15/05/2012
NEWS STORY
It looks like F1 is racing towards flotation on the Singapore stock market and the biggest question most people are likely to have about it is what does the business actually own. It only has around 250 staff and very few tangible assets but it certainly brings in plenty of hard cash as F1's annual revenues come to around £1bn. So where does it all come from?
Contrary to popular belief, the most valuable asset owned by F1 is not its chief executive Bernie Ecclestone. There is absolutely no doubt that Ecclestone is the most important person involved with the business of F1 but he most certainly isn't owned by the company which runs the sport - in contrast, he owns a 5.3% stake in it. Ecclestone most probably wouldn't take too kindly to being owned by anyone, and quite rightly too. He is simply employed as F1's chief executive and in 2010 had an annual salary of £4.9m.
In fact, literally the most valuable asset owned by F1 is its contract with the sport's governing body the Federation Internationale de l'Automobile (FIA). This grants F1 the commercial rights to the sport for another 98 years. Ecclestone signed the contract with the FIA in 2001 and it was widely seen as being a terrific deal for him. In total, the contract gave his business the rights to run F1 for 100 years for £195m. To see just how good a deal it was it is worth considering that F1 now makes in revenue every year more than five times the total fee it paid for the rights.
FIA president Jean Todt has said that there is no way the federation could extract more money from the contract. "It is what we have," he said in April last year. In addition to locking down the fee, the contract also prevents the federation from taking over the commercial rights to F1 but did the FIA really need to sign it? Some explanation needs to be given before this question can be answered.
The FIA ultimately owns the rights to the sport since it set it up in 1950 through writing the technical regulations which define what an F1 car is. As time went by the FIA passed the rights to the teams to manage and, in 1981 the teams handed this task to Ecclestone's company Formula One Promotions and Administration (FOPA) in return for it taking a 23% cut. Using his sharp business skills Ecclestone became fabulously wealthy through this work.
Before Ecclestone's involvement F1 was run in a rather haphazard way as races could be cancelled at the last minute if not enough teams showed up. It made broadcasters reluctant to show F1 but Ecclestone changed that by getting the teams to sign the Concorde Agreement which commits them to race. He then took this to the European Broadcasting Union (EBU) which guaranteed coverage on its multiple member channels and then, after F1 had got a foothold, he unshackled the sport from the EBU by signing agreements with separate broadcasters. Ecclestone says it was the best business decision of his career but, in fact, he is being modest as that was yet to come.
By 1995 Ecclestone had become the world's highest paid executive when he received a salary of £54.9m from FOPA. However, he had his eye on even greater riches to be reaped from F1. By the late 1990s Ecclestone was in his 60s and suffered from heart problems which culminated in him having a triple bypass in 1999. His wife Slavica was 24 years his junior and together they had two young daughters.
Ecclestone wanted to leave them a substantial lump-sum of a legacy if he died and he was advised that he should cash in on F1's success by floating his business. The problem was that to do this his company needed to directly get the contract for the F1 rights, as it does now, whereas his contract was with the teams to manage the rights on their behalf.
This hurdle was swerved around on 19 December 1995 when the FIA agreed that another of Ecclestone's businesses, FOCA Administration, which is now known as Formula One Management (FOM), would get the contract for the F1 rights from 1997 to the end of 2010 for the annual fee of £6.3m. It led to McLaren's executive chairman Ron Dennis saying "Bernie effectively stole Formula 1 from us." Nevertheless, Ecclestone had what he needed to float F1 and it handed him the keys to the billionaire's club.
Over the 14 years of its contract with the FIA, the F1 rights generated over £5bn in revenue whereas the federation only received around £85m. Perhaps unsurprisingly, the close relationship between Ecclestone and the FIA fell under the gaze of the European Commission (EC) and in 1999 it opened an anti-competition investigation into F1. This put the brakes on Ecclestone's plans to float but it didn't stop him building up his legacy for his family. He transferred his shares in FOM to his family trust and in the decade following the signing of the contract with the FIA it made £2.4bn from selling stakes in the company and securing a loan on it.
The EC eventually closed its investigation into F1 after a number of changes were made by Ecclestone and the FIA. Crucially, the FIA said that to separate the commercial side of the sports it regulates from the governance aspect, it would sell the rights to them for a lengthy period. This is how F1 ended up with its current 100 year rights contract which began in 2011. So, the short answer to the question posed earlier is yes the FIA did indeed need to sign the 100-year rights contract as it was necessary to appease the EC. However, that doesn't mean to say that the FIA couldn't seize the F1 rights if the contract was broken and recent evidence demonstrates this.
