The Bambinos and the Banks

We should have known that times were hard at the Ecclestone household when we saw Bernie's oldest daughter, 22-year-old Tamara, taking a job as a Formula One TV journalist, interviewing the likes of Grand Prix drivers Niki Lauda and Arturo Merzario (and making a good job of it) in the Inner Sanctum of Karl Heinz-Zimmerman's motorhome at Monza, the very track where Tamara's mom and dad met in 1981.

What could possibly be the source for such distress at Bambino Holdings, Ltd., the Ecclestone Family Trust entity named after Tamara and Petra, which functions as the trust Bernie Ecclestone set up for wife Slavica as well as the two daughters?

On July 3rd 2006, an English law firm, Peters & Peters, filed a Claim on behalf of Kamos-Finanz, a Swiss lender, in the High Court of Justice Chancery Division in London, against SLEC Holdings Limited and Bambino Holdings Limited which, according to the court papers "concern[s] a loan of US$235,219,972.50 advanced on 24 April 2001 ('the Loan')."

Given the staggering sum set forth in the Claim, it is surprising that the lawsuit has not been proceeding through the courts at the speed of a Formula One car. In checking with the High Court, though, it appears that only the most preliminary litigation steps have been taken, with lawyers appearing for the two defendants and extensions of time having been requested and granted before the defendants have to show their hands and formally respond to the Swiss lender's Claim.

What is this US$235 million lawsuit all about? Have the girls gone crazy shopping at Harrods while Bernie was away running the races? Have they gone off and bought a small country somewhere and forgotten to pay for it? Or has Daddy just gone out and bought Ferrari from Fiat?

Unfortunately, it is doubtful that anything as scintillating as any of these scenarios has occurred. But a significant business deal does lie behind the pending US$235 million lawsuit, having very little to do with Bernie and his family, who are doubtless very much insulted from this Claim, but much more to do with the future of Formula One and how it is owned and financed.

Given the time period referenced in the lawsuit, this case probably has much to do also with the prior owners of SLEC - Kirch Media and EM.TV - now long gone from the scene, but whose deeds (and deals) live after them.

Indeed, sources close to the case surmise that the US$235 million loan Kamos-Finanz is suing on is actually an internal transaction, an intercompany "loan" of sorts between the entities that formerly owned SLEC, with no interest rate and no repayment date provided for in the loan documents, thus giving the borrower more latitude than the usual borrower has, notwithstanding what the lawyers for Kamos-Finanz assert in their Claim.

Deal of the Century: Formula One Hundred

It all begins back in the year we called Y2K. It had to be regarded as the deal of the new century when, in June 2000, Bernie Ecclestone bid successfully on obtaining the commercial rights to exploit the FIA's Formula One World Championship for 100 years.

Was this "franchise" awarded by the FIA on a sole source basis to Bernie? No, the FIA had also been trying to extract a bid from the manufacturers involved in Formula One for months before June 2000, but, as this fractious group of manufacturers has shown time and again, the manufacturers were never organized enough to make a satisfactory bid.

The manufacturers - remember the GPWC rival series to Formula One that never was - kept asking the FIA for more time for a possible bid from them but the FIA was not prepared to wait until September 2000 for an offer that might never appear when the FIA had Bernie's bid in hand.

What made the deal all the more remarkable was that Bernie had not even sought 100 years of commercial rights (he already had the commercial rights until 2010 under the then-prevailing Commercial Agreement between Formula One Management and the FIA, and Bernie will be 80 years old by 2010), but Ecclestone had that 100-year structure thrust upon him by two regulatory bodies of all things - the FIA, and the European Commission Competition Directorate, who together were the midwives for transferring 100 years of Formula One commercial rights - the core value of the F1 franchise - to Bernie's companies.

How and why? The EC had brought an antitrust proceeding against the FIA and FOM, Bernie's company, claiming that the way the sport of Formula One ran itself was an anti-trust violation. As a face-saving palliative gesture to the EC to settle the case, the FIA accepted the suggestion of the EC that the governing body had to divest itself of the commercial aspects of the sport and for a sufficiently long period of time so that any fears of a lingering conflict of interest or lack of impartiality in running the sport could be put to rest.

