17/03/2009
NEWS STORY
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When F1's commercial rights were bought by the finance firm CVC in 2006 it started a huge amount of speculation as to who would really ultimately control the sport. Soon after the deal was announced it was discovered that CVC hadn't even used its own money to buy F1 but had instead used a $2.7bn loan from RBS and Lehman Brothers. This completely changed the landscape of control in F1.
To get the loan CVC had to pledge that if it missed its annual $185m ($260m) repayments the lenders would get the valuable commercial rights to F1. But the financial twists and turns didn't stop there. We all know now that RBS and Lehmans hit the wall last year and to quickly recoup the F1 loan both banks sold the right to repayment.
The new debt owners hold the real keys to the future of F1 since if they don't get their annual F1 loan repayments they could end up owners of the sport's commercial rights and to get their money back they would surely sell them on. In short, they could decide the future of F1 - who owns it and who runs it, which in turn could affect where it races and even where it is broadcast. They obviously are also given fantastic foresight of F1's revenues since any decrease could affect the repayments due to them.
Who these mysterious debt owners are is unknown. Funds such as the Chicago-based Citadel (www.citadelgroup.com) bought the debt initially but the company says that it sold it on again. Nothing has been heard from the current owners. Until now.
Pitpass' business editor Chris Sylt has not only interviewed one of the debt holders but his article about this in today's Financial Times reveals how the economic downturn has only just begun to batter F1. It is the teams that have most to lose.
We have all seen how Honda, RBS and ING have pulled out of F1 due to the downturn. But today's article shows how it is also sending spectator numbers plummeting and driving sponsors away from F1's corporate hospitality as they try to cut costs and disassociate themselves from its image of lavish spending. "Although this isn't the largest of F1's revenue streams it is the most at risk," says one of the debt holders who contacted Sylt with questions about the future of F1 and its teams. Sylt knows his identity but is sworn to secrecy.
F1's commercial rights generate around £891.9m ($1.3bn) in annual revenues (see below) with fees from hosting races bringing in around a third of this, TV rights making a similar sum and the remainder split roughly between income from trackside advertising and corporate hospitality. F1's Paddock Club has a champagne bar, gourmet banquet and guided tour of the pits, but at an average cost of £2,183 ($3,070) for a one-day pass, it's no surprise that companies are cutting corporate hospitality costs.
In recent years at the Australian GP, BMW has entertained up to 400 clients with its own grandstand and bar and restaurant area costing it close to £450,000. However, it is axing this entirely this year with Foster's also cutting its spending on the race. The departure of ING and RBS will also leave CVC with a £21m ($30m) hole from the amount they were spending on trackside advertising and, more immediately, they are both cutting their corporate hospitality budgets this year.
Sylt says that RBS is expected to spend almost nothing on F1 corporate hospitality this season and ING is likely to make a similar cut since it will be reducing its entire F1 budget by 40% in 2009. This effect will filter down throughout the season with Bahrain already reporting a "downturn on our corporate hospitality bookings."
CVC refuses to comment on Paddock Club advance-bookings but Sylt's source at the F1 debt holder says that it is more of an expectation than a concern that this income will be weak in 2009. Due to the huge overheads of transporting catering equipment around the world, corporate hospitality doesn't make much of F1's profits. Accordingly, any dents in this income will not badly hammer the sport's bottom line. "The margins on this revenue stream are lower than the other revenue streams of F1," explains the debt holder adding that the big risk would come from a decrease in race fees.
"If several race promoters were to fail to pay their sanction fees in 2009, this would be a concern," he says. This is far from hypothetical.
Hosting fees cost an average of £17m ($24m) per GP annually and the race promoters' main source of revenue to cover this is ticket sales. This explains F1's sky-high ticket prices but with each race lasting just two hours the value for money is easy to question, especially in a downturn. The last thing the sport needs this year is any processions and the forward-bookings show what they are up against.
The cheapest tickets in F1 cost $31 for the Malaysian GP but even these sales are down by 20% year-on-year. Likewise, Australia has reportedly sold 15,000 fewer tickets this year. If a promoter has insufficient income to cover the fee then it faces the risk of bankruptcy, and the race being cancelled, unless CVC is prepared for it to continue without payment. In both cases CVC ends up out of pocket and it is already down this year on 2008.
The promoter of the Canadian GP reportedly missed payments over the past three years leading to the race being struck off this year's calendar. "Rising costs have put the race out of reach of a private promoter," said organiser Normand Legault last year. This view was echoed by his counterpart at the French GP which has also been ditched this season "for reasons related to the financial situation."
Abu Dhabi is a new addition in 2009 but this has been scheduled for three years. The calendar is still down by one race since neither the French GP nor the Canadian GP has been replaced. This is no surprise since it takes several years for a circuit to be prepared for F1. The upshot is that if further races drop out then CVC will lose revenue and this does not look like a remote possibility.
The British GP is the only race which has confirmed increased ticket sales in 2009 due to Lewis Hamilton's success but even this is at risk. Next year it is moving to Donington but the circuit's owners have yet to secure the £40m needed to redevelop it for the race. Its management recently said that "the current economic conditions create uncertainty particularly over...the availability of bank and other finance in the foreseeable future."
In January FIA president Max Mosley said "I cannot envisage that Formula One Management's forecast earnings still hold in the economic crisis. Bernie will have problems with some organisers." Since then Ecclestone has suggested that he is prepared to take a hit on the German GP in order to save it.
Ticket sales for the race at Hockenheim have slumped 37% since 2002 and last year it made a $6.6m loss. "Without grants from the state there will be no more Formula One in Hockenheim," said the circuit's boss Karl-Josef Schmidt last year but Ecclestone recently revealed "we'll look after them...I don't think there will be any problems."
Not only will a decrease in hosting fees, corporate hospitality and trackside advertising revenues put pressure on CVC's ability to pay back its debt, but it also has a knock-on effect on the teams. This is where the vicious circle hits top gear.
Around a third of the teams' revenues come from prize money and the total amount available is comprised of 50% of F1's profits from the previous year. So a decrease in its revenues this year will give the teams less money next year. This is the last thing needed by teams such as Williams, which will lose $20m from RBS in 2011, and Renault, which will lose $65m from ING next year.
It's no coincidence that Renault recently threatened to leave F1 if it doesn't get more money from the sport. "We're seeking to bring down contract costs and receive more of the revenues" said the company's chief operating officer Patrick Pelata. However, Ecclestone will not budge on the prize money paid out and this is perfectly understandable since if CVC pays out more money to the teams it could increase its risk of missing debt repayments.
In a nutshell, F1 is a victim of its own success. When the going was good businesses were beating down F1's door - they were desperate to get involved in the hope that its glitz and glamour would rub off on them. This was when F1 built up its debt mountain and because the sport was in rude health the amount borrowed was massive. However, the economy has changed a lot since then.
During a downturn, the last thing many companies want is to be associated with glitz and excess of corporate hospitality. F1's circuits pose a different problem since they receive no revenues from the rights holder but bring it a third of its revenues. If F1 loses more Grands Prix the sport could go into reverse or worse.
F1's total revenues in 2008
£287.4m: Race hosting sanction fees
£270m: TV rights
£121m - Trackside advertising
£106.8m - Corporate hospitality
£42.7m: F1 partner programme
£35.6m - Misc (including merchandising, internet and publishing revenues)
£28.4m - GP2 (F1 junior series)
£891.9m - Total
Source: Formula Money