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F1nvestor: The Way Forward

FEATURE BY MARK GALLAGHER
22/05/2006

The agreement between Bernie Ecclestone and the GPMA announced on Friday brings to close a long and unsettling chapter in the history of Formula One that began a full 10 years ago. It's a chapter that introduced followers of the sport to the ins and outs of corporate financing, mergers and acquisitions and the complex structure of the businesses which have at various times owned Formula One, although it seems that at no stage was anyone in control of it other than Bernie himself. It's a chapter about the future of Formula One.

With Formula One now under the ownership of holding company Alpha Topco Ltd the sport has at last a structure which seems set to last the distance, including the inevitable stock market flotation which is the typical exit strategy of private equity firms such as CVC Capital Partners. It owns the controlling stake in Alpha, alongside shareholders Bambino Holdings, Bernie Ecclestone and the Formula One Management team. With the teams and manufacturers also committing to a new commercial agreement, all sides are aligned.

The journey to reach this point began a decade ago with Bernie Ecclestone setting out to float Formula One, a plan that did not take off thanks to a combination of factors which ultimately led him to an innovative finance-raising Eurobond issue. This was put together by Morgan Grenfell Equities which then took a stake in Formula One.

A European Union investigation into the business structure of the sport began at this time and ultimately lead to the formal links between Formula One and the FIA being severed when Bernie Ecclestone agreed in 2000 to pay $360 Million for a 100 year extension on the commercial rights which he already controlled until 2010 - giving him the rights to 2110. Yes, you read that date correctly.

Also in 2000 a 50% stake in the Formula One group of companies owned by the Ecclestone family trust SLEC, comprising 12.5% belonging to Morgan Grenfell and 37.5% to investment bank Hellman & Friedman, was sold to EMTV, a business owned by German media moguls Thomas and Florian Haffa which at its peak in February 2000 was valued on the Neuer Markt at €15 Billion. EMTV was an ambitious company which was chiefly known for its ownership of valuable television rights including Jim Henson's 'Muppets' business.

By 2001, however, EMTV was crippled under the burden of debt caused by its aggressive expansion while the Haffas came under investigation and were later fined €1.4 Million in 2003 for misleading investors with inaccurate profit forecasts. EMTV's debts forced its sale to the German media group Kirch, which itself collapsed within a year. In the meantime Kirch had taken up EMTV's 'put option' on a further 25% of Formula One, which gave it a holding of 75%, but following the demise of Kirch this fell into the hands of its creditor banks, JP Morgan, Bayerische Landesbank and Lehman Brothers.

The three years that followed saw the banks and Bernie Ecclestone work to find a way forward, culminating in Bayerische Landesbank taking over the entire bank stake in order to facilitate the sale of the majority holding to CVC Capital Partners which was announced on November 25th last year.

Things have moved quickly since then, including the purchase announced on March 31st this year by Alpha Topco Ltd of Allsport Management S.A. and Allsopp Parker & Marsh, the companies which previously controlled the rights to the Formula One Paddock Club corporate hospitality business and advertising/sponsorship rights to the FIA Formula One World Championship respectively. This last deal brought one of Formula One's idiosyncratic structures to an end, for everyone had always wondered how Paddy McNally's Allsport Management came to operate such a lucrative business without any apparent involvement of Bernie Ecclestone. McNally now sits on the board of Alpha.

Ironically, all these twists and turns of the past decade have achieved precisely the kind of structure that the City institutions would rather have found in the first place when Formula One began considering a stock market flotation all those years ago. Formula One was at that time characterised by influential media such as The Economist as being 'murky' and 'secretive', but the reality was it simply was not formatted to meet the rigours of a stock market flotation and the prying eyes of a sceptical business press.

The business is now tidied up in terms of its structure, wholly transparent with strong revenues and committed teams, and thus a credible place for investors, including potentially the general public, to put their funds into in the future. An Initial Public Offering cannot be far from Alpha's mind.

This restructuring of the Formula One business has principally answered the age old question of 'what happens after Bernie goes'? He seems destined not to retire, and why should he? He is as sharp as ever and, whether it is big picture restructuring or micromanagement, he knows his business better than anyone. Inevitably, though, time and mortality catch up with us all and the structure of Alpha means that a Board of Directors will oversee the future of Formula One, meaning that life-after-Bernie will simply require a capable CEO to be appointed to manage the business, just like any other multi billion dollar enterprise.

Parallel to all this restructuring, of course, has been the absolute need to settle a new Concorde Agreement. Without that, no one had anything to offer. As we know the motor manufacturers threatened, unwisely, to create a breakaway championship unless Formula One spread its revenues more equitably. It was a blunt instrument used to tackle an issue which required finesse.

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