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The price of peace

NEWS STORY
11/08/2009

Nothing comes for free in F1 and the recent signing of the new Concorde Agreement is no exception. When its predecessor was signed in 1998 Williams, McLaren, Tyrrell and Ferrari were allegedly offered stakes in F1's holding company in return for their commitment. They never got their stakes for a range of complex reasons but their incentive for signing up this time is much more straightforward.

According to a report in the Express by Pitpass' business editor Chris Sylt, F1's teams will get a financial bonus for the next five years in return for signing the Concorde and it will cost the sport over $180m.

F1 had revenues last year of $1.5bn and the teams get 50% of its profits giving them a total of around $500m annually. This deal has been in place since 2008 and before that the teams' take only came to around 25% of profits. However, as an incentive for signing the Concorde Bernie Ecclestone committed to giving the teams a payment amounting to the difference between their 50% profit share and the lower rate they received from 2004 to 2007.

The 2007 accounts for Delta 3, F1's UK holding company, state that "the increases in prize fund in respect of 2004-7 are estimated at $182.0m and these will be paid out in five equal instalments...at the end of each year in the period 2008-12." Williams is one of the few teams which was paid its share of this upfront but, despite this, F1 will still have to pay out $73m this year as the rest of the teams should get their 2008 and 2009 bonus payments in one go.

The payout is sure to put more pressure on F1's profit margins which are already being squeezed by the downturn. Corporate hospitality bookings, which provide around 10% of F1's total revenue, are believed to be down by as much as 25% this year. However, although the Concorde signing may lead to F1 having a financially rough ride this year, it should nevertheless give the sport's owners a big boost.

Finance firm CVC bought F1 in 2006 and the Concorde is its ticket to selling the sport at a premium since it guarantees the participation of the star teams. Although the Concorde doesn't give CVC stability beyond 2012, it lays the groundwork for a follow-up contract and F1's finances have already been given a bounce by this first step being reached.

CVC used a loan of over $2bn to fund its acquisition of F1 and, since it bought the sport, the right to repayment of the debt has been sold by the banks which lent CVC the money. The price of the debt gives a good indication of the health of F1 - the more likely it looks that the sport will fail, the lower the price of the debt.

So, for example, when the threat of a rival series was rife, the debt was selling for 69p in the Pound. In other words, the risk of F1 failing to make enough money to pay back all the debt was so great that buyers would only pay 69% of the amount which the sport should pay them back. However, following the signing of the Concorde, the price rose to 75p and the debt owners aren't the only ones who will be thankful that the contract has been signed.

The signing bonus is also a timely windfall for many of teams such as Renault, which will lose an estimated $65m from the departure of its title sponsor ING next year, and Brawn which has signed few sponsorship deals despite its initial success.

As F1 has found in the past, there is little point in committing teams to the sport when they don't have the wherewithal to continue. Time will tell if the bonus is even enough to ensure that F1's current teams can ride through the recession.

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