The Weekly Grapevine

Where to next for SLEC, now that the three banks - BayerischeLB, JP Morgan and Lehman Bros - hold a voting position commensurate with their shareholding, thus enabling them to 'exert influence' over the management of Formula One?

The obvious next step is widely believed to be that the bankers, led by Bayerische's Dr. Gerhard Gibrowsky, cut a deal with the GPWC under whatever guise it chooses to mutate to next. According to Paul Stoddart, "a sale of a stake to the carmakers would be the first step to avoid the disaster of two Championships"; whilst Eddie Jordan suggested the banks should leave Bernie Ecclestone in charge of their not insubstantial investment.

Unsaid, the latter infers that Ecclestone and the manufacturers should set aside their differences and work towards a common goal, with the health and vitality of potentially the most spectacular sport on earth at the very top the agenda. Worthy, yes, but somewhat Utopian, for the carmakers have long stated that all trust between them and Ecclestone evaporated with the collapse, in December 2003, of the Memorandum of Understanding, which had as its primary objective exactly such co-operation.

Apart from any other consideration, why, as detailed in this column last week, would the carmakers venture anywhere near SLEC, which is in dire danger of being absolutely worthless come the expiration of the Concorde Agreement, after the 2007 season? All the company has after that date is (an exceedingly costly) heads of agreement deal with Ferrari - which, it could be argued, was negotiated without approval from the banks - and the balance of the 100-year FIA deal that expires in 2110.

Sure, in addition it holds television and circuit contracts, but, by their nature, these could be viewed as transient at worst, and of short- to medium term duration at best. So, whilst SLEC declared assets in Formula One Administration Ltd totalling $3.145 billion for the financial year ending 31 December 2002 (no later figures are available, in apparent breach of British company law), the fact that over 99% of that figure is listed as 'intangible', with only $31.3m listed as 'tangible', would tend to support this view.

(Forget not that the 'intangible' portion devalues at the rate of at least 1% per annum, so will have lost 5% since being granted by the FIA in 2001 - further skewing the tangible/intangible ratio.)

Then, at that stage, SLEC was winding down 'Bernievision' - the superb but extremely complex digital subscription service - and, given that a value of $60 million had been originally placed upon its equipment, it is fair to assume its written-down asset value was included under 'tangible'. Today, of course, the equipment is no longer state-of-the-art...

So, why, in the first place, would any group of hard-headed businessmen even consider purchasing a group of companies which has failed to file financial records for at least two years, and of which over 99% of their asset value is freely admitted to be 'intangible'?

Then comes the second factor: given that the banks need to recover at least $1.6 billion for their 75% stake in SLEC/FOA, so, on paper, they own three-quarters of $3.45 billion (at 2002 economics), or $2.58 billion - so a good deal, if trying to impress investors. But, should Concorde and the FIA Formula One World Championship face opposition from GPWC, that paper value could decrease exponentially, and, a worst case scenario indicates that the banks could well lose their shareholding at the rate of 33.3% per annum by end-2007.

So, again, what group of hard-headed businessmen would venture near a buy-in under those circumstances when it could all land in their collective laps within three years?

Finally, the 2002 results show that FOA's 2002 turnover was $642.7 million ($593.5 million in 2001) and profit after tax, interest, administration and sundries amounted to $126.5 million in 2002 ($117.7 million in 2001). Again, who would pay $1.6 billion in return for 75% of $100m per annum?

So, all in, the purchase of the banks' slice by the car-makers (whether as GPWC or other co-operative) is an unlikely scenario, and is further compounded by the fact that they firmly believe themselves to be in the driving seat in 2008. In addition, anti-Ferrari sentiments are at an all-time high, particularly as the Italian company's financial woes are now a matter of public record, and it is surely a matter of time before its masters are back-footed.

On to the second alternative: flotation of Formula One, as had originally been mooted by Ecclestone way back in 1997, and from whence came the bond, which begat the sale to EM.TV, the take-over by Kirch and, finally, the present predicament the banks find themselves in.

When first aired, the concept of selling Formula One on the London Stock Exchange was intriguing, for here was a glamour sport, supported (mainly) by listed multi-nationals, with a worldwide viewership measured in hundreds of millions. The fact that 16 rounds on five continents attracted full houses was no hindrance, whilst rumours that the sport was targeting emerging markets only added to the intrigue.

But, for all the numbers available to them, the City's figures operate on gut-feel, and Ecclestone's rather secretive business ways found little favour with them. At the time he blamed economic factors for the rather muted response to his plans; however, no stockbroker worth a brass shingle ever shied away from a listing offering visibly above-average returns - and, to be sure, 20% per annum return on turnover is fully acceptable in City circles. (Note: this return on turnover should not be confused with return on assets, under which the banks are presently labouring.)

