The Weekly Grapevine

The New F1 Deal

The only surprising aspect to the surprises Bernard Charles Ecclestone springs on Formula One is that people are constantly surprised.

And, so it is with the 'purchase' of SLEC, Bambino Holdings, Speed Investments Ltd, Formula One Holdings Ltd, Formula One Management Ltd by London-based CVC Capital Partners, for, whilst the general media seemed surprised by last Thursday's announcement, those in the know realized well over a week before that an undefined, yet major, development in Formula One's commercial evolution was bubbling under.

How so?

Simply by Ecclestone's absence from Formula One's first-ever sponsorship seminar - in Monaco's Grimaldi Forum - after he had given the initiative more than merely tacit support and indicated his attendance, then been a no-show throughout despite having been sighted in the Principality on numerous occasions during the period in question.

Given that the enclave is surrogate home and office to FIA President Max Mosley, that Toyota's John Howett, BAR-Honda's Nick Fry and Red Bull Racing Sporting Director Christian Horner all put in appearances at the Forum, then mysteriously disappeared during its proceedings, that FIA Director of Communications, Richard Woods, too, was in and out of the Forum like a Jack-in-the Box, something major was obviously brewing somewhere.

But, 'what?' was the question at the time, for who was to know at that time that a certain Michael Smith, the 52-year old chairman of CVC capital partners, lists amongst his various residences a home in Monaco?

All has since become clear. True, the 'sale' of one hundred-plus years' worth of the commercial rights' to Formula One requires consent - in terms of the original dispensation - from the sport's governing body, but, given the generally symbiotic relationship thought to exist between Mosley and Ecclestone, such rubber-stamping is said to be no more than a formality; equally crucial to the completion of the 'purchase' is European Union Commission merger clearance.

The latter could complicate matters somewhat, given the commissioner's undoubted suspicions of monopolistic practices in Formula One's affairs, but, again, the persuasive powers of Mosley and Ecclestone are legendary, and they will easily convince a bunch of bureaucrats in Brussels that MotoGP - the rights to which are ultimately vested in CVC via control of Dorna, the commercial rights' holder to motorcycling premier formula - and Formula One are in vicious competition with each other, with nary a synergetic function between them...

So, who, then, is this controller of MotoGP's rights, of the Automobile Association, of Kwikfit and Halfords, of Mr Minit and Italy's Yellow Pages, of the Danish and Belgian postal services, and past and/or present proprietor in various sectors such as auto parts distribution and the manufacture of portable toilets, and, now, to all intents and purposes, owner of our beloved sport?

How much did they pay, and, more importantly, why and how did they decide to 'invest' in Formula One, and what are the chances of their raiding its not inconsiderable coffers?

In true F1 style, numbers are hard to come by, but informed estimates place the value of the 'transaction' - note parenthesis, for until official consent is gained, no actual deal can exist - at anywhere between €1bn and €6bn, with most figures hovering at the €1.5bn mark. Given that the percentage shareholding of SLEC, holder of Formula One's commercial rights', is 52% Bayerische Landesbank, 25% Bambino Holdings (Ecclestone's family), with 23% split between bankers Lehman Bros and JP Morgan, such a deal would roughly repay their approximate financial exposure at the time of the ill-fated (and rather ill-advised) Kirch Media transaction which was to rope this trio of highly unwilling banks into F1.

Not only do (did?) they, the banks, hold 75% of a business of which they knew absolutely zero - some would say the square root of - but found themselves hobbled by dividends, or, rather a lack of, on Formula One's annual turnover and profit - estimated at €500m and €300m respectively - by Ecclestone's bond issue. This extremely cunning transaction saw him borrow, back in 1998, a balloon sum of €1.5bn, to be repaid via FOH from future earnings. Thus he - for which read the Ecclestone family coffers - benefited immediately, with the banks subsequently finding themselves responsible for 75% of the bond value, whilst Ecclestone carries responsibility for only 25%.

Crucially, in terms of the bond, no dividends may be disbursed to shareholders by SLEC until the capital sum and interest thereon are cleared. Thus, the banks have smelt zero return on their 'investment' as a large portion of Formula One's profits services the debt. Any wonder Formula One's ten teams, who receive just 23% of income whilst 50% goes to servicing a family loan, are exceedingly dissatisfied?

The net effect is that SLEC is sitting upon €500m in cash revenues. A similar sum has been repaid, with the same amount still outstanding. Obviously CVC is gambling upon settling the bond issue via cash on hand, then grabbing the sport's annual profits - which could, though, equate to nothing or even less should the prevailing SLEC/GPMA squabble result in two opposing series. Either way, neither scenario bodes well for the sport's future health, particularly given CVC's profit-above-all reputation in the City.

