23/05/2012
NEWS STORY
It is hardly a secret that Formula One is hoping to float on the Singapore stock exchange this year. It will be the first time ever that shares in the business have been offered to the worldwide public and Pitpass predicted it way back in November last year when F1's boss Bernie Ecclestone told business editor Christian Sylt that he had been advised "it would be better to float the company in Singapore than sell it."
Pitpass followed up this world exclusive by revealing in March that "one of the most important changes to the commercial landscape of Formula One" was on the way. It is now official.
In a report written by Sylt in today's Daily Telegraph, Ecclestone reveals that "all the things that have to happen have happened. It will be finished by the end of June."
It follows the recent sale of 21.3% of the business to three investment funds for £1bn ($1.6bn). This values F1 at £5.8bn ($9.1bn) and puts a £305m ($480m) price on Ecclestone's 5.3% stake in it. Not a bad little earner given that he was handed the shares as a management incentive in 2008.
In January US investment fund Waddell & Reed paid £635m ($1bn) for a 13.9% stake in F1's Jersey-based holding company Delta Topco. It was followed by US money manager BlackRock and Norges, the investment division of Norway's central bank, which together paid £381m ($600m) to get a combined stake of 7.4%.
BlackRock is the world's biggest money manager with £2.3tn ($3.7tn) in assets but the other two investors are less well-known. Norges is owned by the government of Norway and is one of the world's biggest sovereign wealth funds with assets valued at £364bn ($573bn). Waddell & Reed is headquartered in Kansas and has £57bn ($90bn) in assets under management including investments in Apple, Coca-Cola, Google and McDonald's. To put in perspective how important it has become to F1 it is worth pointing out that the fund's 13.9% stake is a larger shareholding than that owned by Ecclestone and his family trust combined.
"It is super to have [the funds] on board," says Ecclestone adding that it "shows how seriously Formula 1 is treated in the financial world. These people joining is a sort of stamp of good housekeeping. It's a great way to start and lets investors know what they can expect."
Goldman Sachs, Morgan Stanley and UBS, the joint lead book-runners on the F1 flotation, are understood to have got the funds on board. By buying into the business before it floats, the funds got a preferential price and they are expected to get an uplift of between 10% and 30% as their projections show that on listing, F1 will have a market capitalisation of £6.4bn ($10bn) to £7.6bn ($12bn).
The investment from the three funds shows how little some sports reporters understand the arcane business of F1. Back in March Sylt revealed that F1's second-biggest shareholder, the estate of bankrupt bank Lehman Brothers, has to sell its 15.3% stake by 2014. Sylt's sources said it is worth £950m ($1.5bn) which values F1 at £6.4bn ($10bn). Several ill-informed reporters scoffed at this with one saying "lovely though it might be for the finance people to think that the sport can be valued at $10 billion, it is worth a fraction of that at the moment." Another added "if that 15.3 percent is worth $1.5 billion, then Formula 1 as a whole is worth more than $10 billion, which simply isn't the case at all." Ironically, at the very same time that they were writing this, Waddell & Reed was finalising its investment which put a concrete value of £5.8bn ($9.1bn) on F1.
Lehman Brothers is believed to be providing the bulk of the shares for the flotation and around 30% of F1 will be listed on the Singapore stock exchange. It is on track to be the biggest flotation this year after Facebook and Sylt reveals that the funds are so confident in its financial success that they haven't even bought shares which give them votes on the board of F1. The new investors' shares give them a stake in F1 and the right to receive a dividend from its profits but they don't give them any say in the running of the company.
The funds' shares were sold by private equity firm CVC Capital Partners which was previously F1's majority shareholder. Although CVC now only has a 42.5% stake it is still in control of F1 since the funds did not buy shares with voting rights. CVC will then float a further 11% of F1 when it is listed on the Singapore stock exchange so it is well and truly exiting. Last year it owned 63.4% of the sport but after the float this will be reduced by more than half to 31.5%. CVC has only been an owner of F1 since 2006 but it is already home and dry since it has made back in the latest sale nearly as much as it spent on buying F1 in 2006 when it paid £1.1bn ($1.7bn) for the business.