The solution fashioned by the FIA's lawyers and accepted by the EC was bold and far-reaching: the FIA sold the commercial rights for Formula One for the next 100 years so that it could be as pure as the driven snow in administering the sport. The current commercial rights holder - Bernie Ecclestone's FOM - agreed in principle to pay the FIA $300 million USD for the commercial rights, over a period of seven years, and at a meeting on June 21, 2000 in Warsaw, Poland, the FIA's World Motor Sport Council voted unanimously in favor of the 100 Year Solution to the EC's antitrust case.

Paying the Bills

Even a billionaire like Bernie does not have US$300 million lying around, and paying such a huge sum to the Piper - the FIA - caused discomfort all around right from the start. Max Mosley made it known that notwithstanding the World Motor Sport Council's acceptance of Bernie's offer in principle, Mosley preferred cash to Bernie paying out the US$300 million to the FIA over seven years.

As Bernie's former lawyer back in the 1980s, Max Mosley found himself in an awkward position: on the one hand, as president of the FIA, he was acting on behalf of the beneficiary of the US$300 million, the FIA Foundation; on the other hand, Mosley surely knew that financing this US$300 million obligation was becoming problematic given Bernie's then-partners, EM.TV, a German media and merchandising company, which by then owned 50% of SLEC because of a sale of equity by Bernie to EM.TV in March 2000.

Ultimately, entities other than Bernie and his family trust would own up to 75% of Formula One, all the more reason then for the FIA to be insisting on cash in hand, not a promissory note payable seven years out or in installments.

By 2001, when Max Mosley was making his demands, all was not well among Formula One's new owners. EM.TV's stock was dropping on the Frankfurt stock exchange and the financial squeeze EM.TV was in presumably made borrowing even more difficult for the Formula One Group than if Ecclestone had been seeking financing on his own.

By April 2002, Kirch Media, which had bailed out EM.TV, itself filed for insolvency proceedings under German Law and the debt that is the subject of the Kamos-Finanz Claim may well have originated in the EM.TV/Kirch era of ownership.

Money Comes Between Friends (or Seemed To)

In any event, however the debt/loan originated, by March 2001 - nine months after the FIA had approved the 100 year transaction - things came to a head and began to get ugly. Mosley notified Ecclestone that his companies had to come up with a substantial downpayment on the US$300 million - US$60 million - before the next FIA General Assembly meeting on March 22nd 2001, or risk losing the benefit of the 100 years of commercial rights to Formula One.

Always one to follow strictly the public relations rubric "if you punch me, I punch back," Bernie took on his ex-lawyer and friend of 30 years, telling the Financial Times that Mosley had gotten his facts wrong. "There is no truth in the article," he said. "[The Ecclestone Family's trust] has seven years to pay, unless the company floats [its stock in an IPO] . . . If the FIA wishes the trust to pay earlier than envisaged, it will need to grant it a discount."

Remarkably, Ecclestone dismissed the dunning campaign by the FIA as "extortion." In most circles, use of such a highly-charged term would be "fighting words", but to those who know him, that's just Ecclestone, for whom colorful and vivid language is irresistible.

Mosley knows Ecclestone as well as anyone, is somewhat of a wordsmith himself, and is alert to Ecclestone's verbal dexterity. In responding to Ecclestone, Mosley did not rise to the bait of the extortion charge and did not reply in kind and escalate the rhetoric but instead minimized the importance of this tiff over a mere US$60 million or so, saying on February 6th 2001: "There is no question of extorting money from Mr. Ecclestone.

"We are just trying to get his family trust to keep to their undertaking to agree [to] a contract and make an initial payment of US$60 million. This should all have been done last July [2000]. We have now informed them that if they don't complete [the downpayment] immediately, the next FIA General Assembly (on 22 March [2001]) may decide to make other arrangements. This seems to be entirely reasonable."

