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Revealed: CVC's 8.4% take from Formula One

NEWS STORY
10/03/2014

Gracing the latest issue of Motor Sport magazine is a cover story which outlines a plan of how Formula One could change after the departure of its current boss Bernie Ecclestone. It is a fascinating piece and although it contains a significant error it happens to be highly thought-provoking in itself.

It is found in one of the key contentions in the article which is that "F1 generates about $1.5 billion a year, but roughly 40 per cent of that leaves the sport and is taken by the owners." To understand the flaw in this we first need to analyse the structure of the sport's ownership.

F1 has nearly 20 separate owners including the sport's governing body the FIA which has a 1% stake as Pitpass revealed last year. F1's largest single owner is the private equity firm CVC Capital which took over the sport in 2006 and has a 35% stake.

As Pitpass also revealed way back in 2007, CVC used a great deal of debt to buy F1. It used two loans - $965.6m from its $7.3bn investment Fund IV and $1.1bn from the Royal Bank of Scotland (RBS). This left F1 with annual debt repayments which come to tens of millions of dollars and many commentators have a strong emotional objection to CVC as a result. However, in fact, F1 has become more stable than ever since its arrival on the scene.

Before CVC bought into F1 the teams were threatening to start a rival series due to a dispute over pay which saw them share as prize money a sum which was only equivalent to around 25% of the sport's profits. In 2006 CVC signed an agreement with the teams which doubled their take and it has accelerated since then. The teams now receive around 60% of F1's profits which has led to claims about the remaining 40% going to F1's owners. In fact this is far from the case.

The claim raises the question of exactly what happens to the money made by F1. Where does it go? It is a question which is of direct interest to fans as well as anyone involved with the business of F1 and the answer has not been in the public domain until now.

An article in today's edition of the business newspaper CityAM reveals exactly where the money in F1 ends up and the most surprising revelation is that CVC only takes home 8.4% of the revenue. Combining the amounts made by all of F1's shareholders reveals that, in fact, 23.9% of the money generated by F1 leaves the sport and is taken by the owners. It is a long way off the reported 40% and it doesn't just go to CVC but to all of F1's owners from the FIA, Ecclestone and his family trust to the sport's management such as former hospitality boss Paddy McNally and chief legal officer Sacha Woodward-Hill.

To understand the why the actual figure is 23.9% rather than the reported 40% you first need to get your head around the business concepts at the heart of the matter.

The first terms to explain are revenue and profit. Revenue is the money which comes in to a company. In F1's case this is from sources such as race hosting fees, television rights fees, corporate hospitality tickets and trackside advertising.

As the CityAM article shows, F1's revenue comes to a total of around $1,580.4m annually and the costs of the company are deducted from it. Paying F1's 313 staff costs $39.8m with Ecclestone's salary coming to an additional $4.2m. All the other running costs (such as transporting freight to races and paying for the corporate hospitality) add up to $328m. After the costs have been paid, the company is left with the profit and the team prize money share is calculated from this.

So, to be completely clear, the owners' take and the teams' prize money does not come out of F1's revenue but from its profit. The amount taken by the owners can be expressed as a percentage of the revenue but it is not calculated from it. This is a crucial point because in order to get from the revenue to the profit you have to deduct costs. This isn't factored into Motor Sport's analysis as is revealed by one of its suggestions about how to improve F1.

It states that "the sport currently generates about $1.5 billion per year. Give each of the current 11 teams $100 million of that. That still leaves change of about $400 million per year for the owners." This fails to take into account F1's running costs, tax bill etc which comes to a total of $381.4m. On the argument presented in the magazine this would leave the owners with $18.6m not $400m.

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READERS COMMENTS

 

1. Posted by Bobster, 11/03/2014 9:10

"That works now, thanks, but there's still ambiguities in the article. EG
1) "All the other running costs (such as transporting freight to races and paying for the corporate hospitality) add up to $328m."
2) "This fails to take into account F1's running costs, tax bill etc which comes to a total of $381.4m"
Which would suggest 53.4 million for taxes and "etc".

So it's confusing. Two columns of figures - revenues and expenses - would have been a lot clearer. "

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2. Posted by Chris, 11/03/2014 3:21

"Bobster - the remaining $131.9m is $118.3m interest on loans and $13.6m income tax. I didn't break it down in the article as I thought it might be too fine a level of detail but you certainly have a good eye for figures."

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3. Posted by Bobster, 10/03/2014 13:03

"Is there a figure missing here? I have
1580.4 million (total revenues)
-39.8 million (staff)
-4.2 million (Bernie)
-328 million (Staff)
Gives us profits of 1208.4 million
Then the teams take 698.5 million
So that leaves us 509.9 million.

But if CVCs take of 132.3 million is 35% of the net profits then the profit should be ((132.3/35)*100) = 378 million. So that leaves 131.9 million.

So have I missed something?"

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4. Posted by Podge, 10/03/2014 11:45

"Well, that's opened my eyes a bit. The teams have been pretty convincing in making us believe they only get a pittance. This now begs the question that perhaps the flaw is not in how F1 distributes it's money to owners and teams, but in how the teams' money is spread between themselves. Ferrari is well known to be the biggest beneficiary, for no other reason than being Ferrari."

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