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F1, full of Eastern promise?

NEWS STORY
15/01/2007

South Korea has already signed up to the Formula One dream, with India, Singapore, Russia and many others to get on board. But ever wondered why Formula One, under the guidance of Bernie Ecclestone and CVC is so keen to ignore Village People’s rallying cry and Go East?

When CVC bought Formula One in 2005 some questioned the logic saying it was a flight of fancy for CVC's managing partner racing fan Donald Mackenzie. Others said that the teams would never see eye to eye with the FIA and so CVC could never make money on the deal. But as Christian Sylt and Caroline Reid report, yesterday's news that the F1 group has raised a $2.9 billion loan has confounded the critics and looks like it has already given CVC exactly what it is after - almost 300% return on investment.

CVC is a giant in the world of finance and works on essentially simple principles. Wealthy individuals and institutions give CVC money to manage in investment funds which buy into companies. The idea is that these companies will pay a high rate of return on investment from either being sold, floated or raising money. CVC has a knack of succeeding.

Founded in 1981, its investment funds have totalled over $18bn and acquired over 220 companies in Europe including flagships such as Kwik-Fit, Halfords, Debenhams and the AA. CVC has had turbocharged growth over the last decade.

Its fund completed in 1996 raised just $840m. Two years later its next fund secured $3.3bn with the following in 2001 raising $3.9bn and its latest 'Fund IV' closing in 2005 at $7.2bn. Sources say that whilst the net internal rate of return on its 1996 fund was around 25%, its 2001 fund reached close to 45%. F1 has been one of Fund IV's highest profile acquisitions but isn't likely to be the most expensive.

CVC's majority stake in F1 is believed to have cost around $1bn with the sport's hospitality and advertising businesses another $350 million. That's a total of $1.35bn. However, CVC didn't put all this money in itself. Far from it. As revealed yesterday, The Royal Bank of Scotland (RBS) lent CVC $1.17bn. This means that CVC put in approximately $180m from its own Fund IV.

The RBS loan had a catch - a high interest rate. So CVC took out another loan just a couple of months ago from RBS and US bank Lehman brothers. With Lehmans onboard as an investor in a new F1 parent company, CVC is likely to have got a lower interest rate. And instead of just refinancing the original loan, CVC pulled out all the stops and got a loan for $2.9bn.

Paying off the original loan, complete with one year's interest payments, could cost $1.35bn. In addition, there's a deposit of around $600m which has been lodged with RBS to get the new loan. Finally, it is thought that $313m could be used to pay off yet another loan taken out by F1 in 2001 to buy the sport's 100-year rights. In total this all comes to $2.26bn and would leave around $640m from the loan of $2.9bn.

Whilst CVC's exact stake in F1 isn't known, let's say it owns 80%. This would give it around $510m of the remaining money from the latest loan. Paying this back to Fund IV would give it a return of around 300% on the $180m it is estimated to have initially invested. Not bad for around a year's work. By comparison, CVC's stake in William Hill had returned 314% by the time the bookmaker was floated in 2002. Its stake in MotoGP had already given it a return of over 800% by the time it was sold last year. And there could be more to come from its F1 investment.

As majority owner, CVC could make at least another billion by selling F1 in future. A flotation could make even more but this is something the sport hasn't found easy to pull off in the past.
Then there are F1's 100-year rights. These are held by a company called Formula One Asset Management and come into effect in 2010.

Under four weeks ago FIA president Max Mosley and an F1 representative signed a document to allow mortgages on the shares of this company. It isn't clear whether a further mortgage could be obtained on the 100 year rights in addition to the existing $2.9 billion loan, which is secured on F1's current rights. However, if this were to take place, the mind boggles at what could be raised on 100 years of rights when just three years can be used to obtain $2.9bn.

But what does all this mean to the man on the street? Well, it saddles the sport with a massive amount of debt and this will be paid back by the revenues from the F1 group over time. F1 is going to have to grow seriously if it is to be able to pay back a $2.9bn loan. That inevitably means more races in less saturated areas such as the Middle East and China.

Perhaps the most interesting conclusion that can be drawn is about the sport's immediate future. After all, the memorandum of understanding signed between the carmakers and CVC is, as is often noted, not a full Concorde Agreement and doesn't tie the teams to race in F1 after 2008. However, it is strong enough for RBS and Lehmans to lend $2.9bn on the back of it. And since that is the largest amount of money F1 has ever raised, it might not be going too far to say its prospects are better than ever.

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