The sale clearly made sense for CVC financially but that wasn't the only driving force. It was crucial because there are few comparable businesses which can be used to gauge the value of F1 so selling the stakes was the best way to put a price on it. There are no other listed motorsport management companies and although shares can be bought in many sports teams, unlike F1, they all have direct competitors. F1's closest competition is the World Cup and the Olympic Games but even they take place every four years and neither is run by a listed company.
Talk about CVC selling F1 in order to put a valuation on it is not new. In March Sky News' blogger Mark Kleinman reported that "Temasek Holdings, which is one of the Asian city-state's principal sovereign wealth funds, has been approached by CVC Capital Partners about the sale of a minority stake in F1 ahead of a prospective stock market listing in Singapore."
Kleinman claimed that this "would help establish a benchmark valuation for F1 ahead of a flotation." However, like many of Kleinman's intermittent reports on F1, it hasn't come to anything. To be fair, he did say that "talks are expected to take place between CVC and Temasek in the coming days, although any agreement about a deal is likely to be some way off and may not materialise at all." He got that part spot on.
Although Temasek has not invested in F1, the three new owners have. They put a price on the business but it doesn't change the fact that F1 is hard to pigeon hole. Investment banks are using their media analysts to cover F1 because last year it derived around £310m ($490m) of its £950m ($1.5bn) revenue from selling television rights. However, in fact, race hosting fees are the biggest source of revenue for F1 and provided around £325m ($510m) in 2011. The business also has capital expenditure of only around £3.5m ($5.5m) annually which is much lower than traditional media companies, many of which supply set top boxes and satellite dishes to customers.
"We are in the entertainment business but there is no company like Formula 1," says Ecclestone adding "I look at the float as a change of shareholders. We've got some shareholders at the moment so now they are going to sell some of their shares and we are going to have some other shareholders. I don't imagine the shareholders will be running the company so there's no real change. It's not going to bring any investment to the company as it doesn't need it."
When F1 floats CVC will relinquish its control of the sport and this will pass over to the board of the company. This could have a big effect on the sports side of F1. Following the float Ecclestone will remain F1's chief executive which means that he will be in charge, as he currently is, of the day-to-day running of the sport. However, when it comes to bigger picture issues which affect the future of the business, a board vote will be taken. These kind of issues could include the payment of a dividend, agreeing to sign the Concorde Agreement, the contract which commits the teams to race in F1, or deciding whether to increase prize money paid to the teams.
The board will have over 15 people on it including six independent directors, three team representatives (from Ferrari, McLaren and Red Bull), Ecclestone, F1's chief financial officer Duncan Llowarch, its chief legal officer Sacha Woodward-Hill, a representative from Ecclestone's family trust and several executives from CVC. To get a majority of votes on his side Ecclestone will need around seven other people agreeing with him. It could explain why Ecclestone might want his ally the Crown Prince of Bahrain to take McLaren's seat rather than his nemesis, the company's executive chairman Ron Dennis. In contrast, at the moment CVC has complete control of the board and as it completely supports Ecclestone there is no danger of him being outvoted. He will not reduce his 5.3% stake in the float and says that no successor is being groomed.
"I wouldn't appoint somebody to do my job because nobody would run the business the way I do. You might as well have asked Frank Sinatra who he would appoint to replace him. Somebody can sing but can they sing like Sinatra? No. Will somebody run the business the way I run it? No. They might run it better but they wouldn't run it the same."
Ecclestone says that he will not have a deputy when F1 is listed but one of its independent non-executive directors, Nestle chairman Peter Brabeck-Letmathe, will become non-executive chairman. He has been chosen over F1's other independent non-executive director, WPP boss Sir Martin Sorrell who has been openly critical of Ecclestone. "Peter is super. He is a different type of person to Martin Sorrell," says Ecclestone.
Although all the pieces for the flotation are in place, F1's race to the stock market has only just begun and, as we all know in F1, it's not really over until the chequered flag has fallen.