22/05/2006
FEATURE BY MARK GALLAGHER
The agreement between Bernie Ecclestone and the GPMA announced on Friday brings to close a long and unsettling chapter in the history of Formula One that began a full 10 years ago. It's a chapter that introduced followers of the sport to the ins and outs of corporate financing, mergers and acquisitions and the complex structure of the businesses which have at various times owned Formula One, although it seems that at no stage was anyone in control of it other than Bernie himself. It's a chapter about the future of Formula One.
With Formula One now under the ownership of holding company Alpha Topco Ltd the sport has at last a structure which seems set to last the distance, including the inevitable stock market flotation which is the typical exit strategy of private equity firms such as CVC Capital Partners. It owns the controlling stake in Alpha, alongside shareholders Bambino Holdings, Bernie Ecclestone and the Formula One Management team. With the teams and manufacturers also committing to a new commercial agreement, all sides are aligned.
The journey to reach this point began a decade ago with Bernie Ecclestone setting out to float Formula One, a plan that did not take off thanks to a combination of factors which ultimately led him to an innovative finance-raising Eurobond issue. This was put together by Morgan Grenfell Equities which then took a stake in Formula One.
A European Union investigation into the business structure of the sport began at this time and ultimately lead to the formal links between Formula One and the FIA being severed when Bernie Ecclestone agreed in 2000 to pay $360 Million for a 100 year extension on the commercial rights which he already controlled until 2010 - giving him the rights to 2110. Yes, you read that date correctly.
Also in 2000 a 50% stake in the Formula One group of companies owned by the Ecclestone family trust SLEC, comprising 12.5% belonging to Morgan Grenfell and 37.5% to investment bank Hellman & Friedman, was sold to EMTV, a business owned by German media moguls Thomas and Florian Haffa which at its peak in February 2000 was valued on the Neuer Markt at €15 Billion. EMTV was an ambitious company which was chiefly known for its ownership of valuable television rights including Jim Henson's 'Muppets' business.
By 2001, however, EMTV was crippled under the burden of debt caused by its aggressive expansion while the Haffas came under investigation and were later fined €1.4 Million in 2003 for misleading investors with inaccurate profit forecasts. EMTV's debts forced its sale to the German media group Kirch, which itself collapsed within a year. In the meantime Kirch had taken up EMTV's 'put option' on a further 25% of Formula One, which gave it a holding of 75%, but following the demise of Kirch this fell into the hands of its creditor banks, JP Morgan, Bayerische Landesbank and Lehman Brothers.
The three years that followed saw the banks and Bernie Ecclestone work to find a way forward, culminating in Bayerische Landesbank taking over the entire bank stake in order to facilitate the sale of the majority holding to CVC Capital Partners which was announced on November 25th last year.
Things have moved quickly since then, including the purchase announced on March 31st this year by Alpha Topco Ltd of Allsport Management S.A. and Allsopp Parker & Marsh, the companies which previously controlled the rights to the Formula One Paddock Club corporate hospitality business and advertising/sponsorship rights to the FIA Formula One World Championship respectively. This last deal brought one of Formula One's idiosyncratic structures to an end, for everyone had always wondered how Paddy McNally's Allsport Management came to operate such a lucrative business without any apparent involvement of Bernie Ecclestone. McNally now sits on the board of Alpha.
Ironically, all these twists and turns of the past decade have achieved precisely the kind of structure that the City institutions would rather have found in the first place when Formula One began considering a stock market flotation all those years ago. Formula One was at that time characterised by influential media such as The Economist as being 'murky' and 'secretive', but the reality was it simply was not formatted to meet the rigours of a stock market flotation and the prying eyes of a sceptical business press.
The business is now tidied up in terms of its structure, wholly transparent with strong revenues and committed teams, and thus a credible place for investors, including potentially the general public, to put their funds into in the future. An Initial Public Offering cannot be far from Alpha's mind.
This restructuring of the Formula One business has principally answered the age old question of 'what happens after Bernie goes'? He seems destined not to retire, and why should he? He is as sharp as ever and, whether it is big picture restructuring or micromanagement, he knows his business better than anyone. Inevitably, though, time and mortality catch up with us all and the structure of Alpha means that a Board of Directors will oversee the future of Formula One, meaning that life-after-Bernie will simply require a capable CEO to be appointed to manage the business, just like any other multi billion dollar enterprise.
Parallel to all this restructuring, of course, has been the absolute need to settle a new Concorde Agreement. Without that, no one had anything to offer. As we know the motor manufacturers threatened, unwisely, to create a breakaway championship unless Formula One spread its revenues more equitably. It was a blunt instrument used to tackle an issue which required finesse.
The previous deal, whereby 47% of the lucrative TV revenue was split between the top 10 ten teams according to the order in which they finished the constructors championship in the previous season, simply left too much money in other peoples hands. Including businesses such as Allsport Management and Allsopp Parker & Marsh. The new deal apparently ensures 50% of all revenues will go to the teams, which means the teams will have half of an estimated $700 Million a year in income rather than 47% of the previous total of $450 Million. I would also assume the new deal includes all 12 teams from 2008, otherwise it's difficult to understand how Prodrive F1 would have been able to secure the funding for its entry. One cannot imagine David Richards being left out.
In coming up with the new deal Bernie Ecclestone played the chess game beautifully, pulling the teams apart one by one starting with a reasonable target - Ferrari. Once Ferrari broke ranks with the other manufacturers in January 2005 the game was up. Red Bull, closely aligned with Bernie Ecclestone, brought both its teams to the table, while Midland and Super Aguri were a forgone conclusion. And when BMW ducked out of Williams, it came as no surprise that probably one of the first calls Sir Frank made was to Formula One's Princes Gate offices in London to sort out a new deal.
It would be tempting fate to wave the newly signed commercial agreement between the teams and Formula One in the air and cry 'peace in our time' but there can be no doubt that for the first time in a decade a clear path has been laid out for the future of the sport and all its key players. If two items on the task-list of Formula One remain, they are to reduce the costs of competing and turn the pit-stop dependent racing into a genuine contest between all 12 teams in 2008. Then Formula One really will be something the world will want to buy into and the owners of the sport will be pushing at an open door to the markets.
Mark Gallagher
mark@pitpass.com
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