25/06/2012
NEWS STORY
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Over the past few weeks we have heard all about perceived threats to Formula One's planned stock market flotation. There's the theory that the sport's boss Bernie Ecclestone will be charged following the allegation that he bribed F1's former chairman Gerhard Gribkowsky. Then there's speculation that Mercedes won't sign a new Concorde Agreement to stay in F1 after the end of 2012, allegedly due to bias in the contract towards its rivals.
Pitpass recently debunked the significance of the former threat and although Mercedes has not signed a new Concorde Agreement, the significance of this is put in perspective through an article in today's Telegraph written by our business editor Christian Sylt. It reveals that F1's controlling shareholder, the private equity firm CVC, is on track to make a return of more than 600% regardless of whether the sport floats. It makes F1 one of the most successful private equity deals in history.
Turmoil on the world's markets has put the brakes on F1's flotation which is expected to value the business at £6.4bn ($10bn). However, last week Ecclestone stressed that the float has not been derailed by recent allegations that he bribed Gribkowsky to wave through the sale of the sport to CVC in 2006. Ecclestone confirmed that the float will take place by the end of this year but CVC has no need to rush.
CVC is the largest shareholder in F1's parent company Delta Topco but over the past six months it has cut its stake by around half to 35.5%. In January US investment fund Waddell & Reed paid £641.8m ($1bn) for a 13.9% stake in Delta Topco. It was followed by US money manager BlackRock and Norges, the investment division of Norway's central bank, which together paid £385m ($600m) to get a combined stake of 7.4% in May.
Earlier this month CVC announced that Waddell & Reed has invested a further £320.9m ($500m) taking its stake to 20.9%. The sale put a £4.6bn ($7.1bn) value on F1's equity and, combined with its £192.5m ($300m) of cash and £1.4bn ($2.2bn) of debt, gives the business a capitalisation of around £5.8bn ($9bn). However, the sale doesn't change the control of F1 because, as Sylt has revealed, CVC's shares entitle it to appoint representatives, known as I Directors, who can outvote any number of other board members.
Through selling just 28.3% of F1 CVC has already made £1.3bn ($2.1bn) which is more than double what it paid to buy the business. It bought F1 in 2006 with £706m ($1.1bn) of debt from the Royal Bank of Scotland (RBS) and a loan from its investment Fund IV which, according to CVC had funds of £4,659m ($7,260m) in it. Material produced by CVC (pdf link) two years after it bought F1 shows that its investment in F1 came to 13.3% of the total amount in Fund IV which puts the loan at around £619m ($965m). It was a big gamble as F1's teams were threatening to set up their own series due to a dispute over the amount of prize money they received.
Private equity firms are not renowned for building up businesses but this is exactly what has happened since CVC took over F1. To ease the gridlock with the teams Ecclestone brought all of F1's key companies under one roof. Flush with the bank debt and loan from its fund, CVC bought F1's trackside advertising and corporate hospitality divisions then acquired the sport's feeder GP2 and set up GP3 as a grass roots entry level series.
By bringing all of F1's divisions under one umbrella Ecclestone was able to give the teams a cut of everything for the first time. He handed them 47.5% of the sport's earnings before interest, taxes, depreciation and amortisation (EBITDA) with an additional 2.5% going directly to Ferrari. The deal tempted all the teams to stay in F1 and it immediately doubled their income from F1 which came to £440m ($686m) last year.
The payment to the teams is F1's biggest single cost and it gives the business a profit margin of around 30%. It has paid back the loan to Fund IV thanks to a £1.9bn ($2.9bn) debt refinancing in 2006 and last year F1 had underlying profits of £304m ($474m) on revenue of £977m ($1.5bn).
The terms of F1's debt have prevented it from paying a dividend since CVC took over but that will change this year due another debt refinancing. Around £1.15bn ($1.8bn) was outstanding at the end of 2011 and CVC repaid it with a new £1.4bn ($2.2bn) loan which is the company's debt as stated earlier. The £250m ($400m) difference, along with £320m ($500m) in cash, was moved from Delta Topco's subsidiary companies to Delta Topco itself where it can be paid to shareholders. By moving the money to Delta Topco when the loan was repaid there were no terms which prevented it from declaring a dividend. It is expected that a dividend of around £545m ($850m) will be declared this year giving CVC around £193.8m ($302m) in line with its shareholding.
The £619m ($965m) loan repayment to Fund IV, along with the proceeds from the share sales, have already generated £1,967m ($3bn) for CVC giving it a return of approximately 320%. The dividend will take this closer to 350% and CVC's remaining 35.5% stake has an equity value of around £1.6bn ($2.5bn). This gives CVC a total of £3.8bn ($5.9bn) in cash out and remaining value from F1 yielding a return of around 612%.
It is far higher than the average for Fund IV. Data from CalPERS, the largest pension fund in the US, shows that by the end of September last year it had received a multiple of 150% from the £223.5m ($348.2m) which it invested in Fund IV in 2005.
To put its returns from F1 in perspective, CVC had made 314% on its £120m (€184m) investment in bookmaker William Hill by the time it exited through share sales and a flotation in 2002. Likewise, the £30m CVC invested in stockbroker Collins Stewart generated a return of 292% from share sales and a 2002 flotation.
Although CVC is set to get a higher than average return from F1 it is still some way off its top performers. They include IDC, one of the leading independent private hospital operators in Spain, which gave CVC an 831% return when it was sold in 2005. However, in contrast to the £1,967m ($3bn) CVC has already banked from F1, IDC only returned £145m (€222m) in cash. So although other investments may have made more in percentage terms, when it comes to cash returned F1 is likely to be on pole position in CVC's record books.