Apparently, Mosley's position held sway. The public record shows that in April 2001 the figure paid out to the FIA was US$313.6 million.

Until this Kamos-Finanz lawsuit was filed in July 2006, Mosley's threat to Ecclestone - to pay up by March 22nd 2001 or else - was the last we had heard about how the then-owners of SLEC managed to finance the 100-year transaction to fend off Mosley making good on his threat.

Returning to the High Court pleadings filed by Kamos-Finanz in July 2006, however, the full statement of the details of the claim seems to advance the story from this March 2001 period:

"These proceedings concern a loan of US$235,219,972.50 advanced on 24 April 2001 ("the Loan"). The Claimant is the entity now entitled to repayment of the Loan. The Claimant seeks, as against the First Defendant [SLEC] an order for payment of US$235,219,972.50 and interest thereon. In the alternative to the claim against the First Defendant for interest, the Claimant seeks as against the Second Defendant [Bambino] a sum in damages equivalent to interest on the Loan at US$LIBOR plus 300 basis points from 29 November, 2001. The Claimant also seeks further or other relief and costs. The grounds upon which the Claimant is entitled to this relief are set out in the Particulars of Claim, a copy of which will follow . . . Judgment [requested] for the sum of US$292,816,84.50." (Emphasis added)

Unfortunately, the court files do not reflect the Particulars of Claim, or the terms of the Loan, especially basic identifying information such as who the borrower and lender were, the interest rate charged, the maturity date on the Loan, the guarantors, if any, and the collateral pledged to support the Loan. For example, the Claim alleges that the money was advanced in April 2001 but never really says when the Loan was due. And as to Bambino, an interest rate is named in the Claim, but only since November 2001. Very mysterious.

What can we learn from these skimpy allegations by Kamos-Finanz? Doing the math, US$235 million is 75% of US$313 million, so perhaps it was Bernie's 25% ownership interest that brought cash to the table with the other 75% financed by means of an intercompany loan between and among the then 75%-owners of SLEC.

Apparently, Bernie paid the US$60 million downpayment Max demanded by the March 22nd 2001 due date, and then in April 2001 the SLEC ownership group somehow negotiated a further US$235 million loan, or more, with someone to finance a further payment to the FIA so that the FIA could receive the bargained-for US$313.6 million in late April 2001 as consideration for the 100-year transaction.

The other fact suggested by the Kamos-Finanz Claim is that there may have been another lender involved back in April 2001 in making the US$235 million loan, which Kamos-Finanz then purchased (presumably, at a discount) from the original lender. Note that the lawyer for Kamos-Finanz states "Claimant is the entity now entitled to repayment of the Loan." Who was the original lender, if that hypothesis is accurate? And was it an intercompany loan among SLEC stockholders rather than a conventional bank financing? And if it was, how has the subsequent insolvency proceedings of certain entities affected the debt?

The terms of the Loan, as alleged, are revealing. As noted, Ecclestone said that his family trust had seven years to pay the FIA from March 2001 (unless they sold their shares through an Initial Public Offering), and, indeed, the allegations of the Claim suggest that the Loan appears to have been a five-year Loan, from April 2001 to April 2006 (although that is not alleged very clearly, as stated above), giving the trust sufficient time to come up with long-term financing, by means either of taking on a partner, or cashing out in an IPO.

One curiosity you may wonder about is why, according to the Claim, the loan balance on the US$235 million loan made in 2001 is still, well, US$235 million, according to Kamos-Finanz's lawyer. Does that mean that nothing has been paid on the loan for five years? If it was an intercompany loan with favorable terms, perhaps nothing has been due these last five years, and therefore, nothing paid.

Alternatively, if it was a conventional loan it could mean that for five years the owners of Formula One have been making only interest payments on the US$235 million loan, with the variable interest rate pegged to LIBOR (the London Interbank Offering Rate). This is like you making Minimum Payment on your credit card bill, except that Bernie's interest rate would be somewhat more favorable than your credit card rates, LIBOR plus 300 points.

