46 replies to this topic

[Eastern]

Mr Mosley and Mr Ecclestone agree on one thing: Formula 1, they say, is not in crisis. I speak here of financial crisis, rather than moral crisis.

According to Formula Money, via the Financial Times, here are some figures for 2006:

Williams profit: -$55 million (loss) (down from +$58 million in the previous year); turnover down 30% to $115 million
McLaren profit: -$6.7 million (loss); turnover down $5.9 million to $197 million
Renault profit: -$3.9 million (loss)

CVC profit: +$6.0 million (profit), down from $313 million.

CVC purchased the commercial rights to F1 for $1.7 billion from Ecclestone, who in turn purchased them from the FiA for $320 million. CVC's acquisition was leveraged, and it is faced with an annual interest charge of $220 million. But this is CVC's debt, not Ecclestone's debt, nor the FiA's debt. Yet the suspicion exists that the Formula 1 stakeholders, one way or another, are going to be asked to pay.

Turning to the gross revenues of the Formula 1 Group, there is probably no way to get a 100% accurate picture. But here is Formula Money's best guess:

TV, Broadcasting rights 380
Trackside advertising 164
Corporate hospitality 140
Race hosting fees 329
TOTAL $1,013 million

(Does not include merchandising, electronic games, video rights, etc)

Under the MOU with the teams, the teams now get 50% (as of end-2007) of the net profit derived from the above figures. I find it hard to imagine what the expenses amount to - apart form the $220 million interest payments, if indeed they are in the same P/L account.

The most striking thing about the figures to me is this: although I accept that the 100 year lease does not kick in until 2010, and that CVC has to finance a $1.7 billion purchase until it does - that is CVC's problem and not Ecclestone's or the FiA's. What should be exercising people is the fact that a 100 year lease was sold by the FiA to Mr Ecclestone for $320 million, which he then promptly sold on for $1.7 billion. In real estate terms, that is some flip for an off-plan residence.

Leaving aside CVC's interest payments, it is hard to imagine that on a turnover of over $1 billion per annum, the expenses of the Formula 1 group would reach even $100 million. And I think that would be exceedingly generous. If one were to apply a P/E (edit)ratio of 10 (end edit) on the resulting $900 million - that means that the FiA undersold the family bullion by about $8.7 billion

I fully accept that these figures are almost certainly not accurate in detail - how could they be, with the obfuscation that Mr Ecclestone has always used to cloak his business dealings? Nevertheless, in the broad outline I believe they are not far off. Certainly I believe that they are accurate enough to demand a proper justification of them from the FiA.

Personally I do think F1 is in financial crisis: if the 2006 accounts were bad, it is hard to imagine that 2007 and 2008 are better. I do not have figures, but instinctively one has to feel that corporate sponsorship must be shrinking in the current climate. Trying to curb expenditure in F1 is analogous to fighting global climate change - too little, too late.

(PS - if the admins feel this thread should be merged with Mosley 5 or any other thread - fine with me, I didn't have the time to go search the archives).

[StefanV]

I hope that this thread can stay separate from the Mosley thread because it does not deal primarily with Mosley and it would be watered out in the other thread. I also hope that whenever Mosley is discussed here, it will be about his decisions and involvement in the economical parts of F1 and not about his private escapades. Unfortunately, I have currently nothing to add to this discussion but I will follow it with great interest.

[skinnylizard]

i think you need a lot more information before you can judge crisis or not. McLaren number is obviously due to their fine.

[Gareth]

Originally posted by Eastern
CVC purchased the commercial rights to F1 for $1.7 billion from Ecclestone, who in turn purchased them from the FiA for $320 million.

Turning to the gross revenues of the Formula 1 Group, there is probably no way to get a 100% accurate picture. But here is Formula Money's best guess:

TV, Broadcasting rights 380
Trackside advertising 164
Corporate hospitality 140
Race hosting fees 329
TOTAL $1,013 million


The most striking thing about the figures to me is this: although I accept that the 100 year lease does not kick in until 2010, and that CVC has to finance a $1.7 billion purchase until it does - that is CVC's problem and not Ecclestone's or the FiA's. What should be exercising people is the fact that a 100 year lease was sold by the FiA to Mr Ecclestone for $320 million, which he then promptly sold on for $1.7 billion. In real estate terms, that is some flip for an off-plan residence.

as I understand it, the 100 year deal was for TV rights only. If you look at the Formula Money figures for revenue, TV rights generates 40% of FOA's revenue. So of the $1.7bn open market valuation put on F1 (another valuation vastly below the $6bn to $21bn suggested - if these numbers were true, in the numerous open market sales of FOA, why have they never been touched?) approximately $680m is from TV rights. This also includes the 4 year or so (CVC deal was 06?) Of rights remaining on the existing deal, so that needs to be subtracted. Lastly, the CVC deal was some 5 or 6 years after the 100 year deal. Once that's factored in, the CVC deal shows that the value the FIA got for the 100 year deal was likely fair.

