25/01/2009
NEWS STORY
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Much has been said in recent months about the financial health of the Williams F1 team. After car giant Honda pulled out of the sport many wondered how the only team not owned by a billionaire or a car company could survive.
Williams' chief executive Adam Parr gave some reassurance when he said last month that "we're among the best equipped to handle the economic crisis." It was a bold boast given that only a short while before McLaren boss Ron Dennis had said that he expects his team to lose a third of its revenue due to the downturn. That's a team which is World Champion and is owned by a sovereign wealth fund, a billionaire and a car company. So how might Williams manage to stay on track? Well, part of the answer is revealed in an article in the Financial Times by Pitpass' Christian Sylt and it has nothing to do with Williams' ability to raise sponsorship.
If anyone ever thought that F1's commercial supremo Bernie Ecclestone favours the top teams then they should read the piece in the FT. Not only does it reveal how he has helped to keep Williams on track but it also gives insight into the behind the scenes bargaining going on over the future of F1.
According to the FT, Ecclestone has advanced the Williams team a share of a £14.5m ($20m) prize pot after it committed to stay in the sport until 2012. Williams made a loss of £50m over the past two years and trebled its net debt in 2007 but with the boost from Ecclestone the team has been able to get its budget in place until the end of 2010.
A total of £130m ($182m) has been set aside as an incentive for F1's nine teams to sign a new Concorde Agreement, the contract which binds them to race in F1. The last Concorde expired at the end of 2007 and the lack of a guarantee over the teams' participation makes it extremely difficult for finance firm CVC, which majority owns F1's commercial rights holder, to sell up.
The teams are currently racing in F1 under a Memorandum of Understanding (MOU) agreed with CVC in 2006 but this is not legally binding. The MOU increased the teams' annual prize money from 25% to 50% of the sport's profits and these payments began last year when the previous Concorde expired. However, although they are getting paid at the increased rate, they have not signed a new Concorde.
As a last ditch effort CVC offered the teams a signing bonus comprising the difference between the old and the increased prize money backdated from 2004-2007. According to the 2007 accounts for Delta 3, F1's UK holding company, "the increases in prize fund in respect of 2004-7 are estimated at $182m...these additional prize monies will only be paid out... subject to each team having satisfied criteria in the Concorde Agreement."
However, although a Concorde Agreement has yet to be signed, Williams' chief executive Parr admitted to Sylt that the team has received its share of the money from 2006 and 2007. "It's a prepayment," added Ecclestone explaining "they are entitled to some back-payments only due for payment when they sign the Concorde... we said to them we will pay you now."
Although he lacks a Concorde Agreement, Ecclestone has some security since Williams has signed a legally binding agreement to remain in F1 until 2012. Parr says that the bargain was struck in 2005. It was well timed.
In 2005 Williams lost a supply deal with BMW which was providing engines believed to be worth around £75 million per year. Since then it has suffered financially and this year it has lost an estimated £33m ($45m) in sponsorship from Baugur, Lenovo and Petrobras.
The back-dated payments represent around 20% of Williams' revenues so will no doubt have helped the team get its budget in place despite losing sponsors. Alluding to the team's revenue mix Parr recently said "we have got some good solid sponsorship contracts in place for 2010 which together with FOM (Formula One Management) revenues give us decent working budgets for the next two years."
Williams has used up a good few lifelines with the backdated payments and the debt. So what next for the Grove outfit? "They say they have got enough sponsorship without any problems," Ecclestone told Sylt adding "I think they say they have got new people which I hope they have."
There is a question mark as to just how much the recently-agreed cost-cutting measures will help the team. There is no doubt that the purpose of the cost cuts is to keep the smaller teams going but this is largely through ensuring they remain competitive against their bigger brethren. By curbing the excessive spending habits of the manufacturer teams, not only does it narrow the gap between them and the minnows of F1 but it also prevents the possibility that car companies themselves will find F1 too costly.
"The single biggest cost for an independent team or manufacturer is the engine, so we have to do something about it," Parr said last October. The cost cuts will for sure do something about this cost but there is another one towering over Williams' accounts and until this is reigned in it may be tough for the team to make a profit.
It is a remarkable fact that, according to their latest accounts, of all the F1 teams based in the UK, Williams has the highest ratio of staff costs to revenues. In 2007 it paid a total of £30.3m on its staff and this represented a massive 45.2% of its revenues. In contrast, the cost of its engines has been estimated at £13.7m.
However, it is when Williams' staff costs are compared to those of the other teams that the enormity of its burden truly comes to light. Former World Champions Renault spent just £3.6m more on staff in 2007 than Williams despite having over £40m more revenues. Likewise, current World Champions McLaren spent only £4.6m more on staff than Williams but had nearly double the revenues. Even Honda, which was driven from the sport due to its excessive spending, only spent £5m more on staff costs than Williams in 2007 despite having well over double Williams' revenues.
The upshot is that Williams has staff costs which are as high as manufacturer-owned teams but revenues which are only a fraction of them. Frank Williams even admits to the FT that his eponymous team is not on a par with F1's leading lights when he says "our knack is not good enough for today's act. There are better groups of people at the present time." Nevertheless, despite this recognition that Williams is not performing with the big boys, it has still been spending on staff like them and evidence says it doesn't have to.
Williams employed 500 people in 2007 but Red Bull Technology, which makes cars for two teams, employed only 54 more. And Force India had just 238 staff in 2006 - the most recent year for which it has filed accounts. Force India's staff costs were just £11.4m in 2006 - a good lead for Williams to follow. It is highly unlikely that the cost-cutting measures will shave this much staff off Williams' headcount so the incentive may have to come from Parr and Sir Frank since there may not be many lifelines remaining.
Nevertheless, despite being advanced the prize money by Ecclestone, there is no special treatment between the two parties. An example of this is how Williams has been working with the organisers of the F1X theme park due to open in Dubai next year.
Ecclestone says that the organisers want to put replicas of all the team cars at the entrance to the theme park but adds that "Williams won't let them use their car." He adds that "I'd be delighted if I had a team to have sponsors on the car for everyone to look at."
Parr explains that "the reason that we have not yet agreed to provide our assets for display is that we have not been able to agree commercial terms for so doing. I am still hopeful that we will do so." He says that "unlike some teams which are in F1 to market their products, we do not get an intrinsic benefit from the display of our cars," and so "we are not in a position to offer such benefits without the appropriate fees."
However, Ecclestone disagrees with this way of thinking. "They are stupid because they would get money the other way. You go to the sponsor and say this is another add-on." In a nutshell, Williams could charge more for sponsorship from the exposure it gets at the theme park. It is one more thing that the team should re-consider if it wants to return to profit.