23/04/2011
NEWS STORY
 |
From reading some of the F1 reports over the past few days you could be forgiven for thinking that Rupert Murdoch's News Corp media empire had made a bid for the sport. In fact he hasn't even spoken to F1's boss Bernie Ecclestone about a takeover and as Pitpass' business editor Chris Sylt reveals in detail in the Daily Mail, there is one very good reason why a bid from News Corp is complete fantasy. As always, Pitpass is the only place to get the inside business story of what is really going on in F1 and it is right here.
The original allegation about News Corp considering a takeover of F1 was printed in a heavily caveated blog post written by Mark Kleinman, the business editor of Sky News which is ultimately 39.1% owned by News Corp. That in itself is an important point as we will come to find out.
To recap, the blog post claimed that News Corp has been in early stage talks recently with the world's richest man, Mexico's Carlos Slim, and "people connected to at least one of F1's big car manufacturers" about collaborating on a prospective takeover of F1. After having built up readers' expectations Kleinman then wrote that "I should say for the sake of clarity that there is a good chance that News Corp's deliberations and talks with outside partners will not ultimately lead to a bid." So by Kleinman's own admission, the headline for his story could read: 'Good chance News Corp won't buy F1'. That too could be an important point as we will come to find out.
Kleinman's claim provoked some interesting responses from Ecclestone. First he told the Telegraph that the story is "rubbish" and that F1 is "not for sale." This caused Kleinman to update his blog saying that Ecclestone's comments are "not a denial of anything I've reported tonight." He added that "it may be many months before the media group and any prospective partners are ready to table anything formal, if indeed they do at all." Yet again, Kleinman went out of his way to say that his own story may well not come to anything. Why on earth would he do that?
Just in case Kleinman was in any doubt about the fact that Ecclestone's comments were indeed a denial of not just anything that had been posted in his blog story but everything in it, the F1 boss came out with an even more robust rebuttal.
"I know Rupert and James Murdoch and Carlos Slim, and if they wanted to do anything they would contact me direct. And they haven't," Ecclestone told the BBC. In a separate interview he said that Kleinman's story "is all rubbish." Obviously, contrary to Kleinman's update, Ecclestone was indeed denying his post and after it had been described as being "all rubbish" the blog wasn't updated again.
Ecclestone's comments to the BBC are a good place to start when it comes to explaining what has really happened here.
There is no doubt that the worst situation to be in when negotiating to buy something from Ecclestone (or any other businessman worth their salt for that matter) is for him to know that you want what he has got. Far better if Ecclestone thinks that you don't really want what he has got so you won't be prepared to pay through the nose for it. If he has evidence that you want something from him then he will make sure that you don't just pay over the odds but you may have to beg, borrow or steal just to afford it. In short, he will make you pay many many times what it is worth and the history of F1 is littered with examples of this. Indeed, it is one of the strategies Ecclestone has used to become a billionaire.
So, let's consider the implications of that in the case of News Corp. By revealing that News Corp is allegedly considering a takeover of F1, Kleinman notified Ecclestone about it. This gives Ecclestone and his business partners CVC time to discuss just how much money could be extracted from News Corp and Slim so that if (not when) they walk through the door to his office he could ensure that they pay as far above the odds as possible for F1.
As Pitpass reported last year Ecclestone believes that F1 is worth six to seven billion dollars so now that he knows Murdoch and Slim allegedly want to buy F1 perhaps they would be forced to pay eight or nine billion. Indeed, following Kleinman's blog post, Ecclestone told Bloomberg that "if someone was to come along with an enormous offer, a lot more than it were worth, they [CVC] would have to look at it."
So, in summary, if Murdoch and Slim do come walking through Ecclestone's door to discuss buying F1, they could end up paying perhaps a billion dollars more than F1 is worth and it would be thanks to him having been tipped off by Kleinman's post. There is good reason why these kind of negotiations are kept secret in deals which do come to something and it is to prevent leaks. If one of the parties deliberately leaked that it is going to make an offer it could be tantamount to business suicide. That's not something Rupert Murdoch is renowned for.
Kleinman is an extremely talented and credible reporter. He made his name breaking big mergers and acquisitions stories and rose through journalism's ranks to become City editor of the Sunday Telegraph so he certainly has a good track record.
In one of Kleinman's reports about F1's jailed banker Gerhard Gribkowsky he claimed that he was "not clear" whether he is in fact in prison. He also claimed that F1 faced "being thrown into turmoil" by an internal investigation into the circumstances surrounding the sale of the sport to CVC. However, he failed to mention that the companies carrying out the investigation are retained by F1 to inspect its business dealings so weren't likely to find anything they hadn't spotted before. Indeed, they have now concluded there was no wrongdoing by the F1 Group.