[karlth]

Originally posted by Gareth
as I understand it, the 100 year deal was for TV rights only. If you look at the Formula Money figures for revenue, TV rights generates 40% of FOA's revenue. So of the $1.7bn open market valuation put on F1 (another valuation vastly below the $6bn to $21bn suggested - if these numbers were true, in the numerous open market sales of FOA, why have they never been touched?) approximately $680m is from TV rights. This also includes the 4 year or so (CVC deal was 06?) Of rights remaining on the existing deal, so that needs to be subtracted. Lastly, the CVC deal was some 5 or 6 years after the 100 year deal. Once that's factored in, the CVC deal shows that the value the FIA got for the 100 year deal was likely fair.

The deal is for the "commercial rights of Formula 1".

I got a bit confused with your analysis but could you explain how $313m is a fair deal for 100 years of $1B in revenue?

[karlth]

Several good articles worth reading:

BBC: Mosley defends agreement
AtlasF1: Initial report on the agreement

[Gareth]

Originally posted by karlth


The deal is for the "commercial rights of Formula 1".

I got a bit confused with your analysis but could you explain how $313m is a fair deal for 100 years of $1B in revenue?

I beieve it was just for TV rights. Things like trackside advertising, circuit fees etc were, I believe, already owned by FOA.

My analysis starts from the proposition that the Kirsch deal (valuing FOA at $1.34bn) and CVC deal (valuing FOA at $1.7bn) set fair, open market valuations on all of the rights FOA owns. From that apply the percentage income from TV rights to come up with the TV rights portion of that valuation, split the TV rights valuation between those already owned by FOA (up to 2010) and the 100 year deal (2010 onwards) and apply inflation (100 year deal done in 2000, Kirsch in 2001, CVC in 2007).

[Modern Lover]

Originally posted by skinnylizard
i think you need a lot more information before you can judge crisis or not. McLaren number is obviously due to their fine.

The results are apparently for the fiscal year of 2006. The McLaren figure is thus not affected by the fine. The low figure can however be due to the rapid down-payment of Paragon, or the write-down of equipment or Paragon itself. Im no accountant so its all guesswork.

[karlth]

Originally posted by Gareth
I beieve it was just for TV rights. Things like trackside advertising, circuit fees etc were, I believe, already owned by FOA.

My analysis starts from the proposition that the Kirsch deal (valuing FOA at $1.34bn) and CVC deal (valuing FOA at $1.7bn) set fair, open market valuations on all of the rights FOA owns. From that apply the percentage income from TV rights to come up with the TV rights portion of that valuation, split the TV rights valuation between those already owned by FOA (up to 2010) and the 100 year deal (2010 onwards) and apply inflation (100 year deal done in 2000, Kirsch in 2001, CVC in 2007).

It doesn't matter how you try to play it. The numbers will never add up.

BBC bought the TV rights for the UK for 5 years for 200 million pounds which is more than the total payment for 100 years for every single market. 5 more years for the UK alone and everything will have been paid for including inflation and interests due to the early payout. UK Market alone!

It is very simple. Selling the commercial rights to Formula 1 for 100 years for $300m is massive corruption

[Eastern]

Well, I guess I raised two separate issues in one thread: firstly, does F1 in general face a financial crisis, and secondly, were the rights sold fairly both in the manner of the sale, and in the amount?

On the latter issue, a point that I am trying to highlight is that if the FiA felt that the $320 million for all the commercial rights was a fair price - and Gareth in particular attempts to prove that it was fair - how was Ecclestone able to convert that into $1.7 billion within a couple of years, and even before the lease became active - according to Gareth, for the broadcasting rights alone? If the $320 million was a fair price, then Ecclestone can turn water into wine, as far as I am concerned.

