such would be the power struggle.

Where, though, do F1's de facto owners, the FIA, sit in all this? In June it was clear that president Jean Todt knew something was up, telling Autosport during the FIA Sport Conference in Torino: "We are talking with very respectable business people," adding that any deal would require "final agreement from the FIA".

What is clear is that CVC and its associated fund holders and investors wish to exit F1, either entirely or to reduce their interests substantially - with a Liberty company providing the perfect exit strategy. Two tranches, listing and a solution to the sticky question of succession. With up to 75% to offer - although actual ownership of less than half that - CVC is able to offer a prospective buyer full control, which is crucial.

In return, F1 would be controlled by a media-savvy company able to fully exploit future opportunities and synergies while ridding the series of its troubled present ownership - provided the price is realistic. Come to think of it, the best favour CVC could do F1 during its 10 years of ownership is to sell to Liberty (either or both).