29/01/2011
NEWS STORY
Last week's announcement that Williams is considering a stock market flotation took the F1 world by surprise. To put it mildly. Not only did it seem bold that a team which recently lost a raft of sponsors would have a flotation on its mind but it also seemed odd to distribute a press release simply to say that it is "considering a flotation on the stock exchange." Surely it would have made more sense to wait until the plan was definite and then announce it with a press release. Given that F1 has a history of releasing statements about events which never transpire (those about the mythical rival series spring to mind) could Williams' announcement be something of a public relations faux pas?
The speed at which it all came together wasn't lost on the media with one journalist saying that Williams' plan was explained "in a hastily arranged phone conference." Pitpass' business editor Chris Sylt has been investigating the implications of the flotation for the past week and is preparing a detailed analysis of it. The following is a sneak peek into what is coming up and it begins with some background.
When a company floats the public can buy shares in it in the hope that their value will increase and they can ultimately sell them to make money. Companies which are making profits declare dividends and these can then be distributed between the shareholders. It gives the public a real incentive to invest in a solid business.
In Williams' case the team hasn't said how much of it will be floated, just that Sir Frank Williams will remain the majority shareholder. So the public will not be buying into the entire team, just a portion of it, and one report has speculated that Williams may only list 20% on the stock exchange.
The team is currently run by the UK company Williams Grand Prix Engineering which is 63% owned by Frank with 27% in the hands of Patrick Head and the remaining 10% held by former Sportscar driver Christian Wolff. It looks like the portion to be floated will be transferred to a separate UK company called Williams Grand Prix Holdings plc (WGPH) which was incorporated on 21 December last year. Its formation was the earliest public record of Williams' flotation plan and WGPH is now based at Williams' Oxfordshire headquarters.
There are currently four directors of WGPH: Williams' chairman Adam Parr, the team's chief executive Alex Burns, its in-house lawyer Mark Biddle and a company called London Law Services. The latter is a London-based business which specialises in incorporating companies and WGPH was based at its offices until 30 December last year.
The WGPH incorporation documents state that London Law owned both of the two shares issued in the company but this is likely to change. It is common for advisers to act as caretakers of companies which have just been set up and are likely to have changes in their ownership. The big question is whether the public is interested in buying shares in Williams.
On the face of it you might think that Williams' recent financial track record would be the biggest obstacle to a successful flotation. Only a few weeks ago it was revealed that as of the end of the F1 championship in November last year Williams' bills were paid 9 days overdue. This was 50% slower than at the start of the season and was the second biggest increase in late payment of any of the teams according to business information firm Dun & Bradstreet.
In terms of constructors' titles, Williams is the second most successful F1 team and it has an incredible history. Buying a piece of this is likely to be a big draw for some investors but those who go by the team's results (on or off track) over the past five years may come to a different decision.
Williams has made combined net losses of £5.9m over the past five years and in 2009 its pre-tax profits fell by 50% to £4.5m as it lost sponsorship from bankrupt Icelandic conglomerate Baugur. Then, at the end of last year it lost an estimated £28m in sponsorship due to the departure of four brands including government-owned bank RBS which was alone paying the team around £13m.
This year the team has dumped respected German driver Nico Hulkenberg in favour of Venezuelan Pastor Maldonado who is bringing with him an estimated £9m of sponsorship from local businesses. Although this will give a slight boost to Williams' budget there were huge empty swathes of blue and white on its car's livery when it appeared in Caracas on 14 January. This is admittedly only what is known as an interim livery but the team doesn't have much time before the first race to sell more sponsorship. We will soon see if it can do this and its moves will be followed even more closely than usual due to its flotation intentions.
One thing investors in any business don't like is uncertainty. They want the opposite - guarantees that revenues and profits will increase. Whilst few, if any, businesses can offer that, F1 teams in particular have little visibility when it comes to future revenues. Sponsorship contracts typically only have a duration of three or four years at most and prize money depends on race performance. The situation is not so different when it comes to profits.
Williams' first task should be to convince the public that its aim is to make profits, even if this means sacrificing race wins. It may want to do both but investors really only want to know that it will put profits before all else. You can hardly blame them since they are the ones who would be buying Williams' shares. It sounds simple enough but could any F1 team really claim that its first aim is not winning races? It may be possible but to say it wouldn't go down well with fans is an understatement.
Then comes the not so small task of actually making profits. Last year Williams was using the same engine as three other teams and the Resource Restriction Agreement (RRA) was in place to limit spending and thereby even out the playing field. So why didn't Williams win races? Only the team knows the answer to that but the upshot is that if it fails to win more races then its ability to command higher sponsorship values diminishes. This in turn reduces the likelihood that it will make a profit which is the last thing that shareholders would want.
If Williams starts winning races again then it is well-placed to build up a healthy bottom line. The RRA limits spending so, theoretically, if Williams' revenues accelerate, the increase should fall straight to the bottom line as profit. However, the big question is whether its revenues will accelerate. If it fails to win races it becomes harder to secure sponsorship and harder to increase revenues. It sounds like a catch 22.
If Williams does float then it will have to release more detailed company information. Much more. At the top of prospective investors' minds will be the question of why the team is floating. As we said at the outset, in a flotation the public buy shares in a company in the hope that their value will increase. It can raise a great deal of money and the public would want to know what the team's current owners are going to do with it. The ideal scenario may be that the proceeds of the flotation are invested into the business so that its value, and that of its shares, increase. However, as yet, we don't know what Williams is going to do with the funds which are raised.
When asked whether a flotation would involve raising funds for the company Parr said no. Clearly the flotation would raise funds so presumably he means that the company does not need the funds to continue trading. This makes sense but Parr goes on to say that a flotation "is the best way to secure the future of the team and its 450 employees." So if the team does not need the money raised by the flotation then how exactly would it secure its future?
There are certainly many unanswered questions and any company which plans to float needs to put in place a good line of communication if it wants to succeed.
However, the team hasn't yet committed to floating and, although Pitpass can't make that decision for it, in these kinds of situations it is often worth looking to the words of F1's number one sage Bernie Ecclestone.
Such is Ecclestone's extraordinary experience and knowledge of the sport that his words are often like a crystal ball into the future of F1. Indeed, they can sometimes apply, almost mysteriously, to teams, sponsors, circuits or broadcasters even if he is only talking about his own business. In September last year he told Sylt that his business "wouldn't float under me," and he gave the simple reason that "there's no way I would sit in front of a load of shareholders." If it's not good enough for Ecclestone then it is natural to be sceptical that it is the right direction for Williams. Time will tell.