On the financial crisis side, here are some more stats, the biggest sponsors (I think these are also 2006 figures) :

Marlboro - $100m - Ferrari
Vodafone - $65m - McLaren
ING - $65m - Renault
Honda - $60m - Super Aguri
Petronas - $40m - BMW-Sauber
Panasonic - $55m - Toyota
Shell - $35m - Ferrari
AT&T - $25m - Williams
Intel - $25m - BMW-Sauber
Elf - $20m - Renault

This is on-car sponsorship, and there is of course off-car sponsorship, and trackside advertising. The biggest sponsors are telecoms and technology firms, together with financial services firms: between them they account for $380 million. Tobacco is down to $100 million, which is Marlboro/Ferrari alone. It is interesting to note besides, that there were a total of 315 firms sponsoring F1 in one form or another. So the vast majority were spending much smaller sums. It is tempting to dwell on the big names and the big numbers - but any significant retrenchment by smaller sponsors would be as severe, if not more so.

A typical manufacturer-backed team spends $215 million a year. "Expenditure on team operations, travel, entertainment and marketing is almost equal to staff costs, and together they total about $120m." (Source: FT). The remaining $95 million is spent on the cars themselves. Costs are spiraling out of control, and the various freezes that the FiA has imposed, seem only to have resulted in higher spending.

I have no idea what the tech/telecom/finance companies are going to do in the current and future foreseeable: but remember that 63% of F1's fan base is in Europe, and by extension that remains the percentage of the worldwide TV audience. The development of a Far/Middle Eastern fan base and sponsorship base is a high priority for F1, but it will not equal or overtake the European one overnight. The USA is a virtual zero in terms of audience.

My personal view is that these sectors, especially those based in Europe and North America, are likely to retrench their sponsorships of all sports, not only Formula 1. It is true to say that the teams are getting a bigger slice of the pie than they were from the commercial rights. If my understanding is right, they were getting 47% of the TV rights alone, and now (end-2007) they are getting 50% of all the rights, after deduction of expenses.

Today, the real financial crisis belongs to CVC, the legal CRH holder. It is financing a leveraged purchase from Mr Ecclestone which is costing it $220 million/year, against the revenues accumulating under the old rights agreement until 2010. When Mr Mosley talks of the FiA coming under some pressure from CVC and Mr Ecclestone to "re-negotiate" parts of the agreement - I personally find some credibility in that. I think there is a short-term and a medium-term financial crisis about to envelop F1. The first of these is CVC's, as I stated - but shortly I believe to be passed onto the rest of the F1 stakeholders. The other crisis is more dangerous: a shrinking consumer-based economy in the western world, and an out-of-control spending machine which is called Formula 1 racing cars.

[Eastern]

Just another couple of snippets:

- The broadcasting rights to the football premier league were last auctioned for $3.3 billion, for the UK alone - for a three-year period (not 100 years)

- The revenues accruing to the CRH simply for licensing the F1 name to computer games are $15 million/year with virtually (one assumes) zero expenditure to offset against this. On a P/E ratio of 10, this would value these rights alone at $150 million.

[Rinehart]

Why would F1 be in crisis if the global financial climate dictates that sponsors can't pay as much, manufacturers can't invest quite so much?

Surely that would meant that the teams would have a little less to spend?

A budget cut in other words.

Isn't that what all the teams are trying to agree on? A budget cap...

So what, its going to happen naturally, which is a crisis, but if it was implemented through rules it would be the saviour of the sport?

Excuse me if I don't quite follow the logic here!

[Racer Joe]

Originally posted by Eastern
Just another couple of snippets:

- The broadcasting rights to the football premier league were last auctioned for $3.3 billion, for the UK alone - for a three-year period (not 100 years)

I am not familiar with football premier league's income distribution. So here is my question - the amount of TV money quoted there, 3.3 billion, does some of that need to be distributed to the league teams in the same way the reported annual 1 billion dollar income of F1 needs to have 50% distributed to the team?

Coz I am not sure we are comparing apples to apples here.

[Beedeeai]

Turning to the gross revenues of the Formula 1 Group, there is probably no way to get a 100% accurate picture.

Here it is straight from the horse's mouth and it pretty much confirms what you've got Eastern

http://www.cvc.com/C...s.aspx?PCID=737

[Eastern]

Racer Joe - I am not an expert on football either. But in the Mosley thread someone explained that the Premier League clubs are all shareholders in a limited liability company that owns the rights. The FA does not own those rights, although it owns the broadcasting rights for matches where the national team is playing. So, you are right, it is not apples and apples - it is a different system. Seems to me to a rather more equitable system: periodic three-year auctions, and all the proceeds going to the teams.

