06/05/2013
NEWS STORY
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Holding a Grand Prix close to New York is a plan which is nearly as old as Formula One itself. As the following memo (pdf) shows, a New York race even had a date on the calendar back in 1985. It was due to take place on 22 September and Marlboro was considering becoming its title sponsor for the whopping amount of $1.5m. It may not seem like much now but back then it was a great deal, particularly in the United States where F1 was not as well-known as in Europe.
The race didn’t take place of course and the memo reflects the scepticism about the event as it states that “there is little chance that the organizers can pull off the race this September. Most likely, the race will be run next June in combination with the other North American races, Montreal and Detroit.” The outlook hasn’t changed much since then.
The race finally seemed to be on track in October 2011 when it was announced that, nearly 30 years after the previous attempt, it would yet again get a date on the calendar. This time the Grand Prix of America was due to take place in June this year on a 3.2-mile street circuit which snakes alongside the Hudson river opposite Manhattan's historic skyline. It was a grand plan and, remarkably, the organisers trumpeted that they would not even need public money to pull it off. Pitpass’ business editor Christian Sylt was sceptical that the race would ever take place from that moment on. There is good reason for his hunch.
F1 races are generally run to break even at best with the ticket sales covering the hosting fee and governments providing some or all of the money used to fund the running costs. In summary, they tend not to be profitable businesses so there is little financial incentive for private investors to buy stakes in them. If they break even or, even worse, make no profit then it makes it hard for investors to get their money back through dividend payments. Likewise, if the business isn’t profitable then it isn’t likely it will be easy to sell which means that it could be tough for an investor to get a return by offloading his stake.
Bearing this in mind it may seem that private investors wouldn’t invest in any F1 race promoters but in fact this is far from the case. For example, Singaporean billionaire Ong Beng Seng is one of the biggest backers of his country’s Grand Prix and he also happens to own several hotels in the area. It means that he benefits from the increased rates and occupancy in his properties during the Grand Prix and this offsets his investment in the race organiser.
In the case of New Jersey, property development firm Roseland, owns a lot of the land on which the race is due to run. This makes it a logical candidate for investing in the Grand Prix but it is reportedly not putting any money into the race.
So why else would investors put money into a race promoter? Circuit of the Americas in Texas, which hosted its first US Grand Prix last year, is a good model when it comes to attracting investment. Its backers include beverages tycoon John Paul DeJoria, Red McCombs – the co-founder of outdoor advertising company Clear Channel and Bobby Epstein, founder of hedge fund Prophet Capital Management. Their money was used to run the race and build the 3.4 mile track whilst state funding covers the annual hosting fee.
The benefit of this structure is that even if the race itself makes a loss, the investors still have an asset (the track) which can be sold to give them a return. Of course this isn’t possible in the case of a street race which is held on public roads as is the case in New Jersey.
The difficulty of securing private investment in a street race explains why they almost always have government funding. This concept isn’t just restricted to F1 but is common across many motorsport series in countries all over the world. Indeed, council funding was even granted to the Formula 3000 Superprix, which was held from 1986 to 1990 on the streets of Birmingham.
The key rationale behind governments supporting street races is that they show off local landmarks to anyone watching the race on television. In turn this drives tourism as it encourages fans to visit the site of the on-track battles. This driving force isn’t really applicable to the Grand Prix of America because the New York area certainly doesn’t need to rely on an F1 race to drive tourism. It therefore makes sense that the organisers didn’t attempt to get government funding for the race but in turn it could have put them in a Catch 22 due to the difficulty in securing private investment for a street race.
This is why Sylt has been sceptical about the future of the race from the moment that the organisers said they would not need state support to pull it off. His hunch was somewhat validated in September last year when it came to light that the race would not take place this year. F1’s boss Bernie Ecclestone revealed that he had torn up the contract for the Grand Prix of America after the organisers missed deadlines in their agreement. It followed months of speculation about the financial position of the race and the resignation in August of its president Tom Cotter. He wasn’t the only departure.
The executive director of the race is Leo Hindery Jr, an occasional racer and businessman who runs InterMedia Partners LP, a private equity fund focused on media investments. He was supported by the former president of Charlotte Motor Speedway, Humpy Wheeler and staff from his management business The Wheeler Company. One of these staff was his son Trip Wheeler who was chief marketing officer of the Grand Prix of America. He took on the role in January 2010 but, according to his profile on Linkedin he left in September 2012.
Linkedin also shows that the same month saw the departure of Michael Cummings, the chief financial officer of Port Imperial Racing Associates which is understood to be the company responsible for running the proposed race.
The organisers have not announced the departures of the chief marketing officer or the chief financial officer. Nor have they announced whether replacements have been appointed. In fact, recent talk about F1 in the US has been focused on the west coast rather than New York.
Over the past few months there has been mounting speculation that the Long Beach street circuit in California is considering replacing IndyCar with F1. The race was launched in 1975 as a round of America’s Formula 5000 championship. It became an F1 race the following year and stayed until 1984 when it switched to CART then Indycar.
Sponsorship agent Zak Brown and Chris Pook, founder of the Long Beach Grand Prix, are reportedly attempting to buy the contract to the race from its owners, motorsport entrepreneurs Kevin Kalkhoven and Gerald Forsythe.
Ecclestone added fuel to the fire by recently telling Sylt that “we are not in deep discussions with Long Beach but we have spoken to them.”
However, Kalkhoven has said that “Gerry and I are not interested in selling Long Beach” and would only consider it if “stupid money” was on offer. Jim Michaelian, the president and chief executive of the race added that “this is a story that keeps bouncing around every year or so, despite the fact that the race isn’t for sale and there’s been no contact between anyone and Kevin about a sale.”
Ecclestone says that he hopes to resurrect the stalled race in New Jersey but is “talking to different people in the States so who knows?” As Pitpass revealed in October last year, he has considered asking Red Bull to fund the Grand Prix of America in return for the exposure it would generate. This would be one way to solve a funding Catch 22 but with an annual fee estimated at £16m ($25m) and a ten-year contract, the race could prove to be too big a risk even for a company the size of Red Bull.
Adding a race in California and one in New Jersey would also put huge pressure on F1’s calendar which is restricted to 20 races by the teams’ commercial agreements. There are 19 this year and the total will hit 20 in 2014 with the addition of the Russian Grand Prix in Sochi.
Lifting the restriction currently requires a majority vote from Ferrari, Red Bull Racing and McLaren. The teams refuse to race at more than 20 Grands Prix due to increased travel costs and time away from home.
However, there is an opportunity for the limit to be increased as it could be written into the Concorde Agreement, the contract which will commit the teams to race in F1 until the end of 2020. The previous contract expired at the end of last year and Ecclestone says that legal details have prevented it from being re-signed.
“We are doing what we have to do with the Concorde Agreement. The money side is all agreed. The financial side, for a change, is not a problem. The hold-up is generally lawyers. They write something down and the other one says ‘I don’t think it should be written like that, it should be written like this.’ Then the other one says ‘I don’t know about that.’”
Ecclestone initially blamed the FIA for holding up the signing of the Concorde but he says this is no longer the case. “The FIA has been very co-operative. No problems at all.” He doesn’t expect that situation to change.
Later this year the FIA’s presidential election will take place and its current president Jean Todt is the only candidate who has come forward so far. “Todt will get in,” says Ecclestone adding “he has not caused us any problems. He has been travelling a lot. He has been doing what he should do as a president, looking after all the national sporting authorities. He hasn’t put his nose into Formula One which is good.” So, even if the future of F1’s calendar is uncertain, at least its governance looks stable.