To appease the EC the FIA didn't only have to sell the rights to F1 for a lengthy period but it also had to do the same with the rights to the World Rally Championship (WRC). The same objective drove both decisions. As the EC explained in a document it released in June 2001 this objective was "to establish a complete separation of the commercial and regulatory functions in relation to the FIA Formula One World Championship and the FIA World Rally Championship where new agreements are proposed which place the commercial exploitation of these championships at arm's length." This is the way things have been since the agreement was signed but in the past six months it has been turned on its head and the commercial exploitation of the WRC has certainly not been at arm's length from the FIA.
The origin of the current situation stretches back to 2009 when North One Sport, subsidiary of production company North One Television, was appointed by the FIA to look after WRC's commercial and media rights in a long-term deal to run until 2020. Then in March 2011 North One Sport was taken over by sports marketing firm Convers Sports Initiatives (CSI) which was headed by Russian entrepreneur and investor Vladimir Antonov.
In November last year Antonov was arrested on a Europe-wide warrant and then charged in a London court with alleged fraud as part of a money-laundering investigation in Lithuania. It led to CSI being placed in administration and the FIA taking over WRC's driving seat.
After North One Sport failed to give the assurances that it would fulfil its contractual obligations and deliver promotion of the WRC in 2012 the FIA terminated its contract and the took back the rights to the series. In January the FIA released a statement explaining the reason for its move.
It said, "following the recent unforeseen circumstances which led to CSI the parent company being placed into administration in November 2011, the FIA has fully supported and co-operated with both North One Sport and the administrators of the parent company CSI in their efforts to secure a purchaser. Contrary to press speculation however, no firm offer to purchase North One Sport has been presented to the FIA during this period but only numerous non-binding expressions of interest subject to due diligence. The FIA has been notified of at least seven expressions of interest, but none have come to fruition."
On 7 February the FIA outlined the tender process for the new WRC promoter which began with all interested applicants formally registering their interest with the FIA by February 24. It was then due to spend the following month negotiating with the interested parties and, according to the FIA's press release, "the selected candidate(s) shall be informed of his/their selection no later than 30 March 2012 and will be required to sign a memorandum of understanding (MOU) with the FIA in order to go ahead with the process."
It seems that this did not lead to anything as not only was a new promoter not announced but, at the FIA's World Motor Sport Council meeting on 9 March it was decided that "after the termination of its contract with North One Sport at the beginning of the year, the FIA is finalising an interim solution for the promotion of the WRC for the rest of the 2012 season. In this light, a deal has been struck with the EBU (European Broadcasting Union) for the distribution of the media rights for the Rally of Mexico. For 2013 onwards, the FIA has received a great number of expressions of interest and is confident in building in consultation with the main WRC stakeholders a strong promotional platform for the long-term growth of the championship."
In summary, no new promoter has been announced for WRC and there is no evidence that one has been appointed yet. However, it seems there is hope a new promoter for WRC will come on board for the 2013 season. Pitpass' business editor Christian Sylt understands that a group led by the chairman of one of Britain's leading public companies made an approach about taking over the WRC rights but was rebuffed by the FIA. Until a new promoter is found, the FIA will continue to run WRC and it needs to be stated that there seems to be nothing wrong or improper about this.
As the ultimate owner of the rights, the FIA had no choice but to take over WRC when Convers went into administration. Likewise, the FIA cannot be forced to sell the WRC rights if none of the buyers meet its criteria.
Further endorsing the idea that nothing untoward took place is the fact that the separation of the FIA's commercial and regulatory roles is monitored by a trustee who had been appointed by the federation by the time that F1's 100-year contract began on 1 January 2011. EC spokesperson Marisa Gonzalez Iglesias adds that "on the basis of the limited information available, it is not possible to tell whether the recent developments concerning the World Rally Championship would raise concerns under EU competition law."
Under modernised anti-trust rules, which have been in force since May 2004, it is companies themselves that are responsible for ensuring they abide by competition law by self assessment of their conduct. Companies cannot ask the EC to give clearance to their actions so the only way they know they have stepped out of line is if an investigation is opened. In this respect, the EC is the ultimate judge and the very fact that the EC has not investigated this is the strongest proof that the FIA is not acting improperly by running WRC.
The upshot of this is that although the FIA can not take F1 back due to the 100-year agreement, in the very unlikely event that the sport's promoter goes bust (and there is absolutely no evidence that there is a risk of this happening), the federation could seize the rights. And the recent example of the WRC demonstrates that if this were to happen it could be some time before another promoter is chosen.