Rinehart - you are right of course in the precept that less revenue=less money to spend, result equilibrium, and everyone happy. Would that the world were like that. In this case, yes the big boys could trim their cloth accordingly. But the small teams have little or no cloth to trim, and are likely to disappear. Actually they already are. Some think this is fine, others think that it diminishes Formula1. Take your pick. But certainly for small teams, independent teams, yes there is a crisis, and it is already upon them.

[Gareth]

Originally posted by karlth




It doesn't matter how you try to play it. The numbers will never add up.

BBC bought the TV rights for the UK for 5 years for 200 million pounds which is more than the total payment for 100 years for every single market. 5 more years for the UK alone and everything will have been paid for including inflation and interests due to the early payout. UK Market alone!

It is very simple. Selling the commercial rights to Formula 1 for 100 years for $300m is massive corruption

So CVC picked up F1 for a song too then? How about Kirsch - they pauid even less than CVC. They must have got the, second only to Bernie, deal of the century. Oh wait, they went bust ...

Both of those purchasers will have done a full due diligence on FOA and concluded it was worth $1.34 (Kirsch) and $1.7bn (CVC). FOA includes rights other than just the 100 year TV rights paid to it. These figures are therefore the maximum those TV rights are worth (unless, as I say, you think Kirsch and CVC also got the benefit of corrupt deals).

[karlth]

Originally posted by Gareth
Both of those purchasers will have done a full due diligence on FOA and concluded it was worth $1.34 (Kirsch) and $1.7bn (CVC).

Probably because they thought they would have to pay real money for the commercial rights.

[Eastern]

Gareth, with all the respect I owe you, I find you are arguing like Alice through the looking glass. You are justifying the $1.4 and then the $1.7 billion price tags paid by Kirsch and then CVC. But that is not the figure we are attacking - even if we believe that it probably is on the low side.

We are attacking the $300 million +/- paid by Bernard Ecclestone Esquire. The FiA never touched a penny of the billion plus sums that Ecclestone trousered - it got about a billion less than Kirsch and CVC thought the business was worth. THIS is what has most of us so exercised, especially when we read a so far unrefuted allegation that Ecclestone rewarded Mosley to the tune of another $300 million. (It might be sterling, I can't remember).

The other thing that you must remember is that both Kirsch and CVC bought from Bernie with borrowed money: and it is the debt burden that did in Kirsch, and is undoubtedly hitting CVC's bottom line right now. Bernie is like the cheshire cat in all this, all you can see is his enigmatic smile - after all, he was able to sell the same asset twice for a vast profit and at little risk to himself. Actually, you know what? I think he CAN turn water into wine.....

[Melbourne Park]

Originally posted by Gareth
I beieve it was just for TV rights. Things like trackside advertising, circuit fees etc were, I believe, already owned by FOA.

My analysis starts from the proposition that the Kirsch deal (valuing FOA at $1.34bn) and CVC deal (valuing FOA at $1.7bn) set fair, open market valuations on all of the rights FOA owns. From that apply the percentage income from TV rights to come up with the TV rights portion of that valuation, split the TV rights valuation between those already owned by FOA (up to 2010) and the 100 year deal (2010 onwards) and apply inflation (100 year deal done in 2000, Kirsch in 2001, CVC in 2007).

Have you actually ever valued anything Gareth?

I have - I have valued buying things, such as the Australian Defense Forces Home Loan scheme, worth back in the '80's almost 1 billion dollars.

So, how exactly how have you done your valuation? Or are you just bullshitting?

[Josta]

It does seem rather bizzare that 100 years of half of the cash generated for formula 1 is sold for less than a top teams annual budget.

[pup]

2006, and in particular the team budgets cited, provides a very skewed take on F1 finances. In that year, McLaren were running without a title sponsor, as was Williams (who had only just lost BMW), and Renault were fighting for the championship.

[Eastern]

You are right, pup, on all counts.

I guess we will have to wait for the 2007 accounts, once they are published. But McLaren for sure will be skewed, on account of a $100 million fine. It also seems a little bizarre to me that a championship-winning team would suffer financially: this is explained in Renault's case, so I gather, by the fact that Alonso was on a performance bonus, and eight wins in the season almost bankrupted the team.

How does that work?

[Gareth]

Karlth - both the Kirsch and CVC deals were done after FOA had purchased the 100 year licence.

Eastern - I am aware that you are attacking the $300m deal. The point I am making is that both the Kirsch deal and the CVC deal set a maximum figure on the value of those rights. As FOA also owned lots of other assets at the time of those deals, the value of the 100 year licence is obviously lower than those maximum figures.

