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F1 teams hold the keys to the sport's future

NEWS STORY
17/11/2008

It's not often that anyone other than F1's billionaire boss Bernie Ecclestone or FIA president Max Mosley has any real control over the future of F1 but right now the sport is at one of those rare crossroads. A report in the Telegraph newspaper by Pitpass' business reporter Chris Sylt reveals that although F1's commercial rights holder is in good financial shape at the moment, all it takes is for the teams to demand an increase in the amount that they get paid from the sport as prize money and the company could go bust.

The article explains that this could happen because F1's rights holder wouldn't have enough money to make repayments on a $2.3bn loan. As if this wasn't bad enough, the loan happens to come from the UK's Royal Bank of Scotland (RBS) and it is secured on F1's rights. This means that if the rights holder doesn't make its loan repayments then RBS can take over the sport. RBS of course happens to be owned by the UK government so if the sport were to end up in its hands the country's Prime Minister Gordon Brown would effectively become F1's ultimate boss.

Given how much of a balls-up the government made with the £750m Millennium Dome leisure facility, the mind boggles about what it would do with F1. And according to Sylt, this is far from a hypothetical scenario.

Costs have got so high in F1 that it is becoming too expensive for the few independent teams remaining and although the other teams have car manufacturer-backing, these businesses have been badly battered by the recent downturn in the economy.

The bulk of the spending by the car manufacturers involved in F1 goes on each building around 80 V8 engines each year. Mercedes, which co-owns the McLaren team, alone spent £80.7m last year on employing 425 people in Northamptonshire to do this. "Costs must be down by at least 50% by 2010," says Flavio Briatore, Renault F1's boss. The risks are already apparent.

F1's only team not owned by a billionaire or a car company is Williams and this recently posted a £21.4m net loss for 2007 with its net debt trebling to cover the hole. The majority of its £66.9m turnover comes from sponsors including RBS, yes, that RBS, and troubled Icelandic business Baugur.

"Costs need to be reduced to the point where a team should be able to live from the money it gets from FOM (Formula One Management). Sponsors would be a bonus," says Gerhard Berger, co-owner of Toro Rosso. Achieving this may not only require costs to be slashed but also increasing the prize money. It is an outcome which F1's majority owner, private equity firm CVC, needs to steer around if it is to stay in the sport's driving seat.

CVC owns a 69.6% stake in F1's commercial rights holder. To finance this purchase it took out the loan from RBS which the sport now has to pay back. "Total external third party net debt is around $2.3bn," Nick Clarry, CVC's UK managing director told Sylt and added that "in 2006, revenues for the group were $1.07bn and hit $1.15bn the following year. This year (2008) we expect it will accelerate to $1.35bn which is a healthy increase despite the downturn." The revenues come from TV rights, race hosting fees, trackside advertising and corporate hospitality.

Clarry explains that the F1 group's biggest single cost is the prize money payment to the teams - a 50% share of profits after the expenses of running F1 have been deducted. He says that this makes them "equal participants in the success and failure of the series. In a worst case, where profits fall, the impact on the bottom line is lessened by a reduction of our largest cost item."

Clarry says that this year, after the expenses of running F1 have been taken off , but prior to making the team payment, the sport will make a profit of around $1bn. The teams get 50% of this which leaves $500m to deal with the loan. Interest payments on the loan amount to around $260m and Clarry says half of the remaining $240m net profit will be spent on paying off the loan itself.

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