22/04/2012
NEWS STORY
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After today's Grand Prix Formula One's journos will have to get used to writing merely about racing again as some of the reports on the turmoil in Bahrain in recent days have felt more like they came from war correspondents.
Meanwhile, Pitpass' business editor Christian Sylt was doing what he does best and scooped up news about the biggest business story in F1 so far this year - the mooted stock market flotation of the sport. This has been under discussion for the past month with some media outlets talking as if it is a done deal. It is far from that as Sylt reveals in the Mail today.
There are two pieces of crucial news about the float which are revealed in his report. The first is that the board of F1 has to vote in favour of the float in order for it to proceed and, secondly, the piece reveals that the board has not yet given this approval. That does not mean that the float won't happen but just that it has not got the green light.
In addition to being Pitpass' business editor Sylt is also a co-owner of F1's industry monitor Formula Money which works with many F1 sponsors, circuits, prospective races and teams. It carried out research for the advisers of F1's majority owner, CVC, when it was planning its acquisition of F1's rights holder and supplies consultancy services to Red Bull, the Malaysian Grand Prix, the US Grand Prix and the planned South African Grand Prix.
It gives Sylt contacts across the worlds of F1 and finance and his news about the float has been corroborated by two senior sources in these fields. They have confirmed that CVC, is working towards an IPO in June but this could be delayed until October or even shelved depending on market conditions and getting the necessary approval from the board.
It is understood that the decision to float will be put to the board of Delta Topco, F1's parent company, next month and one of the sources says that "CVC is aiming to be ready by June." He adds that "when everything is ready, the prospectus is done and the analysts are briefed, the board will be asked and told that they are about to cross over the watershed line."
In preparation for this, Goldman Sachs and UBS have been hired as the lead banks and as the deadline for applications from junior banks was 13 April. It was a process which the source describes as "a feeding frenzy as it is the hottest ticket for banks which couldn't do Facebook."
It has been widely reported that F1 will be floating in Singapore and Sylt himself was the first journalist who talked about this possibility. As Pitpass reported in November last year, F1's boss Bernie Ecclestone told him that "it would be better to float the company in Singapore than sell it." However, what has been widely overlooked by the media since then was Ecclestone's other comment that "if I wanted to dispose of the company today I would float it in Singapore or Hong Kong." Sylt says that investment banks in Hong Kong are still actively analysing F1 suggesting that the location of the flotation has not yet been decided.
The reason that CVC wants to float in either Hong Kong or Singapore is that F1 will become a flagship for the stock exchange there rather than being just another in a long line of big name brands if it was listed in Europe. This means that the exchange would throw more promotional support behind the F1 stock and the source says "listing in the east is another way of getting the brand out there."
The Hong Kong stock exchange is Asia's third largest market in terms of capitalisation behind the Tokyo stock exchange and the Shanghai stock exchange. As of 30 November 2011, the Hong Kong stock exchange had 1,477 listed companies with a combined market capitalisation of £1.4tn (HK$17tn). The Singapore exchange is much smaller and had just 772 listed companies with a value of £323bn (SGD$650bn) as of 31 January 2012. Both markets are dwarfed by the London Stock Exchange which is where 2,966 companies are listed.
It is hard to tell whether F1 will go for Hong Kong or Singapore if it floats. Singapore seems more logical given that F1 has a race there which the entire country gets behind in a big way. However, that could actually be a sticking point. "The Singapore government wants Formula One to be listed here and for that to happen, it knows the race has to remain here," an unnamed banker was recently quoted as saying. It just so happens that Singapore's race contract expires at the end of this year and, reportedly, the organisers want a reduction in their fee which is estimated at £36.4m ($58.6m) by Formula Money.
The quoted banker admitted that Ecclestone has a strong negotiating hand as he "knows Singapore needs him because the SGX (exchange) hasn't had any big names in recent years. Being the shrewd businessman that he is, he will play hardball." Last year, Manchester United Football Club chose Singapore for a partial flotation but this has yet to happen. In contrast, in June 2011 CVC led a £777m (HK$9.73bn) flotation of the Samsonite luggage brand in Hong Kong, just two years after the company had gone bankrupt. It is that kind of cash raising power that CVC will be looking for from the F1 float.
If F1 does float in either Hong Kong or Singapore it doesn't mean that only people in those countries will be able to buy shares in it. Anyone will be able to do this worldwide and a total of around 20% of F1 is expected to be made available. The bulk of these shares are likely to come from bankrupt bank Lehman Brothers which is F1's second-biggest shareholder and needs to sell up by 2014 as Pitpass revealed last month.
So who are the people who will be deciding on F1's commercial fate? Delta Topco's executive board consists of Ecclestone as well as CVC co-founders Donald Mackenzie and Rolly van Rappard, Frederique Flournoy, the representative of Ecclestone's Bambino family trust, and Peter Sherratt, who represents Lehman Brothers.
CVC has a 63.4% stake in Delta Topco with 15.3% owned by Lehman Brothers, 8.5% held by Bambino, 5.3% in Ecclestone's hands and investment bank JP Morgan owning 3.1% of the shares. The remaining 4.4% is split between management and advisers and they would all be in for a tremendous windfall from a flotation of F1.
"Formula One generates around $500m a year in profits and cashflow and when you capitalise that at the right sort of multiple and yield that's a big number," says the source adding that a $10bn valuation of the business would be "about right."
Ecclestone is not expected to sell any shares if F1 floats and he will be staying its chief executive. CVC will also remain the largest shareholder for the long-term providing continuity for F1. Since buying F1 it has taken steps to make it even more corporate. It established an audit and remuneration committee and appointed two independent non-executive directors - WPP boss Sir Martin Sorrell and Nestle chairman Peter Brabeck-Letmathe. They would also remain on the board if F1 floats. The source describes the float as "just a further institutionalisation of the business." He adds that F1 "has been run to a public company standard in preparation for a float one day."
According to Formula Money, Delta Topco has annual turnover of around £900m ($1.5bn) with race hosting fees being the biggest single source of revenue at £353m ($570m). This is followed by the £291m ($470m) from the sale of television rights, £149 ($240m) from trackside advertising, £93m($150m) from corporate hospitality and £62m ($100m) from sponsorship. Only 10% to 20% of F1's contracts need to be renewed annually as they have an average length of around five years. "It gives excellent forward visibility on earnings and stability which the markets love," says the source adding "it can offer a very attractive dividend yield because it is so cash generative."
Apart from giving an opportunity to buy into F1, the float is likely to have much more far reaching consequences for fans. Floated companies have to show the public that their revenue and profit is growing every quarter and the value of their shares can plummet if they don't.
This gives F1 even more compulsion to look for even more money-making opportunities than it already does. These are likely to more merchandise, entertainment at the track and more pay-per-view broadcasts.
Splitting broadcast of F1 between free to air and pay-per-view is a good way of increasing revenue because it doubles the fee paid. It also has added benefits as has been demonstrated in the UK where Sky Sports has created a dedicated F1 channel which increases promotion of the sport and forces the BBC to try to improve the quality of its broadcasting to compete. If F1 floats we can expect more deals like this to come pretty soon. Within the next month we should know whether the float is proceeding in June or has stalled at the first hurdle.