MP - yes, I have been involved in valuations. More importantly, though, the professional advisors acting for Kirsch and CVC will both have valuation experience and have had full knowledge, through due diligence, of FOA's assets. So I think their valuations of the bundle of assets FOA owned are an excellent starting point, and certainly a fair maximum, for the value of the 100 year deal. If, with your experience, you would like to point out any errors with the adjustments I make from those starting points then that would be helpful (certainly a lot more so than simply suggesting I may be bullshitting).

[Rinehart]

Originally posted by Eastern


Rinehart - you are right of course in the precept that less revenue=less money to spend, result equilibrium, and everyone happy. Would that the world were like that. In this case, yes the big boys could trim their cloth accordingly. But the small teams have little or no cloth to trim, and are likely to disappear. Actually they already are. Some think this is fine, others think that it diminishes Formula1. Take your pick. But certainly for small teams, independent teams, yes there is a crisis, and it is already upon them.

Eastern, before we go on, I would like to commend you on some seriously top contributions to this forum of late. Now let this debate commence...

So your position is that the 'bigger teams' are ok, its the 'smaller teams' that are in danger. Who would that be then?

If we take the 'larger teams' to be the works teams, that'd be Ferrari, McLaren, Toyota, Honda, Renault, BMW who are ok. The smaller teams must therefore be the privateers, Red Bull, Williams, Torro Rosso and Force India.

Red Bull and Force India are owned by two of the worlds wealthiest men, who are in it for reasons of enjoyment as well as commericality. This is likely to benefit F1 in terms of their strength to pursue against financial wisdom (judgement clouded by passion if you like). Torro Rosso are for sale, so their position is difficult to comment upon until we know the outcome of that, save for the fact that DM has alluded to the fact that he will bankroll the team until a suitable buyer is found.

So that just leaves Williams, who I fear for most on one level, but least on another as if anyone can keep going against the tide, it is they.

To me the real problem remains not in the fear of competing teams deserting (even Renault confirmed their commitment), but in the impossibility of a new team joining. The last completely new start up was Toyota and before that Jordan. The rest, the likes of Renault, BMW, Honda, Force, Red Bull, Torro Rosso and Spyker are simply rebranding old teams, they're not new teams to the extend of adding two cars to the grid. To change this fact, I think, its not the ecomomic crisis we need to worry about, but the fact you need a factory of 300+ people, two wind tunnels, the most powerful computer in the UK, and 2 years to R+D before your ready to compete. Its too prohibitive. We need a non - constructor class in F1. Sorry, but I've changed my mind (used to be a traditionalist).

[Beedeeai]

More importantly, though, the professional advisors acting for Kirsch and CVC will both have valuation experience and have had full knowledge, through due diligence, of FOA's assets.

I'm not so sure how smart Kirch's due diligence team was though given that the company never evn made one dollar from its acquisition of the F1 Group which cost it well over a billion...

[Pingguest]

Originally posted by Rinehart


Eastern, before we go on, I would like to commend you on some seriously top contributions to this forum of late. Now let this debate commence...

So your position is that the 'bigger teams' are ok, its the 'smaller teams' that are in danger. Who would that be then?

If we take the 'larger teams' to be the works teams, that'd be Ferrari, McLaren, Toyota, Honda, Renault, BMW who are ok. The smaller teams must therefore be the privateers, Red Bull, Williams, Torro Rosso and Force India.

Red Bull and Force India are owned by two of the worlds wealthiest men, who are in it for reasons of enjoyment as well as commericality. This is likely to benefit F1 in terms of their strength to pursue against financial wisdom (judgement clouded by passion if you like). Torro Rosso are for sale, so their position is difficult to comment upon until we know the outcome of that, save for the fact that DM has alluded to the fact that he will bankroll the team until a suitable buyer is found.

So that just leaves Williams, who I fear for most on one level, but least on another as if anyone can keep going against the tide, it is they.

To me the real problem remains not in the fear of competing teams deserting (even Renault confirmed their commitment), but in the impossibility of a new team joining. The last completely new start up was Toyota and before that Jordan. The rest, the likes of Renault, BMW, Honda, Force, Red Bull, Torro Rosso and Spyker are simply rebranding old teams, they're not new teams to the extend of adding two cars to the grid. To change this fact, I think, its not the ecomomic crisis we need to worry about, but the fact you need a factory of 300+ people, two wind tunnels, the most powerful computer in the UK, and 2 years to R+D before your ready to compete. Its too prohibitive. We need a non - constructor class in F1. Sorry, but I've changed my mind (used to be a traditionalist).

