20/11/2012
NEWS STORY
CVC, the private equity firm which is the largest shareholder in Formula One, has been dragged into the ongoing scandal surrounding Gerhard Gribkowsky, former chairman of the sport. Gribkowsky was convicted in June for receiving an alleged bribe of £27.5m from F1's boss Bernie Ecclestone and his family trust in return for steering the sale of the sport to CVC in 2006. CVC has always denied that it had anything to do with improper payments to Gribkowsky and it has not been charged with any wrongdoing. However, this has not stopped it from being on the receiving end of a £409m lawsuit in the New York Supreme Court connected to its takeover of F1.
Details of the lawsuit and Ecclestone's response have been revealed today in the CityAM newspaper by Christian Sylt. Pitpass is the first media outlet worldwide to offer its readers a copy of the lawsuit which can be found here (pdf). It makes for fascinating reading.
On Friday, whilst F1's teams were revving up for action in Texas, private equity firm Bluewaters Communications Holdings was filing the lawsuit against Ecclestone and CVC in New York. It would probably have overshadowed proceedings in Texas had news got out before the Grand Prix took place on Sunday.
The origins of the lawsuit stretch way back to 2005 when F1 was 25% owned by Ecclestone's family trust Bambino with the remaining 75% in the hands of three banks which took over their shares after previous owner, German media company Kirch, defaulted on a loan they gave to it. The banks were JP Morgan, Lehman Brothers and German state-owned lender BayernLB which was F1's biggest single shareholder with 47.2% of the sport in its hands. All three of them wanted to sell up because they hadn't got the shares voluntarily and simply wanted the money back from the loan they had given.
Eagle-eyed Pitpass readers may remember the name Bluewaters as we revealed in October last year that it had made an offer to buy the three banks' shares in 2005 though it was lower than the price paid by CVC. Bluewaters' lawsuit confirms this in great detail.
It states that Bluewaters' bid was itself backed by two New York private equity firms - Apollo and King Street, which happen to be clients of Sylt's Formula Money F1 consultancy and industry data business. Bluewaters secured £314m ($500m) from each of them and its lawsuit states that "on November 15, 2005, Bluewaters submitted a written offer to BayernLB offering to purchase the Bank Group's shares of Speed Investments for one billion dollars." It needs to be stressed that this payment was only offered for the shares owned by the three banks and not for F1 itself as wrongly reported elsewhere.
As revealed last October, this £628m offered by Bluewaters was significantly less than the £527.1m ($839m) paid by CVC for BayernLB's stake as well as the further £131.9m ($210m) and £131.5m ($209.25m) it paid for the shares owned by JP Morgan and Lehman Brothers respectively. In total CVC paid £162.5m more than Bluewaters offered but that is not the end of the story.
The lawsuit reveals that the letter accompanying Bluewaters' written offer stated that "Bluewater is prepared to pay 10 percent more in cash consideration or other forms of equally valued securities above any genuine bona-fide offer put forward by any other accredited buyer." In a nutshell, Bluewaters is alleging that it would have outbid CVC and therefore BayernLB had an obligation to sell to it, particularly since it is a state-owned bank.
Bluewaters says that although it was prepared to pay more than any other bidder, it "received no response from BayernLB." Its lawsuit claims that Ecclestone paid a bribe to BayernLB to ensure that it sold F1 to CVC since it had committed to retaining him as the sport's chief executive.
In contrast, Bluewaters says it gave "no commitment to him in that regard." Indeed, according to the lawsuit, Ecclestone told Bluewaters' founder John Gregg in a telephone conversation that Apollo had a reputation of being "tough money." Gregg took this as an admission that Ecclestone was concerned about Apollo controlling F1.
According to the lawsuit, after CVC had been announced as F1's new owner, Gregg telephoned members of BayernLB's board of directors to reiterate that he would beat any accredited buyer's offer by 10%. However, allegedly, BayernLB's board members did not return Gregg's calls.
Gribkowsky got his position as F1's chairman through also being chief risk officer for BayernLB. This put him in charge of the sale of F1 and after it was sold to CVC he became a very rich man. In the two years following the sale Ecclestone and Bambino paid a total of £27.5m to Gribkowsky which he did not tell BayernLB about and did not declare to the tax authority in Germany where he is resident. The payment was discovered by German media late in 2010 and Gribkowsky was arrested soon after that on suspicion of receiving a bribe, breach of trust and tax evasion.