So, if a listing was unattractive last century, when CART went public, just why should it be more acceptable this year, particularly given the court cases, threats, team bankruptcies, generally negative exposure the sport has received since then, and CART's crisis?

When Ecclestone first suggested Formula One plc, the sport had 10 teams, with Honda and Toyota indicating their intention of joining in as full chassis/engine operations. Then, Ferrari was healthy, Bridgestone had just entered and Michelin indicated its intentions of joining - making it, with Goodyear, three tyre companies either in or thereabouts.

Today, Formula One's grid levels remain at 20 cars despite the entry of the Japanese giants (who have recently indicated their allegiances to GPWC), Ferrari is far from a figure of corporate health, and there are constant talks of a single tyre supplier. Such matters count for plenty in Threadneedle Street.

And, despite Ecclestone's recent protestations against suggestions that FOA's dealings are far from transparent, the City still has no access to the group's 2003 results despite the first quarter of 2005 having been consigned to history. Of course, such matters can be rectified, but their implications linger, and the City's belief in Ecclestone is hardly at an all-time high. Is two-and-a-half years remaining on Concorde sufficient to gain their trust? Unlikely.

All of which leaves SLEC with the final (and simplest) alternative: reform. Promoters in all other sports retain 15-20% of the takings; why should F1's commercial rights holder be rumoured to be on the inverse or better? Of course, the present situation could be justified as the teams signed up with Ecclestone on that basis in 1997; equally, a case could be made that at least three teams have either left ignominiously, or not joined the fray at all, as a direct result of rather one-sided revenue distribution.

Would Arrows and Prost have filed for bankruptcy had a more equitable financial system been in place? Would Jaguar have left? Would Minardi have needed to sell to Stoddart? Doubtful.

Would the Australian have built a team of his own, Red Bull created an outfit as opposed to purchasing a lame cat, Midland done a direct deal with Dallara had more money been available to the teams? Probably.

More equitable, highly transparent revenue distribution would ensure the carmakers see no reason to press ahead, would ensure the survival of the teams and attract new blood, and, finally, reduce the constant bickering in the paddock and at the Heathrow Hilton. The playing field would be levelled, too, and, with all teams treated equally, true meritocracy would again hold sway in the sport, thus attracting goodwill.

Of course, the banks and Bernie would earn less, but, to be sure, they would earn far more than if the whole shooting match imploded. Reform will take time, and, no doubt, cause massive pain, but, in the long run, Formula One has no other option if it is to survive without a split in its ranks.

And, the banks may just receive a return on their investments. Over a period of about 100 years.

Taking the Michael

With all the furore surrounding the lack of performance by Ferrari and Bridgestone, it is all too easy to forget that, since Budapest in mid-August last year, Michael Schumacher has had but one race he could really be proud of - Japan.

After the Hungarian event came Belgium, and, whilst he took his seventh World Championship, the German was nonetheless beaten to the line by Kimi Raikkonen and a resurgent McLaren. At the time theories abounded that Schumacher had taken it easy to ensure his title at the circuit which saw his debut in 1991, but, really, he hardly looked on the boil for much of the weekend.

Then came Monza, and a spin on the opening lap hardly set him up for victory. Sure, he reeled in Jenson Button for an eventual second (behind Ferrari teammate Rubens Barrichello), but, again, it was far from the sort of Schumacher display the Red Riding Hoods take for granted.

Shanghai brought more of the same - strangely, Schumacher did not cream the opposition as had been his habit at circuits new to the Championship - whilst, as mentioned, Japan was vintage Schumacher with pole position thrown in for good measure.

Brazil last year saw Juan Pablo Montoya and Kimi Raikkonen take the honours whilst Michael finished seventh after a spin-crash in practice, and so did his seventh Championship-winning season come to an end.

In Melbourne this year, Schumacher crashed into Nick Heidfeld, and Malaysia saw his second seventh place in three races.

Of course, a case could be made that the team and their tyre supplier have not really done the business so far this year - a situation not aided by using a modified version of the F2004 and, if rumours are to be believed, basically last season's tyres whilst both parties awaited the arrival of F2005.

During the same period, however, Rubens Barrichello has won two races from pole, finished a fighting second in Melbourne, and scored two third places. The podium tally since Hungary thus reads: MS - 3; RB - 5. So, is it fair to blame Bridgestone and Ferrari entirely for the recent lack in performance by the seven-time World Champion?