09/05/2011
NEWS STORY
 |
If you do a Google search for "Delta Prefco" you will not find it mentioned in any newspaper articles and it is only mentioned on one website article. It is the following article from 2008 in which Pitpass' business editor Chris Sylt revealed that the GP3 series would be launched.
Even this article only made a cursory reference to Delta Prefco. There is a very simple reason why there are so few mentions of it on the internet. It is the most important company in F1 and outside of the sport's corridors of power, only a handful of business analysts knew anything about the company. Until now.
As an indication of how well hidden the company is, one F1 sports journalist recently had a stab at creating a diagram of F1's corporate structure and Delta Prefco was one of the companies completely omitted, whilst another, which closed last year , was included.
The recent theories about News Corp bidding for F1 encouraged Sylt to dust off his files on Delta Prefco and there is good reason for doing so. It is sometimes said by conspiracy theorists that F1 could be sold and the new owners may find out that in fact they own or control nothing because they have bought the wrong company or perhaps they have to pay more to get control.
True, they are just old wives tales but no doubt they were fuelled by the events of 1998 when several teams were promised shares in Formula One Holdings (FOH) if it floated or was sold. FOH owned Formula One Administration, which directly held F1's commercial rights so it seemed a safe bet. From 1999 to 2006 an estimated $2.5bn was raised by selling stakes in F1 yet the company being sold was not FOH but instead its parent SLEC. As a result, the teams legitimately didn't get a penny. They took legal action about it but in the end were forced to sue their lawyers over the drafting of the contract.
Further fuel for the conspiracy theorists came in 2002 when three banks, BayernLB, Lehman Brothers and JP Morgan, took over 75% of F1's parent company but found that they did not have control of the businesses which run the sport. They were forced to take over the 75% following the bankruptcy of German media company Kirch which bought the stake with a loan given to it by the banks. Kirch paid $619m for 50% of F1 but it only got this price on condition that it took up an option to get a further 25% for $987.5m. This payment is what pushed it towards bankruptcy.
There is no suggestion that any of these scenarios would be repeated if F1 were to be sold now but nevertheless, there is no question that it is always absolutely crucial to buy the right company or, in the current situation, the right companies.
F1's ultimate parent company is now the Jersey-based Delta Topco and if it is sold, its owners will get a share of the proceeds according to the amount of shares they own in it. Private equity firm CVC owns 63.4%, 15.3% is owned by Lehman Brothers, 5.3% is in the hands of F1's boss Bernie Ecclestone, his Bambino family trust has 8.5%, 3.1% is held by JP Morgan, 0.7% by investment firm Churchill Capital, 1% by Patrick McNally who runs F1's corporate hospitality and the remaining 2.7% is split between the sport's management. However, this division is not the one which is used to determine how all of F1's annual profits are distributed. It is certainly not small beer.
F1 generates hundreds of millions of dollars in profit every year after its costs have been deducted from its revenue and this money is not all divided according to the shareholder split of Delta Topco. Instead, Delta Prefco, another company based in Jersey, determines this. Delta Prefco has what are known as preference shares in two companies: Beta Topco 1, which controls F1's trackside advertising and corporate hospitality outfits, and Omega Group Holdings, which runs GP2 and GP3. But what are preference shares?
Owners of ordinary shares get a dividend (a share of profits) based on the number of shares they own in a company. However, holders of preference shares get a fixed dividend which must be paid out before any ordinary dividends can be paid. It is no surprise that preference shares are owned in Beta Topco 1 in particular because it is F1's most profitable business. F1's industry monitor Formula Money, which is produced by Sylt, shows Delta Prefco's position in F1's corporate structure and also reveals that trackside advertising generated a net profit of $203m last year.
It isn't known what amount the fixed dividend from the preferred shares is set at but it is believed to be governed in Delta Prefco's investment and shareholders' agreement. This is also believed to confer the preference status of the shares along with other crucial rights attached to some of them. The investment and shareholders' agreement was signed on 24 November 2006 by Bambino, JP Morgan, Lehman Brothers, Churchill, Ecclestone and CVC.
Underscoring the importance of Delta Prefco, one of the directors on its board directly represents the partners in CVC's investment fund who are governed by the US Employee Retirement Investment Security Act 1974. Public pension funds are the biggest single investors in the funds which CVC uses to buy businesses such as F1 so the position on the board of Delta Prefco gives them a say right at the very top.
Crucially, Delta Prefco's owners are different to those of Delta Topco. F1's management has no shares in it and overall it has only six owners: CVC, Lehman, Bambino, JP Morgan, Churchill and Ecclestone. All but one of them have a greater share in Delta Prefco than they do in Delta Topco. CVC for example owns 69% of Delta Prefco compared to 63.4% of Delta Topco and Lehman Brothers owns 16.7% of Prefco compared to 15.3% of Topco. The big difference comes with Ecclestone's stake. He owns 5.3% of Delta Topco but has just one share of Delta Prefco. That's one very, very important share.
Overall, 8,501 shares are issued in Delta Prefco so Ecclestone's share would give him just 0.01% of the money paid out by Delta Prefco on a pro rata basis so clearly he doesn't hold it for financial reasons. Pitpass understands that the investment and shareholders' agreement confers special rights to the share which are thought to include that of a casting vote at board meetings. Since the amount of the dividend paid out by the company could be changed at board meetings this would be an incredibly powerful share.
In summary, any company wanting to take over F1 has to buy not only Delta Topco but Delta Prefco as well if the new owner wants to pay itself the profits made by the sport. And it doesn't just have to buy control of Delta Prefco it looks like has to buy at least 51% along with Ecclestone's share.
In August last year Ecclestone told Sylt that F1 would sell for "six or seven billion dollars." If a new owner didn't do adequate due diligence (which can happen as demonstrated by the earlier examples) and only bought Delta Topco it may have to pay another six or seven billion for Delta Prefco. And if indeed Ecclestone's share is a casting vote a new owner would have to ensure that it is included in the purchase. If not, it is impossible to say how much Ecclestone would charge since the new owner would be in dire need of his share.
The Sky really would be the limit.