Looking back at LIBOR these last years, it is possible that SLEC has been paying interest rates ranging from 7.5% to 8.25%, roughly the equivalent of the Prime Rate in the United States, the interest rate given to a bank's best customers, meaning perhaps US$20 million a year in "interest only" payments made by SLEC. Or, if the Loan was an intercompany loan, perhaps nothing has been due and nothing paid by way of principal or interest until now, which may provide the basis for a defense by SLEC and/or Bambino, or both.

According to the Claim filed by the lawyers for Kamos-Finanz, however, they claim April 2006 as a sort of the "maturity date" on the Loan, which means to them that the principal amount of US$235 million, whoever lent it, is now due. Now what?

A New Player: CVC

Enter CVC. In the Kamos-Finanz Claim, there are two Defendants named, SLEC Holdings Limited and Bambino Holdings Limited, but, interestingly, the address given for SLEC is not Bernie's office near Hyde Park but instead the following: "SLEC Holdings Limited care of CVC Capital Partners Limited, 111 Strand, London WC2R OAG."

Who is CVC? Happily for Kamos-Finanz, they are in the Money Business. According to the CVC website, "CVC is an independent buy-out firm founded in 1981 and has raised over US$18 billion in Europe and Asia." CVC currently has 38 companies in its European Portfolio. Of the eight "equity funds" CVC has organized, it is significant to understand that Citigroup is affiliated with six of them either as a joint venturer or as a parallel investor. Using shorthand, think of CVC as Citigroup Venture Capital and you would not be too far off although CVC would not want you to think of them that way.

Where does CVC fit in with Formula One, and why is CVC now the First Defendant being served in the Kamos-Finanz case filed for US$235 million? On November 25th 2005, CVC announced that it had formed a new company, called Alpha Prema (couldn't they have spelled it Alfa Primo as long as they were making things up!) to hold the investment CVC was making in Formula One.

In November 2005, CVC bought out Bayerische Landesbank's interest in Formula One and an unspecified percentage of the SLEC/Bambino interests in Formula One. In December 2005, CVC bought JPMorgan's and Lehman Brothers interests in Formula One, the other shareholders.

After all these corporate manipulations had been completed, here is who owns Formula One, according to excerpts from CVC's own press releases as of November 25 and December 6th 2005:

"Alpha Prema is a newly incorporated company through which funds managed or advised by CVC Capital Partners Group ("CVC") are making their investment in Formula One. CVC will have a majority stake in Alpha Prema.

"The shareholders of Alpha Prema will be CVC . . . Bambino (through a reinvestment), Mr. Bernie Ecclestone and the Formula One Management team. CVC will have a majority stake in Alpha Prema and a controlling interest in the Formula One Group. Bernie Ecclestone will remain as Chief Executive of the Formula One Group . . . .

"Mr. Ecclestone commented: 'We are delighted to have CVC as a shareholder whose long-term strategies and vision will provide the stability for teams, promoters and manufacturers. They are knowledgeable about motor sport and make an ideal partner for Formula One.'

[...]

"Following completion of this transaction, Alpha Prema will control 86% of the Formula One group."

To round things out, on March 31st 2006, CVC bought Patrick McNally's Allsport Management S.A. and Allsopp Parker & Marsh - the former entity being responsible for selling the Formula One advertising and sponsor packages and the latter entity being the principal provider of VIP hospitality at Formula One events, i.e., CVC now owns the Paddock Club and has some place to take all of the executives in the 34 European companies it has a stake in.

As with Formula One itself, where Bernie was left in charge, Patrick McNally continues as Chief Executive and was appointed as a member of the Board of Alpha Topco Limited, the new entity CVC created to do this portion of the transaction.

Does CVC sound like the kind of place that would overlook a US$235 million loan on the books? I don't think so, which tells me that there is more than meets the eye to this entire litigation.

