TWO-CAR TEAMS AREN’T SUS­TAIN­ABLE

The sto­ries F1’s big­wigs would rather you didn’t know…

F1 Racing - - CON­TENTS - DI­ETER RENCKEN

Can you di­vide two into three? The way F1’s nances are go­ing, with sev­eral teams on the brink of fail­ure, it may soon have to try to do so in or­der to get 24 cars on the grid.

That’s not to say the sport’s prin­ci­pals are as poor as church mice. This is the way of ven­ture cap­i­tal­ists: at­tract mega-fund­ing, bor­row at low cost, swoop, re­struc­ture, then sell on – ei­ther through list­ing or dis­posal, of­ten piece­meal. In­vest­ment in the long-term health of the busi­ness is low pri­or­ity.

So it is with CVC Cap­i­tal Part­ners, holder of the ma­jor­ity of F1’s com­mer­cial rights af­ter the FIA – then presided over by Max Mosley – and the EU Com­mis­sion gave the all-clear in 2006 to a bil­lion-dol­lar trans­ac­tion in which a trio of banks, sad­dled with the rights af­ter a client (Kirch Me­dia) de­faulted on loans, man­aged to off­load their stake in the sport.

In hap­pier times Kirch had ac­quired the be­lea­guered EM.TV, who over­stretched them­selves af­ter buy­ing 75 per cent of SLEC, the Ec­cle­stone-fam­i­ly­owned en­tity that had leased the

“Will F1 di­vide along the lines of two teams of two cars each, or into three-car teams?

com­mer­cial rights from Mosley’s FIA for 113 years at an es­ti­mated three per cent of their in­trin­sic value. It was akin, one ob­server re­marked, to the el­dest son off-load­ing heir­looms to a close friend, then main­tain­ing that the fam­ily sil­ver had ac­tu­ally been just chrome-plated relics…

It was the in­nate abil­ity of CVC to make sense of all this com­plex­ity that en­abled its Fund IV to re­alise as­tro­nom­i­cal gains on be­half of in­vestors where three banks, sea­soned me­dia op­er­a­tors and youth­ful en­tre­pre­neur­ial air had failed spec­tac­u­larly. Among oth­ers, in­vestors as di­verse as the Cal­i­for­nian Pub­lic Em­ploy­ees’ Re­tire­ment Sys­tem and the Teacher Re­tire­ment Sys­tem of Texas en­joyed re­turns of around 200 per cent.

True, it didn’t all go to plan: the at­tempt to list on the Sin­ga­pore stock ex­change failed to come off. Thus CVC di­luted its orig­i­nal hold­ing by 50 per cent through of­fload­ing tranches to peer funds, and is likely to di­vest com­pletely within 24 months. Still, it has turned an al­most 800 per cent prot via a com­bi­na­tion of shrewd bor­row­ing as in­ter­est rates plum­meted, and enor­mous pres­sure on Ec­cle­stone.

All this de­spite zero real-world growth. TV rat­ings and global au­di­ences have plum­meted, over the past three years, while the cal­en­dar has re­mained largely static: 19 rounds when CVC bought in in 2005; the same again ten years on. Team strength? Up one a decade on, but only af­ter a ma­jor ini­tia­tive by the FIA. So how did CVC achieve such spec­tac­u­lar re­turns? In sim­ple terms, they ap­plied the ven­ture for­mula out­lined above. The squeeze was put on race pro­mot­ers and TV broad­cast­ers through of­fer­ing ‘Devil’s Al­ter­na­tive’ con­tracts con­tain­ing take-it-or­leave- it clauses with an­nual es­ca­la­tors. Many voted with their empty wal­lets, hence the dis­ap­pear­ance in quick suc­ces­sion of cir­cuits such as Turkey, Korea, In­dia and Va­len­cia. Oth­ers have pledged their fu­tures as they strug­gle to re­main on the cal­en­dar. Spec­ta­tor num­bers have largely fallen as pro­mot­ers hiked prices, by which time CVC had banked the host­ing fees. TV com­pa­nies were sim­i­larly shaken up, hence the pro­lif­er­a­tion of pay-per-view or satel­lite broad­casts over the past decade, con­tribut­ing to de­clin­ing rat­ings. These have hit the spon­sor­ship in­come of teams, to whom view­ers are lifeblood. Smaller oper­a­tions are most af­fected, par­tic­u­larly since FOM, CVC’s de facto F1 di­vi­sion, has snared many former team spon­sors as ‘Of­fi­cial Part­ners’.

Then, cru­cially, pay­ment terms to ‘sup­pli­ers’ (the teams) were re­struc­tured, grant­ing the ma­jors enor­mous pre­mi­ums and leav­ing the min­nows, who face spi­ralling bud­gets due to in­creases in the num­ber of yaway rounds and sport­ing/tech­ni­cal changes aimed at en­hanc­ing the show, to ght over the scraps. Now three face ex­tinc­tion – Cater­ham were re­cently saved; Marus­sia re­ceived a mas­sive cash in­jec­tion from their Rus­sian own­ers; and Sauber op­er­ate hand-to-mouth. Grid lev­els will drop un­less dras­tic ac­tion is taken soon. To main­tain grids at 24 cars, F1 must adopt a cus­tomer-car con­cept, with six ma­jors sup­ply­ing tech­nol­ogy to an equal num­ber of sec­ond-tier teams, or move to a sys­tem of eight en­trants op­er­at­ing three cars each. Hence my open­ing ques­tion. Will F1 di­vide along the lines of two teams of two cars each, or into three-car teams? The next ques­tion, though, is “When?”

Left-right: Cater­ham, Marus­sia and Sauber all face ex­tinc­tion and grid lev­els will drop un­less dras­tic ac­tion is taken soon

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