13/02/2013
NEWS STORY
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For over a year we have been hearing reports that F1's owner, the private equity firm CVC, was the highest bidder when it bought the sport in 2006. Now Pitpass can reveal that not only was it the highest bidder but it initially offered to pay £255m ($400m) more than the price it eventually got for F1.
It is thanks to the ongoing saga surrounding former banker Gerhard Gribkowsky that details of the bids for F1 got into the public domain.
Gribkowsky was the chief risk officer of German bank BayernLB which owned a 46.65% stake in F1's parent company SLEC. In June last year German prosecutors sentenced Gribkowsky to eight and a half years in prison for receiving £28.1m ($44m) from F1's boss Bernie Ecclestone and his family trust in return for allegedly steering the sale of BayernLB's F1 shares to CVC. Prosecutors claimed that CVC was Ecclestone's preferred buyer since it agreed to retain him as F1's boss. They added that because Gribkowsky received a bribe to sell to CVC he did not bother looking for higher bidders and therefore BayernLB's F1 stake had been undervalued.
Gribkowsky was found guilty of receiving a bribe to sell to CVC but, as Pitpass revealed, the prosecutors were forced to admit that it was the highest bidder. The indictment (basically the statement of claims) against Gribkowsky confirmed that although BayernLB received several "offers, or rather expressions of interest" in its F1 shares, except for the one from CVC "none of these offers were regarded as being suitable, especially for reasons of price."
Hong-Kong based conglomerate Hutchison Whampoa reportedly offered £638m ($1bn) with rival private equity firm Clearbrook Capital making a £1bn ($1.5bn) bid. CVC paid £1.1bn ($1.7bn) and Pitpass has revealed the company documents which prove this. BayernLB was paid £535.4m ($839.1m) and this was just what it was looking for.
During Gribkowsky's trial Kurt Faltlhauser, who headed BayernLB's administrative board from July 2002 until July 2005, said "the price we were offered by CVC was surprisingly high and it came as a great relief." Former BayernLB management board member Dieter Burgmer added that "BayernLB's management board regarded the net proceeds from the sale of the Formula One stake to CVC as very attractive." Reflecting this, BayernLB announced a valuation yield of £272m (€328m) in its 2006 results and stated that the sale of the F1 shares "decisively contributed to the positive result." It could have made even more from CVC.
Writing for business newspaper CityAM Pitpass' business editor Christian Sylt has revealed that CVC offered BayernLB the chance to reinvest in F1 at a bargain basement price.
On 19 September 2005 CVC made a written offer to BayernLB for the bank's F1 shares and the 25% stake which was owned by Bambino, the Ecclestone family trust. Pitpass is the first media outlet to reveal the offer letter which can be read here (pdf) with certain confidential details obscured for security reasons. It states that CVC offered BayernLB the chance to buy back a 10% stake in F1 for £63.8m ($100m) which may sound like a lot but in fact it was a steal.
F1 was at risk of collapsing in 2005 due to a pay dispute with the teams so BayernLB decided not to reinvest but had it done so it would have made a profit of £510.5m ($800m). Over the past year CVC has sold a total of 28.3% of F1 with the most recent buyer being US investment fund Waddell & Reed in June last year. It paid £319m ($500m) for a 7% stake which gave F1 an value of £5.8bn ($9bn) after taking into account its £1.2bn ($1.9bn) of debt. BayernLB missed out on this and that's not all.
CVC's offer letter stated "you will note that the proposal is for $1.5 billion for your holding of 71.65%. Thus is an improvement from the previous offer that valued 75% at $1.5 billion. This improvement can only be justified if there is some positive news or information about the business we are proposing to invest in: I look forward to hearing it."
Offering £957bn ($1.5bn) for 71.65% of F1 valued the sport at a total of £1.3bn ($2.1bn) which is £255m ($400m) less than CVC paid. Clearly the "positive news or information about the business" did not materialise. It isn't clear what CVC was looking for but presumably it was connected to the commitment of the teams to stay in F1. At the time that CVC invested in F1 several of the manufacturers were threatening to start a rival series if their pay demands were not met.
It was a big gamble for CVC but it has paid off. Core to its success has been Ecclestone's position as F1's boss and one wonders whether the sport would be in the rude health that it is today if it had been sold to another buyer which did not want him running it.
CVC's offer letter confirms that "it is a condition of our investment that Bernie Ecclestone continues as the company's chief executive and we would wish to support his plans for developing the business." With hindsight this has proven to be a sensible decision though it is all in a day's work for Ecclestone.
CVC wanted him to stay because they knew he would keep F1 in one piece and would maximise their profit. Ecclestone is richly rewarded for doing just that and his salary currently stands at £2.5m annually. Given his well-known attitude towards disliking paying for unnecessary costs it is hard to imagine him shelling out £27.5m to stay in his job. It would be much easier to imagine him demanding £27.5m to stay in the job but the German prosecutors took the opposite view and they aren't the only ones.
German media company Constantin Medien has lodged a civil suit against Ecclestone in London claiming that the alleged bribe prevented it from benefiting from a profit share which would have kicked in if BayernLB's F1 shares had been sold for more than £638m ($1bn).
Constantin was due to receive 5% of the amount if the F1 shares had sold for between $1,057,400,000 and $1,119,600,000 as well as 10% of any proceeds over $1,119,600,000. It is claiming damages of £109m ($171m) which is based on BayernLB's shares having been worth £1.8bn ($2.8bn). This would have given F1 a whopping value of £3.9bn which seems to knock even CVC's improved £1.3bn offer into a cocked hat.
Constantin has provided evidence of several valuations of F1 from 2001 and 2002 which is before the dispute with the teams and manufacturers began in earnest. It also points out that the amount received by BayernLB was lower than the cash return from the debt secured by CVC in 2006 and 2007 to refinance its purchase of F1. The debt was secured at the height of the economic boom and the liberal lending habits of banks at that time have been well-documented. Finally, Constantin backs up its claim with Ecclestone's quote to Pitpass, four years after the sale to CVC, that F1 is worth "six or seven billion."
When the case comes to court in October it is understood that Constantin will also present expert evidence to demonstrate that F1 was worth £3.9bn. One wonders whether that will be enough. Even if BayernLB's stake was worth more than the £638m which it received, Constantin's profit share would still not have kicked in if no other buyer had offered a higher price than CVC. And as we now know, its offer was even higher than previously reported. Ecclestone recently told Sylt that the trial will be "amusing" and it will be interesting to see what further evidence Constantin provides to support its case.