I think the customer chassis would had been a good solution for this problem. With the customer chassis new teams don't need to do big investments before being able to take part.

Teams like Williams and Spyker/Force India were the main opposites to the customer chassis. Although their opposition was understandable, I think especially Williams' opposition was a bit hypocrite. The customer chassis enabled Frank Williams to step into Formula 1 in the 1970's and he sold his cars to other teams himself in the early 1980's.

As there are both valid arguments in favor and against the customer cars the Formula 1 should had done a better job to find a compromise. The small self-constructing teams don't want to lose their incomes from TV-rights to non-constructing teams, while new teams want to enter Formula 1 with a customer chassis. A good compromise could had been that the customer chassis would be allowed, with the note that the non-constructing teams wouldn't receive money from the commercial rights.

[David M. Kane]

So let me get this straight, Max does his job for free? Hmmm...

[Eastern]

Rinehart - many thanks for the compliment...

I won't have much time for a debate with you, since Mrs Eastern is taking me off tomorrow for a few days at the Four Seasons to celebrate my 60th, and to check out the rumour that men in their sixties can perform for five hours on only one cup of tea (VERY expensive tea at that particular hotel!)

A lot of what I have been posting on the so-called financial crisis is intuitive, since there is a paucity of hard facts and figures. But when a potential worldwide recession is descending upon us all, it is hard to imagine that motorsport - a VERY capital-intensive and I imagine leveraged industry with chronic cash flow problems (for the teams, if not for Mr E) - can somehow be immune.

Turning to the question of the financial effect on smaller versus larger teams. It seems to me to be self-evident that if and when money gets seriously tight, teams funded or owned by major car manufacturers are going to have more wiggle room. Those that are not, will have less, or none at all.

Super Aguri has already gone; STR is for sale. The customer car débacle has scared off Prodrive, a very serious potential entry, and others I am sure. Williams survives on its magical ability to raise blue chip sponsorship, and I for one very much hope that this continues. But I have serious doubts that with the resources it has it will return to its years of glory - to my everlasting regret, if I am proven right. The tycoons are making all the right noises about their survivability, and their intentions. Once again, I sincerely hope that Messrs Mallya and Matschetitz (did I spell that right?) stay the course. Flogging off STR, with nary a willing buyer in sight though, is not encouraging where the latter is concerned. We have had tycoons before: but if you think about it, they are even more likely than car manufacturers to pull out if the financial equation no longer works in their perceived favour. There is a generic link between racing cars and road cars after all - 4 wheels on the road. There is no such generic link between energy drinks and steel or airlines, and Formula 1. The continued presence of the tycoons relies on the inherent health of their core activities, as well as their personal enthusiasm and judgment.

I am not making a debate about customer cars, or about manufacturers versus garagistes or tycoons. What I am trying to say is that changing economic circumstances as they affect both team owners AND sponsors, are I think very likely to impact on the survivability of certain teams more than others.

[Gareth]

Superb post Eastern.

Happy birthday - hope you and Mrs Eastern have a great time, and enjoy the tea

[Sleep]

Fascinating read, Eastern. You might actually be the most intelligent member on this board. That's huge in my book because I hold myself in very high esteem.

[Sleep]

Originally posted by karlth
Several good articles worth reading:

BBC: Mosley defends agreement

It's true, this is a very good piece of work. When the BBC used to be the BBC...

[Ricardo F1]

Originally posted by Sleep
That's huge in my book because I hold myself in very high esteem.

Having read your posts one has to ask . . . . why?

[Melbourne Park]

Originally posted by Gareth
MP - yes, I have been involved in valuations. More importantly, though, the professional advisors acting for Kirsch and CVC will both have valuation experience and have had full knowledge, through due diligence, of FOA's assets. So I think their valuations of the bundle of assets FOA owned are an excellent starting point, and certainly a fair maximum, for the value of the 100 year deal. If, with your experience, you would like to point out any errors with the adjustments I make from those starting points then that would be helpful (certainly a lot more so than simply suggesting I may be bullshitting).

Good - so please explain your valuation methodologies.

Otherwise just say you lied, and that you don't know what you are talking about.

[Melbourne Park]

Originally posted by Eastern

I am not making a debate about customer cars, or about manufacturers versus garagistes or tycoons. What I am trying to say is that changing economic circumstances as they affect both team owners AND sponsors, are I think very likely to impact on the survivability of certain teams more than others.

