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Could Ecclestone pull the plug on the teams' money?

NEWS STORY
26/01/2009

In recent months there have been a flurry of stories in the media about the F1 teams getting less money than before. On 20th January F1's boss Bernie Ecclestone was reported in the Financial Times as saying "we don't need to pay more. We've got to give them less," Five days before that at Ferrari's ski event, said "maybe now that we've managed to really reduce costs a lot we'll be able to pay (teams) less money." A day later the Times described Ecclestone's controversial idea as a "well-worn theme." Now Ecclestone has gone one step further.

Since the beginning of last year, F1's teams have been racing in F1 under a Memorandum of Understanding (MOU) agreed with the sport's owner CVC in 2006. The MOU increased the teams' annual prize money from 25% to 50% of the sport's profits but it is not legally binding. For CVC to sell its investment in F1 it needs the teams to sign the Concorde Agreement which guarantees their commitment in the sport. Despite the teams not signing a Concorde Agreement, CVC has been paying them at the increased rate but it looks like Ecclestone is coming to the end of his tether.

Pitpass' business reporter Chris Sylt recently spoke to Ecclestone and quotes him in the Financial Times as saying "we have no contract and no invoice so why are we paying them?" Sources say that CVC agrees with this and takes the view that if the teams don't sign a Concorde they may not get paid.

The teams are no doubt in a very strong position due to their unity through the Formula One Teams Association (FOTA). If they want to bring about change within F1 they are certainly better as one. However, any threats about leaving F1 could not really be treated with credibility and so, when push comes to shove, they may have to accept what they are given. Not only have the teams spurned multiple opportunities to set up a rival series but given the currently bleak economy such an idea would be nothing short of madness.

Nevertheless, the teams can take heart in knowing that CVC needs their participation and will do for some time to come. Contrary to the view of some F1 journalists, CVC has not used F1 as a 'cash cow'. Quite the opposite since it has not yet taken any real profit from the sport. But that doesn't mean to say that it doesn't intend to.

It has been widely reported that CVC used billions of dollars of loans from beleaguered British bank RBS to buy F1 and that these loans are secured on the sport's rights. So, if the loan repayments aren't made then RBS gets the F1 rights. Just think about this for a second though. How could CVC buy F1 with a loan secured on F1's rights - assets which it didn't yet own? Understanding this is at the heart of understanding CVC's game-plan with F1.

CVC bought F1's rights holder at the end of March 2006 and although it used loans totalling $2bn to do it, RBS didn't provide the lion's share. In fact, CVC's $7.3bn investment fund provided $1.2bn and RBS provided $800m. It's unsurprising really that RBS initially provided the smaller sum since the risk was higher - after all, this was simply a straight loan to the CVC company which was about to buy F1. That company had no assets and no trading history but of course RBS knew what the business was about to do.

Once CVC's company had bought F1 with the loans it then owned assets which bring in annual revenues of $1.3bn. So with the F1 rights under its wing CVC could then get out yet another loan from RBS, this time the big one which totalled $2.5bn, secured on them. And what did it do with this loan that it got in November 2006? Well, it paid off the original $800m lent by RBS and paid back the $1.2bn to its investment fund. The remaining $500m paid off interest accrued on the original loan amongst other things.

This left F1 with the $2.3bn in debt it now has. So, although CVC's investment fund has ended up with F1 and got its money back, it has yet to make a profit. This should come further down the line.

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