Taking Stock – Dieter Rencken
FORMULA ONE MEMORABILIA has always been big business, with Ferrari, for example, deriving over 50% of its annual profits from licencing deals, and all teams having clothing and merchandising ranges. As with their sporting results, the ranges vary, with the Italian team very much leading the way followed by McLaren and Red Bull, with Lotus/Williams snapping at their heels. The teams are not alone in benefitting from fans’ eagerness to grab a slice of their action with the sport’s commercial rights’ holder, headed by F1 tsar Bernie Ecclestone, annually pocketing around $150m (R1,2bn) per annum from signage, hospitality and merchandising rights, the latter including licensing deals for computer games and items such as watches and clothing.
However, until six years ago when wannabe driver Justin Wilson listed himself on the London Stock Exchange as a means of raising capital to buy an F1 seat (it worked, although the Briton is now in Indycar), Joe Public was unable to invest in the sport. Then two years ago Williams listed on the Frankfurt Development Capital Market with mixed success: share value plummeted immediately after the initial purchase offer that was subscribed to mainly by institutional investors with left-field funds, and it will be interesting to chart the effects of the team’s Spanish Grand Prix victory, scored as this was written.
The team’s choice of exchange and section was telling, for F1 is governed by the highly secret Concorde Agreement – punishment for disclosure of which is life-long banishment from the paddock – so Williams was forced to list on a market with relaxed disclosure rules, with the DCM providing just that as a means of attracting emerging companies. However, such leniency invariably adds risk, which was reflected in the low take-up and an initial share price below market expectations. Still, it was fascinating to observe stockbroker interest in F1 rise on the back of the listing.
Soon, though, well-heeled F1 fans will be able to go after the big fish, for CVC Capital Partners, which own around two-thirds of the sport’s commercial rights after acquiring the majority share from Ecclestone and a consortium of four banks in 2006, has announced it intentions to list Formula One. By comparison with New York and London, Asian stock exchanges have less rigid disclosure rules – even on main exchanges – and there is growing enthusiasm for glamour sports in the Pacific Rim, with Singapore’s grand prix having rapidly grown into one of F1’s blue riband events and football club Manchester United aiming to list there shortly. Thus it is likely F1 will list on the city-state’s exchange, possibly as early as July this year.
During the three-week gap ahead of Spain’s round, Ecclestone worked banks in the City (London), with analysts placing a value on the sport of $6-8bn (R50-65bn) – not bad for a 113-year asset sold in the mid-1990s to Ecclestone by an FIA then presided over by his friend of 30 years, Max Rufus Mosley, for less than half-a-per-cent of that! To this end a new (2013-2020) Concorde is under negotiation, while a prospectus, a requirement ahead of any listing, is currently under preparation. It is anticipated around 40% of the group’s shareholding will be up for sale, with the 15% controlled by administrators of the collapsed US bank Lehman Brothers making up a portion of the offering.
CVC is expected to put up 15%, thereby reducing its holding to a fraction below 50% – still sufficient, though, to retain day-to-day control – while JP Morgan, which recently lost over $2bn in an ill-fated investment, will likely cash-out its 15%. Significantly, Ecclestone (5.5%) and his family trust (8.5%) are unlikely to dilute their investments.
Formula One has, of course, an utterly unique business model and is highly profitable, turning over approximately $1,5bn per annum, made up primarily from race hosting fees and TV broadcast contracts (42.5% each), with peripheral activities contributing the balance. It pays the collective of a dozen teams 50% of underlying revenues (i.e. after direct expenses), itself then grossing approximately $500m (R4,1bn) per annum and netting over half of that. The Formula One Group has a low asset base consisting predominantly of broadcasting equipment, its rights deal with the FIA (of which 98 years remain) and Ecclestone’s legendary negotiating skills. BUT, Bernie turns 82 in October, and while he dictates events in the paddock, there is one thing he has no ultimate control over…
All the sport’s main players, including Red Bull founder Dietrich Mateschitz, Ferrari’s Luca di Montezemolo and a McLaren director, have been offered a seat on the board of the restructured company, although Mercedes – not having been offered a seat – has threatened legal action over what it perceives as unfair commercial terms. This factor, plus the impact of Greece’s [filtered word] and recent French, Russian and US elections on an already far from healthy global economic landscape, could still scupper the deal in the short term, but there is no doubt that F1 is heading for the stock exchange. Time for fans to break open their piggy banks.