Flavio Briatore said on may 19th this year:

I remember when I sold Ligier [in 1997] – there were six or seven people interested in buying the team. There were people queuing up to buy it. What has happened with Super Aguri sends out the clear message that fewer people are interested in investing in an F1 team these days.

It would therefor appear that the business model for F1 is not as attractive as it was in 1997, which is only 11 years ago.

[Buttoneer]

Didn't WRC lose a lot of manufacturers in 2006?

[Eastern]

I don't know, Buttoneer - I am ashamed to admit that I don't follow WRC. I was just intrigued by the figures.

[StefanV]

Originally posted by Buttoneer
Didn't WRC lose a lot of manufacturers in 2006?

WRC has been mismanaged beyond belief and lost not only a lot of the manufacturers, but also a lot of it's fans. Each change in the rules and the regulations was another nail in WRC's coffin.

[Eastern]

Mis-managed by the commercial rights holder, or by the regulatory body, StefanV? I ask in all innocence.

[StefanV]

Originally posted by Eastern
Mis-managed by the commercial rights holder, or by the regulatory body, StefanV? I ask in all innocence.

In all innocence?

The regulatory body. IMHO.

[Racer Joe]

Originally posted by Eastern
Rinehart - many thanks for the compliment...

I won't have much time for a debate with you, since Mrs Eastern is taking me off tomorrow for a few days at the Four Seasons to celebrate my 60th, and to check out the rumour that men in their sixties can perform for five hours on only one cup of tea (VERY expensive tea at that particular hotel!)

A lot of what I have been posting on the so-called financial crisis is intuitive, since there is a paucity of hard facts and figures. But when a potential worldwide recession is descending upon us all, it is hard to imagine that motorsport - a VERY capital-intensive and I imagine leveraged industry with chronic cash flow problems (for the teams, if not for Mr E) - can somehow be immune.

Turning to the question of the financial effect on smaller versus larger teams. It seems to me to be self-evident that if and when money gets seriously tight, teams funded or owned by major car manufacturers are going to have more wiggle room. Those that are not, will have less, or none at all.

Super Aguri has already gone; STR is for sale. The customer car débacle has scared off Prodrive, a very serious potential entry, and others I am sure. Williams survives on its magical ability to raise blue chip sponsorship, and I for one very much hope that this continues. But I have serious doubts that with the resources it has it will return to its years of glory - to my everlasting regret, if I am proven right. The tycoons are making all the right noises about their survivability, and their intentions. Once again, I sincerely hope that Messrs Mallya and Matschetitz (did I spell that right?) stay the course. Flogging off STR, with nary a willing buyer in sight though, is not encouraging where the latter is concerned. We have had tycoons before: but if you think about it, they are even more likely than car manufacturers to pull out if the financial equation no longer works in their perceived favour. There is a generic link between racing cars and road cars after all - 4 wheels on the road. There is no such generic link between energy drinks and steel or airlines, and Formula 1. The continued presence of the tycoons relies on the inherent health of their core activities, as well as their personal enthusiasm and judgment.

I am not making a debate about customer cars, or about manufacturers versus garagistes or tycoons. What I am trying to say is that changing economic circumstances as they affect both team owners AND sponsors, are I think very likely to impact on the survivability of certain teams more than others.

Which is where the much touted budget cap comes in. I don't know exactly how they plan to actually enforce a budget cap myself (and I don't believe it can be done effectively) but if it works, then it would enable teams to compete reasonably on a workable budget. Teams should be much better insulated from a downturn of global economy if they only need to spend $120 million a year. Going further I think teams should take a much greater share of FOM's revenue. It is the 20 or so cars on the grid competing that derive the revenue - it is only reasonable that the teams should receive the vast majority of revenue after cost. But likewise I don't know how it could be done, both from the point of view of transforming from the present structure and maintaining one where the teams have shared ownership of FOM - the latter being the bigger problem as team owners are notorious for being able to agree on anything, even if a top class management is put in place to do the day to day stuff.

Super Aguri was always doomed to fail given that customer cars cannot be run indefinitely. The same goes for Red Bull's version of Minardi (as in no longer manufacturing their own cars). Their business model's (and Prodrive's) exist is no longer viable because the regulations, most specifically their interpretations, disallow it. Fundamentally that has nothing to do with the global economic slowdown we are seeing now as they never planned to attract the budget necessary to build their own cars. The FIA (I am looking at you, Max) monumentally screwed that one up. In my mind that is a much bigger disservice Max had done to F1 than his so called Nazi orgie.

