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Investing in the future of Formula 1

There is a pincer movement going on behind the scenes in F1 at the moment, with CVC Capital Partners, the financiers who control the commercial sid...

Investing in the future of Formula 1

There is a pincer movement going on behind the scenes in F1 at the moment, with CVC Capital Partners, the financiers who control the commercial side of the sport, as the target. The message to them is clear; they need to act now to save the sport - either by exiting and leaving it to others with a long-term plan or by staying on and investing significantly in the business rather than taking money out.

Donald Mackenzie was at the most recent Grand Prix in Bahrain all weekend; he is the man behind CVC's investment in F1's commercial rights holder, who works with Bernie Ecclestone to drive commercial revenues for the sport and the man who once described it as an "alarming company to own."

He cannot have gone away from his weekend meetings with the key stakeholders in any doubt that the sport is at a crossroads with his next move being a decisive one.

This weekend one of the non-executive directors he appointed to the F1 board called on CVC to either sell the asset and exit so the sport can move on or alternatively to invest in the future if it plans to stay on. Also this week a mysterious new website called "Save our Formula" launched its manifesto, calling for wholesale change in the sport.

"Formula One’s fans remain forgotten as the bankers who run the sport worry more about where the next dollar is coming from. Costs are continuing to spiral out of control," was one line from the agenda published online this week, which gives a flavour of the message. Some of their demands are unrealistic - there is no way that the parent companies behind the major teams will 'tear up' the commercial agreements which run to 2020 and guarantee over $100 million a year of income in some cases. CVC and Ecclestone hand back over 60% of the earnings from F1 before interest, tax, depreciation and amortisation, amounting to over $700 million at the current rates.

The non-exec F1 board director who spoke out was none other than Luca di Montezemolo, former Ferrari chairman, while the identity of those behind the "Save our Formula" campaign is not transparent, but many in the F1 paddock believe it to originate from quite a high level within the sport.

Donald Mackenzie

The message from those who want change is clear: this is the time for action.

CVC has held this asset now for almost ten years and has refinanced it several times and sold chunks of it off, earning easily $4-5 billion dollars in the process to date. It planned to exit with a flotation a few years ago in Singapore, which would have meant a gain of over $7 billion in total over the ten years of the investment; this would have made it CVC's most successful investment ever. However the flotation got waylaid by a variety of factors and so CVC is still there, controlling things in one sense, but not really to the satisfaction of any of the other stakeholders, who can see a sport in decline and want to act now to turn it around by investing in the future.

At the end of 2014 Mackenzie called together key stakeholders - without Ecclestone - to a shooting party at his estate, to discuss the succession plan and lined up former Diageo CEO Paul Walsh and his back room team to take over from Ecclestone. But at the crunch F1 board meeting which followed in December, Ecclestone saw off the threat and the status quo was maintained with Walsh and Montezemolo coming in as non-executive directors, keeping them inside the tent for the moment.

The argument runs that, although the racing can be very good with the current formula, as Bahrain showed, and the technology F1 is employing now is both innovative and aligned with the automotive industry, there are some deep faultlines in the sport. These can be summed up as follows: The costs are too high, the income isn't being distributed in a sustainable way for all teams and the show is losing its appeal to the audience, especially the under 25s in a very crowded sports media space.

The fees for hosting a race are too high, which means that races in F1's heartland like Germany and Italy are under threat, replaced by new venues some of which fail to build an audience and a future for the sport. The knock-on effect of high race tariffs is that in most countries ticket sales are too expensive for ordinary fans as promoters are forced to price them at premium levels to recoup their investment. So the grandstands aren't full in many venues.

Ecclestone bears some responsibility all for this, as CEO, but at the same time he is working to a mandate from the principal shareholders and Mackenzie worries whether he can replace Ecclestone with another golden goose.

Meanwhile other so-called "Tier 1" international sports are pulling away dramatically in revenues: The English Premier League recently did a £5 billion TV rights deal in the UK market alone and the American NBA basketball series raised $24 billion over nine years, for example.

Max Mosley

Ecclestone and his ally, Max Mosley the former FIA president, rose to power on a platform of 'getting things done', a form of benevolent dictatorship (although some of Mosley's antagonists would argue about the 'benevolent' bit). Those days are gone. The regulatory and management structure is not in place to effect change, which is why the call to CVC to leave now or to engage and take a commercial leadership role and to invest in areas such as social media, marketing, international growth strategies, to innovate around the promotion of the sport.

One interesting development over the weekend was the resignation of Ferdinand Piech, who ruled over the Volkswagen Group for many years, but lost a boardroom power struggle with CEO Martin Winterkorn. Piech was regarded as the main barrier to Audi or Porsche considering Formula 1 competition. It will be interesting to see whether there is any movement in this situation over the coming months. Another new manufacturer coming into F1, such as Audi, would send out very positive signals about the rules being on the right track.

CVC in Formula 1: The background

Ecclestone sold a 75% controlling interest in F1's commercial holding company SLEC in late 2000/2001, when he had recently undergone heart bypass surgery. A German company called EM.TV bought 50% for around $1.5 billion in 2000 as part of an ambitious expansion plan. It ran out of money and was taken over by Kirsch Group, which exercised EM.TV's right to buy a further 25% for $1 billion.

They ran into trouble too and the stake ended up on the books of several banks, which eventually sold to CVC Capital Partners in the 2005/6 deal, which was the subject of last year's bribery trial in Munich involving Ecclestone, from which he walked away without conviction after paying $100m to the court.
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