Pitpass was disappointed to see Kleinman describe Tom Bower's fundamentally flawed biography of Ecclestone as "excellent." However, Kleinman's work is far far far above the error-ridden text typed out by Bower. Sure, in Kleinman's latest piece he claims that "CVC paid north of $2.5bn to gain control of F1 in 2005-06," whereas, Pitpass readers know, CVC paid precisely £1,038,818,380 ($1,714,362,000) for the sport and this comes directly from the accounts of the company which made the acquisition.
You might say that Sky's business editor shouldn't have even one figure out of place in his reports, particularly such a crucial one. However, this slip up is nothing compared to Bower's utter falsehoods which include making up that Frank Williams has rigged the F1 championship. It is also perfectly excusable for Kleinman since he doesn't specialise in reporting about the business of F1 and has only been writing about it occasionally over the past few months. Given that he covers a very wide range of industries in addition to F1 his knowledge of the sport is most impressive. So there is next to no chance of him knowingly writing an article which would lead to the company which owns 39.1% of his employer losing billions on a deal. It really isn't believable.
Although Kleinman doesn't name his sources, it doesn't take a great leap of the imagination to work out who could have told him about News Corp considering a takeover of F1. If someone from News Corp gave him the news that it was considering bidding for F1 it would have been literal business suicide - tantamount to them saying 'post this on your blog so that Ecclestone knows we want his business and can have a good think about how much extra he should charge to sell it to us.' Clearly that didn't happen.
Like Ecclestone, Murdoch likes to get the most out of every deal. For example, when he sold the Fox Family Worldwide network to Disney for £3.7bn ($5.3bn) in 2001 rumour has it that Murdoch didn't want to be in the same room as Disney's then-chief executive Michael Eisner in case he burst out laughing at how much he had overpaid for it. Likewise, Slim didn't get to become the world's richest man by letting his business rivals know that he wants their assets so that they have time to work out how much to overcharge him.
So we can safely conclude from this alone (and it is just the start) that there is no chance News Corp would have told Kleinman that it is considering buying F1 if it really is doing this now or is going to do so any time soon. However, that doesn't mean to say that News Corp hasn't looked at buying F1 in the past.
Pitpass has seen documents which prove that as far back as August last year News Corp (in specific, its corporate development manager for Europe and Asia) was acquiring research about the business of F1. However, Pitpass understands that it soon came across the insurmountable roadblock described by Sylt in the Daily Mail.
As regular Pitpass readers will know, the teams commit to race in F1 by signing a contract called the Concorde Agreement and this just happens to contain a clause guaranteeing that the sport's rights holder and the FIA will ensure "that the championship will be shown free to air where there are suitable broadcasters prepared to do this." It would prevent Murdoch's pay per view Sky channels from exclusively broadcasting F1 in key markets such as the UK.
Changes to the Concorde Agreement require consent from each of the teams and although the contract is up for renewal at the end of 2012 there is next to no likelihood that they would agree to removing the clause from it.
Last year an estimated 49% of the teams' £970m ($1.6bn) total budgets came from sponsorship and the average deal cost £32.m ($5.2m). This high-octane price is fuelled by wide exposure to F1 on free to air television which gave the sport 527m viewers in 2010.
The teams have demanded the commitment to broadcast F1 free to air in every iteration of the Concorde Agreement since it was first signed in 1981. On Wednesday Ecclestone reiterated to Sylt that "it has always been our intention to broadcast free to air television wherever possible."
As News Corp found out in due diligence, this clause would have a tremendous effect if it were ever to acquire F1. In a nutshell, News Corp would have to spend billions (potentially far more than it is worth thanks to Kleinman's blog post) to buy F1 and then it would be forced to hand it to its free to air rivals to broadcast.
It's hard to imagine News Corp's shareholders agreeing to that deal. One shareholder in particular may be more than a little bit obstructive and he carries a lot of weight. He is Saudi Prince Alwaleed who Forbes ranked as the world's 26th richest man this year with a fortune estimated at £11.9bn ($19.6bn).
Sylt has known Alwaleed since 2002 and has interviewed him on his £86m yacht, in his hotel in Paris and was even his personal guest when he played polo in Windsor with Prince Charles. Surprisingly, the subject of F1 came up in their discussions.
Alwaleed's son Khaled was once linked with bids for the Prost and Minardi teams so Sylt wondered if there is an F1 affinity in the family. It seems not. Alwaleed stressed three times that the reports linking his family to F1 were incorrect and, when pushed, he admitted "I am not interested in this kind of sport." Alwaleed is the second biggest shareholder in News Corp after the Murdoch family so his support could be crucial to a takeover of F1. Going on his comments to Sylt, it may well not be forthcoming.