The transaction details are hazy - CVC is notoriously secretive despite denying such accusations - but it appears BLB and Ecclestone have agreed to sell their holdings, with Lehman and Morgan said to be considering offers for theirs. CVC's plan, then, is the creation a new company (Alpha Prema) - to be majority-owned by CVC but managed day-to-day by Ecclestone, who, surprise, surprise, becomes a shareholder via a 'reinvestment' through Bambino. And, here the plot thickens: Gerhard Gribkowsky, BLB director and, to date, the banks' overall proxy-holder, too, joins the board. Why, given the banks' stated objective of exiting Formula One at the right price, has not been explained, nor is it likely to be.

Whether Lehman and Morgan dispose of their shares or not is totally irrelevant in the greater context: should they sit tight, their 23% versus the combined 77% held by CVC and Bambino, and, somehow, Gribkowsky will ultimately prove little more than an annoyance to CVC.

The venture capital company grew out of the European offices of the US Citigroup corporation, which hit regulatory problems in the early nineties after a series of junk-bond deals soured. A group of extremely ambitious chartered accountant/employees, led by Smith - who had joined Citigroup in 1982 from accountants Arthur Andersen - bought the regional offices and went into business for their own account. From the 'off' they moved fast - a characteristic retained to this day by CVC, as evidenced by their acquisition of Belgian Post: within six months of purchasing 20% of the Danish postal operator, the duo successfully bid for 50% minus one share in Belgium's mail service.

Since 1993 CVC, now primarily based in Luxembourg but operating out 12 European offices, has raised over €60bn, acquiring in excess of 200 companies in the region during that time. A classic buyout-grow-or-strip-sell business model was followed, and the group presently owns 38 companies within Europe - 39 with SLEC included. Prior to the latest deal, the company's residual worth was given as €32.2bn; whilst an additional €5bn could be factored in for the group's Asian-Pacific operations, which have since 1999 acquired 17 businesses employing over 40,000 heads.

According to London's The Sunday Times, CVC's profile is that of a hardball player - which is hardly like to cause sleepless nights for Ecclestone, but could ultimately irritate certain GPMA members, whose business style borders on the conventional. The Times' analysis of CVC acquisition of the AA provides a good case study: no sooner had CVC gained control of the motorists' organization, than they cut the number of patrolmen from 3,500 to 2,900, whilst staff at Kwikfit, too, complained of their treatment.

Over the years Ecclestone has created tremendous loyalty amongst his 200-odd staff members - who draw a combined €15m in annual wages - and such tactics are hardly likely to increase their undoubted productivity. After all, Formula One's hours are hardly short, nor its working conditions ideal: a bit like AA patrolmen's, in fact, and any such disruptions will soon be visible, as some former AA staff complain has been the case.

No sooner had the news of Formula One's 'takeover' broken, than GPMA issued a statement: "The news has been received with interest. We look forward to entering into a constructive dialogue with Alpha Prema as we pursue our objective to further develop the sport for the benefit of all stakeholders, and in particular the fans. Meanwhile, the GPMA and its operating partner, iSe, will continue with preparations for the New Series."

Whilst the GPMA statement provides no evidence of softening by the group representing BMW, Honda, Mercedes, Renault and Toyota - after all, until all stated objectives are met, why would there be - the newly-minted rumour that competing teams could be offered up to 60% of Formula One's total revenues - promoters' fees, media rights, signage and Paddock Club income, plus licensing income - could initiate a change of heart, but only partially so, for, at the root of the problem, lies, according to GPMA, not money, but the present administration and future governance of Formula One.

And, herein lies CVC's - or, more precisely, Alpha Prema's if/when clearance is granted - conundrum: throwing money - i.e. profits dearly needed to satisfy investors - at Formula One teams will only slightly minimize the risk of a breakaway series; whilst maintaining team disbursements at 23% will almost certainly lead to a GPMA championship, regardless of all else. True, CVC may be made up of hardballers, but could any City group be harder than a co-operative made up of exceedingly senior motor industry executives and team bosses participating in the most brutal sport on Earth?

Ultimately, the concept of venture capitalists controlling motorsport rights is not new, as proven by CVC and Dorna - with the latter once, rather ironically, counting a certain BC Ecclestone amongst its shareholders - as proven by Apax Partners, who jointly control ISC, commercial rights' holder of the FIA World Rally Championship, with David Richards who, ironically, procured the series' rights from Ecclestone in the wake of an EU ruling that he, Ecclestone, unacceptably monopolized the FIA's motorsport rights.

In this instance, though, there exists a major difference: neither MotoGP nor WRC are even remotely facing revolutions or breakaway threats.

If CVC's directors intend maintaining their successful investment records, they need to persuade Formula One's teams that not only will substantially more money be made available to them, but that they, CVC, will ensure greater financial and administrative transparency where it is within their ambit to do so, and lobby on their, the teams', behalf where it is not.

Failing that, CVC is sure to find, like EM.TV, who, in liquidation, sold F1 on to Kirch, like Kirch, who, in liquidation, forfeited F1 to the banks, like BLB and their partner banks, who, in desperation, regularly turned to High Court's in the United Kingdom and Switzerland to clarify their ownership of F1, that Formula One is simply a bridge too far.

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- The Autosport.com Team

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