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Teams were "willing to burn down" F1 says CVC

NEWS STORY
28/11/2013

Long-standing Formula One followers will remember well the summer of 2009. The teams were at war with the FIA over a proposed $60m cap on budgets and on the eve of the British Grand Prix they announced that they were starting a rival series. The risk disappeared after just five days and the teams soon signed the Concorde Agreement, the contract which commits them to racing in F1. It was widely understood to be an empty threat but an article in the American motoring magazine Autoweek by Pitpass' business editor Christian Sylt has lifted the lid on the turmoil behind the scenes. It was so great indeed that F1 nearly collapsed.

The revelation came from Donald Mackenzie (pictured with Bernie Ecclestone), co-founder and co-chairman of CVC, the private equity firm which is F1's largest shareholder. Giving evidence in a trial surrounding CVC's 2006 takeover of F1, Mackenzie last week told London's High Court that "what we found out, once we bought it, within weeks of signing a contract, was that actually it wasn't just money. It was emotion. It was years and years of built up anger and mistrust with the current shareholders and with the management of Formula One, which meant that the decisions that we were basing our investment on were really just part of the picture.

"And, yes, the teams do make these threats. But what shocked us is when we met them is how angry they were and how we realised, for the first time, that it was emotion, not just money, it was emotion that was driving their anger and therefore the outcome was wholly unpredictable. As I said to my colleagues internally at the time, these people are willing to burn down the business before our eyes just to prove the point."

The teams had the window of opportunity to leave F1 in 2009 as the previous Concorde had expired at the end of 2007. Their threat was averted when the FIA signed the Concorde after it let the teams self-police the cost cuts. It is a mechanism known as the Resource Restriction Agreement and it has arguably not served its purpose as several teams are now understood to be in financial difficulty.

Mackenzie said that, ironically, the teams claimed they were prepared to cut their budgets in order to minimise the costs of getting a rival series off the ground. "They revealed it to us when they actually started their break away all over again in 2009, when they said, when I challenged them saying that they couldn't afford it, they countered that by saying, 'We're going to slash our budgets and we're going to run it on a much skinnier cost because we are that determined to do it.'"

Although the teams did an about-turn on their plans to start a rival series Mackenzie said in court that "there's no doubt in my mind they were prepared to wreck the current business and walk away from it, for emotional issues that were still being negotiated at the time."

He said that when CVC bought F1 it "took it for granted" that the FIA would add its signature to the Concorde alongside its own and those of the teams. "We hadn't fully understood then that the new Concorde Agreement not only required the teams to sign, but it also required the FIA to sign. And that turned out to be extremely difficult... the negotiations with them turned out to be extremely difficult and very nearly led to the break-up of this company."

Mackenzie added that even though F1's boss Bernie Ecclestone had agreed the terms of a commercial profit share with the teams in a Memorandum of Understanding (MOU), FIA president Max Mosley "threatened" to go against this by withholding its signature from the Concorde. The contract requires the FIA's signature so if it had not given it the teams could have walked away from F1 at any time.

Mosley admits that the FIA was making this threat. He told Sylt that "in the summer of 2009 the FIA was indeed refusing to sign as it had been since before the previous Concorde expired... An obvious reason for not signing in 2009 was we wanted a mechanism to keep costs under control enforced by the FIA, whereas the big teams wanted to control costs among themselves. We thought that would be no control at all.

"We were interested in costs because we thought excessive cost could kill Formula One but also for sporting reasons. If a team has much greater financial resources, it's really no different to having a bigger engine. So we were indeed being difficult vis-a-vis CVC and refusing to sign because the teams would not agree to what we thought was necessary."

Mackenzie partly blames CVC itself for getting into this situation. In court he explained that before CVC bought into F1 his colleagues produced a preliminary investment review in September 2005 which "grossly understated the risk they were taking because they didn't understand it. We do now."

He added that "it was not simply agree the profit share and move on. That was a complete misjudgement on our behalf. It's a much more complex deal and it involves, above all else, a great deal of emotion and a lot of trust. And at that time emotions were running incredibly high and there was no trust with the current shareholders."

Mackenzie said that all CVC had to rely on was "a general agreement. A Memorandum of Understanding. A non-legally binding agreement to agreement. It was worthless. It gave us some emotional pleasure to tell the world that they were no longer fighting with us. But they didn't actually sign. And at the British Grand Prix in 2009 they declared to the world it was over, they were all leaving, including the people like BMW who had signed that letter. So, you know, it really was a misjudgement by us."

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