In contrast, Rupert's son James is believed to be an F1 fan but if anyone thinks that the Murdoch family can do what they like with News Corp, think again.
As the following report shows, a group of News Corp shareholders have filed a legal complaint accusing Murdoch of overpaying for his daughter's Shine Group and using News Corp "like a family candy store." They are challenging the takeover agreement, seeking financial damages and attempting to open the books on how the deal was agreed. Given that Shine was acquired for £402m ($663m), one wonders how the shareholders would react if News Corp were to buy F1 for billions and then be forced to let its free to air rivals broadcast it.
For the sake of clarity it is worth stating that News Corp would not be in a position to for example double the broadcast fees in order to ensure that other broadcasters could not afford to screen F1 even if News Corp itself said it was prepared to pay the doubled fees. Obviously, if News Corp paid broadcast fees to screen F1 that money would be going back into its own pocket if it was the rights holder. Accordingly, it wouldn't be a fair comparison with other broadcasters. More significantly, under the Concorde Agreement, F1 has to be offered to broadcasters at a fair going rate so clearly, doubling it in one year would be prohibited.
It is worth remembering that the Concorde Agreement also commits the FIA to ensure F1 is broadcast free to air and the FIA also just happens to have a veto on who F1 is sold to. Allowing the sale of F1 to a company which is famed for its pay per view coverage could conflict with the FIA's commitment under the Concorde. It is yet another virtually insurmountable obstacle for News Corp.
True, News Corp could guarantee the FIA that F1 will stay on free to air but this would involve it paying billions for an asset (F1) only to see its free to air rivals benefit from it. We doubt that any shareholder would clear that deal which is why it is no surprise that it isn't happening now. This, of course is why News Corp has no problem with a reporter (Kleinman) from a company that it owns (BSkyB) revealing that it could make a bid for F1.
The reality is that News Corp isn't buying F1 and so Ecclestone is not going to be in a position to overcharge Murdoch and Slim for it. This of course could well explain Kleinman's comments that there is a "good chance" that the News Corp takeover won't happen and that it "may well not come to anything." Pitpass certainly agrees with this part of his story and it didn't go unnoticed by other reporters too as the Telegraph's sports reporter Tom Cary stated that "the report was, however, replete with caveats."
Pitpass was also intrigued that Kleinman's blog post didn't refer to what competition authorities might have to say about the deal. He does say that "BSkyB, the UK pay-TV operation, failed with an attempt to buy Manchester United in 1998," so you would have thought that this would be the perfect opportunity to mention the reason why it failed.
To fill in the gaps, BSkyB's bid for the football team failed because the UK's competition commission blocked it due to the power it would give the firm in negotiating broadcast contracts. Clearly, given that its acquisition of one team was blocked, it is not likely that the watchdog would let its purchase of an entire sports series get off the grid. However, it won't come near to this due to that all-important Concorde clause (none other than 5.4(d)(ii) in the 1998 draft).
So what can we say in summary? News Corp has looked at buying F1 in the past but it doesn't look like it will be taking it over in the next 5 to 10 years. It spoke volumes that Murdoch's own Sky News channel reported that it was considering buying F1 before Ecclestone and CVC had been informed. This told anyone who thought about it for a few moments that the takeover isn't at all likely to happen. And why were the brakes put on it? The Concorde requires F1 to be broadcast on free to air TV so News Corp would have to spend billions buying it and then allow its rivals to broadcast it. This is more than enough of a hurdle but if it were to progress, you can bet your bottom dollar that regulators would block it just as they did with BSkyB's purchase of one team: Manchester United.
It is hard to see what was the point in reporters writing so much over the past few days about a non-deal which won't happen. It would surely have been more sensible to wait and analyse the situation, as Pitpass has done here. Journalists may want it to happen as it gives them something to write about but, as has been explained above, this really doesn't look likely.
Some journalists have run away with it so fast you would have thought that a deal had already happened. Pitpass' favourite example of this is the article by Cary at the Telegraph about whether Ecclestone can survive a takeover. Incidentally, Pitpass understands that Ecclestone is none too impressed by the comment in Cary's article that "current owners CVC Capital Partners are understood to be keen to sell despite Ecclestone's protestations."
Time will be the best judge of whether Kleinman's blog post has substance to it. Pitpass is sure that News Corp won't take control of F1 any time soon. Perhaps Kleinman would say that he told readers from the start that there was a "good chance" of the deal not happening and that it "may well not come to anything."
It makes you wonder what was the point of him writing it in the first place.