10/06/2012
NEWS STORY
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The business side of Formula One has a lot of question marks hanging over it at the moment. It looks like the planned flotation of the business on the Singapore stock market will take place later this year due to the current turbulence on the world's stock markets. However, all the groundwork for the float has already been done. Over the past six months new investors have bought in to the sport and a new board of directors, including three representatives from the teams, is being put together. The big question on the lips of many industry observers is which of these developments will still go ahead even if F1 never floats as some seem to think is the most likely outcome.
The biggest decision which is set in stone, float or no float, is the involvement of the new investors. Three funds, Waddell & Reed, BlackRock and Norges, own a total of 21.3% of F1 whether or not it floats. They are here to stay as it seems is F1's new non-executive chairman Peter Brabeck-Letmathe.
Over the Monaco Grand Prix weekend it came to light that he had already taken over and was participating in an F1 board meeting. Brabeck arrived with a bang as one of his first public comments was that the float "is certainly something we are going to look at over the next 3-6 months but there is no set timetable." This came as a huge contrast to the previous talk about the float being a done deal and Brabeck said it days before F1's boss Bernie Ecclestone revealed that F1 is unlikely to list soon due to the stock market turbulence.
It is harder to say whether the representatives of Ferrari, McLaren and Red Bull will definitely join the F1 board as this appears to be dependent on them signing the Concorde Agreement, the contract which commits the teams to F1. Although they have signed an agreement to sign the Concorde they haven't yet put pen to paper on the full contract and we cannot be sure that they will.
One change which has not yet come to light but is indeed set in stone is that F1's company structure has been reorganised in preparation for the float whether it takes place or not. Until recently, F1 had two parent companies: Delta Topco and Delta Prefco. The former owns ordinary equity shares in the entire F1 business whilst the latter owned preference shares in the sport's trackside advertising and sponsorship outfits as well as in GP2 and GP3. Pitpass revealed the existence of Delta Prefco last year and there is good reason why our piece referred to it as 'F1's most important company'.
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 the trackside advertising and sponsorship division in particular since it generates some of the biggest profits in F1.
Revenue from race hosting fees incurs high directly associated costs of transporting camera crews to the Grands Prix whilst corporate hospitality income has huge food and beverage expenses attached to it. In contrast, the trackside advertising and sponsorship division, which made £142.5m ($225m) in revenue last year, has minimal overheads with one of the biggest being paying people to put up hoardings around the tracks. Even this isn't done in-house and to avoid F1 having more people on its pay-roll it is instead sub-contracted to a company called Publibelgium.
As Pitpass' business editor Christian Sylt revealed in our report last year, Delta Prefco had a different shareholding structure to Delta Topco with Ecclestone owning just one share (0.01%) in it which is understood to have granted special rights. Similarly, the stock owned by F1's biggest shareholder, the private equity firm CVC, gives its directors the right to pass any decisions at F1 board meetings. However, as Pitpass has also reported, if F1 floats this right will disappear and instead, decisions will be made according to a majority of votes by the F1 board. The distribution of dividends will also be decided by the board which would seem to make redundant the preference shares owned by Delta Prefco. In anticipation of this, Delta Prefco is being closed down and a dissolution notice for it was filed on 31 May.
It appears that Delta Prefco will remain closed regardless of whether or not F1 floats and this puts all the power in the hands of Delta Topco's board. However, if F1 does indeed float, a new company called Formula 1 plc, which was incorporated in Jersey on 18 May, will take over from it as the sport's ultimate parent.
As Pitpass has reported F1's three new investors have perhaps even more to gain from a float than CVC. Together they paid around £1bn ($1.6bn) for their shares which valued F1 as a whole at $9.1bn. If it does float and has a higher value than $9.1bn then the investors will make a profit on selling their shares. However, they will get no rebate if its value on flotation is lower than $9.1bn and it is understood that the investors are restricted from selling any shares for six months afterwards.
Given that the float would give their shares a public price, which could well be higher than the amount they paid, it is easy to see why the funds might want it to happen. However, they will have known when they invested that, like anything, there is a chance that the float will not go ahead. After all, this is precisely what happened in the late 1990s when a European Commission investigation into F1 put the brakes on the first plan to float the sport.
So were the funds banking on the fact that the float would go ahead or did they have an ulterior interest in investing?
It is easy to see why BlackRock and Norges put their money in F1. BlackRock is the world's biggest money manager with £2.3tn ($3.7tn) in assets so it makes sense for it to invest in a big upcoming flotation like F1. Norges is owned by the government of Norway and is one of the world's biggest sovereign wealth funds so it is understandable why it would also want to invest in F1. As Norges has assets valued at £364bn ($573bn), its investment in F1 will barely show up on its radar. Waddell & Reed is a different matter.
Headquartered in Kansas, Waddell & Reed has £57bn ($90bn) in assets under management. It is a far smaller fund than both BlackRock and Norges which means that it may be riskier for it to invest a large amount of money in any single business. However, Waddell & Reed has a bigger stake in F1 than both BlackRock and Norges and it paid a total of £479.7m ($757.4m) for it. Indeed, Waddell & Reed's 13.9% stake is a larger shareholding than that owned by Ecclestone and his family trust combined. To cap it off, Waddell & Reed typically invests in blue chip American businesses, such as Apple, Coca-Cola, Google and McDonald's, so F1 doesn't fit naturally in its portfolio, particularly given the low level of exposure the sport has in the US. So what is the attraction for Waddell & Reed?
In addition to owning shares in Delta Topco, Waddell & Reed also owns stakes in F1's debt and this gives it two bites of the cherry. Wadell & Reed's Ivy Asset Strategy Fund owns a stake in F1's debt valued at £451.4m ($712.8m) whilst its WRA Asset Strategy Fund owns a stake valued at £65.4m ($103.2m).
The debt derives from the money which was initially borrowed by CVC to buy F1 in 2006 and by owning a stake in it Waddell & Reed gets the right to repayment of it. This means that F1 will pay it back its £451.4m and £65.4m along with interest on it which comes to around 5.5% annually. It should give Waddell & Reed around £28.4m every year and it is a very clever arrangement because it means that even if F1 doesn't float, the fund can sit back knowing that it will make money on the debt alone. Combined with its stake in Delta Topco it could end up making a higher return on its F1 investment than CVC itself and that is saying something.