All of this, by the way, is great news for Slavica, Tamara and Petra, because it means that Ecclestone and McNally have cashed out to a large extent and that it is CVC which now presumably owes 86% of the US$235 million that Kamos-Finanz is suing for, which is why CVC's offices received the court papers as First Defendant and Bambino Holdings is being sued as Second Defendant. The girls can cover their portion of the exposure out of their allowances!

Better still, the lawyers hired to represent SLEC/CVC and Bambino are a formidable bunch, with Freshfields Bruckhaus Deringer appearing for First Defendant SLEC/CVC (some 2,000 lawyers strong worldwide) and Lovells, another big firm with about 1,500 lawyers, appearing for Bambino Holdings; if there is something squishy about this loan, the munchkins at these law firms will find it. Kamos-Finanz is represented by Peters & Peters, a firm of 27 lawyers specializing in civil/commercial fraud, with Keith Oliver, Senior Partner of the firm, signing the Claim on behalf of the Swiss lender, so a good David against Goliath battle shaping up here.

What does it all mean to us as Formula One fans, now that we know that Bernie and the girls are not jeopardized by this lawsuit?

There is money all around these parties, so the Kamos-Finanz lawsuit is really against CVC principally (sorry, Alpha Prema) and will ultimately be settled quietly after some preliminary saber-rattling, including perhaps the Defendants making an application to challenge the jurisdiction of the Chancery Division of the High Court of Justice to hear this case, given the loan documents which may well provide for some other law to apply for enforcement of the Loan or for arbitration. Or perhaps there will be a challenge to the assignment of the Loan from the original lender to Kamos-Finanz or to the efficacy of the Loan itself, given the fact that some of the prior owners of SLEC are involved in insolvency proceedings in Germany.

Whatever the outcome of this Kamos-Finanz lawsuit, the broader and more significant question is what are CVC's plans for Formula One? Remember Ecclestone's idea for an IPO? Well, that concept goes to the heart of what CVC does for a living: acquire companies to add to its portfolio, improve the acquired entity's management and operations and then position the entity for sale, either to an outsider or by means of a float. Indeed, perusing CVC's website and press releases, they list as one of their investment categories a category known as "Recent Exits" to describe the companies CVC has sold its investment in, and there are a lot of them.

To be sure, CVC maintained its investment in DORNA, the company that organizes and manages the commercial rights of the Moto GP World Championship, for eight years, one of its longest holdings (only giving it up as a condition of the EC's approval of the Formula One transaction), so perhaps we are very early in the CVC investment cycle before the Exit Strategy takes hold and Formula One is added to the list of "Recent Exits".

Back to the Family Business

On October 28th 2006, Bernie Ecclestone turns 76 years old, son of a father that died of a heart attack at 87 and a mother who died of pneumonia at 89, so between Bernie's longevity and CVC's holding period for investments, we have probably five more years of stability before all hell breaks loose and we wake up one morning and find that Citigroup owns Formula One or sells it through an IPO!

Alternatively, let us hope the girls have their father's business genes and buy back CVC's shares if and when the going gets tough and the shares go back to where they started. As the always-entertaining and wily Irishman Eddie Jordan once put it, Bernie, now rumored to be worth well over US$3 billion, has seemed to have bought and sold Formula One three times, so do not be surprised to see the Ecclestone Family Tradition continue.

One thing is for sure: if the Loan is a legitimate arms-length transaction, Kamos-Finanz will get its money and have its loan paid in due course (or, more likely, whatever is owed will be re-financed by CVC) and the lender has probably delayed the process by going public with its collection lawsuit.

Bernie never welches on a deal, and is proud of that, as he once told the Daily Telegraph: "What I've done, I've done honestly and correctly. I've never done anything bad to anyone in my life. I've never cheated anybody. If I do a deal, I don't need to write it down on paper. Everyone knows I won't go back. Even if something terrible happened the next day, which was a disadvantage to me, I'd never back out. I am proud of that."

Put it in the bank; the Bambinos are safe and CVC and Kamos-Finanz are too, so long as no one is cheating anyone here. We are the ones in jeopardy five years or so from now at the hands of the venture capitalists.

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