In June a court in Munich found Gribkowsky guilty of receiving the money in return for agreeing to sell F1 to CVC. He was sentenced to eight-and-a-half years in prison by judge Peter Noll who stated that "in this process we assume the driving force was Mr. Ecclestone." He added that Ecclestone "brought the accused into breaking the law and not the other way around." Ecclestone is being investigated by the German prosecutors but has not been charged with any wrongdoing. He admits to paying the money but says he did so because Gribkowsky threatened to tip-off HM Revenue & Customs with false allegations about his tax affairs.
As part of the sale of F1, BayernLB paid Ecclestone a commission of £26m ($41.4m) from the proceeds which happens to be a similar sum to the amount received by Gribkowsky. Ecclestone insists that there is no connection between the two payments but Bluewaters and BayernLB strongly disagree.
Last month BayernLB wrote to Ecclestone demanding that he pay the bank £220m ($350m) for its shares being undervalued because Gribkowsky has claimed that he could have sold them for a higher price. This seems to reflect Bluewaters' own allegation that it was prepared to offer 10% more than anyone else. In its letter BayernLB also demanded that Ecclestone return the commission it paid to him because the bank believes that this money was used to cover the alleged bribe.
Bluewater's lawsuit claims that "CVC knew or was wilfully blind to the bribe." It also alleges that although "CVC had, and continues to have, an obligation to ensure that its employees do not fund bribes to anyone in connection with CVC business... CVC, through BayernLB, supplied the money to Ecclestone... CVC and BayernLB knew or willfully blinded themselves to the fact that Ecclestone was paying a bribe to Gribkowsky and fraudulently concealed the unlawful payment. CVC knew it stood to earn a fortune by acquiring Formula 1 and was a knowing participant in the conspiracy."
The lawsuit continues to say that "Ecclestone manipulated the sale by using cash given to him by BayernLB and CVC to bribe Gribkowsky. In exchange, Gribkowsky made sure that BayernLB (which owned the largest block of the Bank Group's stock) sold the company for a lesser amount to CVC. Ecclestone did this because CVC would allow him to continue to run Formula 1."
It adds that the £27.5m payment "was channelled to Gribkowsky's "consulting" company, GG Consulting, which was established on November 25, 2005-the very same day that CVC acquired a controlling stake in Formula 1."
Gribkowsky and BayernLB are also defendants to Bluewaters' lawsuit which claims that "BayernLB's failure to exercise management oversight over Gribkowsky on the Formula 1 transaction is consistent with its admitted gross negligence in failing to supervise Gribkowsky during this time period."
Bluewaters says that it had no idea about Ecclestone's payments to Gribkowsky, and the alleged part they played in F1 ending up in CVC's hands. The lawsuit claims that "through press reports on the ensuing trial of Gribkowsky, Bluewaters became aware for the first time that the reason it lost the Formula 1 deal was due to bribery and corruption among defendants." This seems to be the reason why Bluewaters' is taking legal action more than six years after the sale and it also has its eye on CVC's high-octane returns.
Earlier this year CVC sold a 28.3% stake in F1 for £1.3bn ($2.1bn) to three money managers - BlackRock, Waddell & Reed and Norges, the investment division of Norway's central bank. Together with dividend payments it brings CVC's returns from F1 to £1.6bn ($2.5bn) making it one of the firm's most profitable investments.
CVC still holds a 35.5% stake in F1 and the lawsuit states that "CVC has marked up the value of its current remaining Formula 1 stake to 4.7 times its initial investment. Those returns rightfully belong to Bluewaters and its financial backers." This is one of many points in the lawsuit which seems to be completely illogical.
It seems incredibly hard to understand why the profits made by CVC whilst it has owned F1 might "rightfully belong" to Bluewaters. It is based on Bluewaters' claim that F1 should have been sold to it because it made a written offer that it would outbid any other buyer. However, that does not mean to say that it would have made anything like the same level of return that CVC has made.
Indeed, there is no guarantee that Bluewaters would have been allowed to buy F1 in the first place. This is because the purchase of the sport needed to be cleared by the European Commission's competition department and although it gave the green light to CVC's takeover we cannot be certain that it would have done the same if Bluewaters had been the buyer. There is no evidence that it would have blocked the deal but we cannot be certain since it did not happen.