On a prima facie level, CVC should still be doing quite well at this point, even if Bernie is running rings around them. It has 75% of 50% of FOM's net income of, say 800 million a year (not sure what on earth could cost $200 million in an 18 race annual TV production plus hospitality and so on but what the heck) to service its interest payment of $220 million (I am assuming that is what you are referring to). So it has $300 million net inflow for a net outflow of $220 million a year. Still pretty good business so long as the TV tap remains open.

[Buttoneer]

This crisis? Sorry, I'm not trying to merge the issues at all, but this IS and issue and it does cause crisis at least because two of the teams are German as well as a lot of the drivers, and a third team is Germany based.

I can't be arsed to look at the full ramifications of this but the national bodies are responsible for at least making appeals to the FIA against decisions made by the WMSC against German teams, and do they not also sponsor the superlicences?

[Gareth]

Originally posted by Melbourne Park


Good - so please explain your valuation methodologies.

Otherwise just say you lied, and that you don't know what you are talking about.

Kirsch and CVC deals set an open market valuation on the bundle of FOA assets. Of those assets, the TV rights generate 40% of the income (going on the Formula Money figures). Of those TV rights, there is the current deal (expiring 2010) and the 100 year deal.

I've detailed this a couple of times in this thread, if you'd like to discuss it theb go ahead. Frankly, though, I'm not impressed with your 'what have you valued?' dick waving contest and accusations of lying. I've set out what I think and why, which is more than can be said for you.

[StefanV]

Originally posted by Gareth

How did you vote?

[Beedeeai]

On a prima facie level, CVC should still be doing quite well at this point, even if Bernie is running rings around them. It has 75% of 50% of FOM's net income of, say 800 million a year

They wish! CVC is getting diddly squat from F1 until 2012 I think (can check if necessary) since it agreed to freeze all dividend payments from F1 when the F1 Group took out several billion dollar loan from RBS which was used to buy the company.

Of those TV rights, there is the current deal (expiring 2010) and the 100 year deal.

To my knowledge the crucial factor was the Concorde Agreement and likelihood of the teams to agree to commercial terms for a fixed period limited by the EC (again, can check the length if anyone wants it). Without the latter the TV rights could be worthless. The valuation was based on the length of time ALL agreements were in place for at the time of the due diligence

[Racer Joe]

Originally posted by Beedeeai


They wish! CVC is getting diddly squat from F1 until 2012 I think (can check if necessary) since it agreed to freeze all dividend payments from F1 when the F1 Group took out several billion dollar loan from RBS which was used to buy the company.

It is quite common for banks to insist on convenants that limit dividend payouts by the borrowing party.

But I don't get the relationships you have got there. I thought RBS lent money to CVC to buy FOM (or whatever parent controlling entity above). Why would the bank limit the amount of dividend that CVC is paid, which is necessary income for it to service interest payment? Why would RBS hold any sway with how FOM pays dividend? FOM is not the borrower as far as I can tell.

CVC might not get dividend until later years as part of the share purchase agreement with Bernie. If that is the case why would RBS lend the money in the first place given such limits?

If you have a link to an article that clarifies the relationship that would be much appreciated.

[Racer Joe]

Originally posted by Beedeeai

To my knowledge the crucial factor was the Concorde Agreement and likelihood of the teams to agree to commercial terms for a fixed period limited by the EC (again, can check the length if anyone wants it). Without the latter the TV rights could be worthless. The valuation was based on the length of time ALL agreements were in place for at the time of the due diligence

That is a very good point.

[Beedeeai]

I thought RBS lent money to CVC to buy FOM

Thanks Racer Joe. In fact in the first stage of the leveraged buyout CVC set up several special purpose companies (Alpha Prema in the UK and Alpha Topco in Jersey) and these companies were then lent the money by RBS which was used to buy SLEC (the parent controlling entity of FOM as you mention).

To get the loans CVC had to pay a deposit upfront and agreed at an Alpha Prema board meeting on 9 February 2006 to secure the loan on the shares and assets of almost all key F1 companies, including SLEC and FOM (known as the ‛Jersey security agreement’ which to be precise involved 33,615 shares in Speed - Bayern LB's vehicle - and 9,074 shares in SLEC.)

One of the covenants of the mortgage agreement was that the cash-generating companies would not pay out dividends during the time that the loan is being repaid (2012 I think) as a protection to ensure that, were the F1 Group to default on repayment, RBS would have more cash in the reserves as security.

I've got all of the mortgage agreements and minutes of the meetings and released some to the press so they should be around somewhere - best bet is to Google 'leveraged buyout' and F1.