TWO-CAR TEAMS AREN’T SUSTAINABLE
The stories F1’s bigwigs would rather you didn’t know…
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 prot 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