The purchase also needed to be cleared by the FIA which, at that time was run by Ecclestone's good friend Max Mosley. If this lawsuit ever turns into a trial and if Mosley were to testify that he would not have given the green light to a takeover by Bluewaters then it is hard to see what hope it would have of succeeding in court.
Bluewaters has also confirmed that it could not guarantee it would have kept Ecclestone as F1's boss. If it had replaced him it is perfectly possible that the sport could have collapsed. At the time of the sale to CVC the teams were threatening to set up a rival series due to a dispute over the amount of prize money they received from F1. They had not signed a long-term contract to remain in F1 but Ecclestone and CVC managed to prevent them from leaving by doubling their take from the sport through buying its hospitality and trackside advertising divisions and giving them a cut of the money they make.
If someone different had been running F1 at such a crucial time things could have turned out very differently. We can only but speculate because that is not what happened.
Bluewaters even tries to claim that simply because Ecclestone was paid a commission from the deal this is proof that CVC was involved with the payment of a bribe. As Pitpass has reported Ecclestone says the commission was paid because CVC required a £62.8m ($100m) indemnity that F1 would not collapse and "all the books were straight and there was nothing wrong." Bluewaters' lawsuit quotes this and says "Why would CVC need an indemnity from management of a company it was acquiring that "all the books were straight and there was nothing wrong"? This strongly suggests a consciousness of culpability on the part of CVC."
We struggle to see how the conclusion follows from the premise and asking for an indemnity from the management of a company in fact looks to be cautious and professional rather than suggestive of any culpability.
The seemingly theoretical nature of Bluewaters' claim is at the heart of Ecclestone's rebuttal. He told Sylt that Gregg "put it in writing that no matter what anyone else paid he would give 10% more but unless there is a bank guarantee it doesn't really matter. It's hard to believe anyone would do that. What would be interesting to find out is, at the time, was he in a position to pay that and where would he have got the money from? It's just a tiresome lot of aggravation. His claim is an absurd claim. He didn't know what the other bidders were going to pay. I've never before heard of anybody saying I will give 10% more without knowing what more is. If you knew there was an offer firmly on the table and they were about to close the deal then you could say I will give 10% more. Maybe then."
The core of Ecclestone's claim is that Bluewaters' offer of 10% more than any other bidder would have only held water if it had been backed up by a bank guarantee. It is hard to see how a bank could give a guarantee for an amount when it does not know what it is. Bluewaters said that it was prepared to pay 10% more than "any other accredited buyer" but as Ecclestone points out it "didn't know what the other bidders were going to pay." No one could have known who would come along. Bearing this in mind, it is tough to imagine Bluewaters being awarded damages. It didn't actually spend one penny on buying F1 so one wonders how it could be said to have lost out.
If this had come to light six years ago then the most appropriate demand in a lawsuit from Bluewaters' would probably have been to ask for the sale process to be started again from scratch. This would be far from easy to do now but that doesn't mean to say that it is not still the most appropriate demand and easier to understand than a request for £409m.
Regardless of whether or not the claims in the lawsuit are valid, it could well cause concern for CVC's investors who put money into the funds which it uses to buy businesses like F1. They were understood to be concerned last year when the Gribkowsky scandal first broke and now CVC has been sued as a result of it. CVC, and the other defendants, have to file a response by 6 December or face judgement in default in favour of Bluewaters.
Although Bluewaters Communications Holdings was only set up on 6 November this year, Gregg has a long history in business. He is an American who lives in Vero Beach, Florida and has an MBA from Harvard Business School. Gregg first founded Bluewater Ventures in January 2003 and before that he was chief financial officer at NTL, a publicly traded broadband cable operator. Whilst at NTL, Gregg helped to set up Virgin.net with Richard Branson in 1996.
The lawsuit reveals that after Bluewater lost the F1 deal Gregg "approached Ecclestone to find out what happened. Ecclestone did not disclose the bribe. Instead, he said that "the Germans" liked CVC better." In Verbier, Switzerland, he also met CVC co-founder Donald Mackenzie who "did not disclose the bribe either. He did say, however, that CVC had been aware of Bluewaters' interest in Formula 1 and was concerned that Bluewaters would win the deal." If this situation worsens he may be concerned that it didn't.