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Who will really benefit from the US Grand Prix?

NEWS STORY
05/07/2010

We all know that Grands Prix bring big promotional benefits to the countries which host them. Governments wouldn't foot the race hosting fees which average at £20.5 million ($31.06m) otherwise. The latest race to join F1's calendar, the US Grand Prix which will take place in Austin in Texas from 2012, is no exception. However, as Pitpass' business editor Chris Sylt points out in an article for Austin's main newspaper, the American Statesman, Texas may not be the only beneficiary of the race.

Surprisingly, despite F1 not being well-known in the US, the Austin F1 race promoter Full Throttle Productions, run by former F3 driver Tavo Hellmund, has managed to do what even the British Grand Prix failed to achieve. Hellmund has secured state funding for the race and a letter sent by Texas governor Rick Perry to Bernie Ecclestone on 7 April 2010 said that "Texas funding shall not exceed $25 million (£16.4 million) during any year the Agreement is in effect." It is believed that this funding will be used to directly cover the hosting fee for the race and will be paid from the Texas Major Event Trust Fund.

This fee will go into the coffers of Formula One Administration (FOA), which owns the commercial rights to F1, but the trail doesn't stop there. FOA is ultimately owned by the Jersey-based business Delta Topco and this company's majority shareholder is the private equity firm CVC. Private equity firms control huge funds which are amassed using money from super-rich individuals, banks and pension funds. These investors get a return on their money by the private equity firms using the funds to buy and sell companies like F1.

In 2006 FOA was bought for £970 million by a CVC fund which has a total of £4.2 billion in it and US state records show that one of the biggest investors in it was the California Public Employees' Retirement System (CalPERS).

CalPERS is the biggest US public pension fund and, crucially, it is owned by the state of California. CalPERS invested £200 million into the CVC fund which bought FOA and has already made a 13.8% internal rate of return on it. As of 31 December 2009, the cash that CalPERS has got out of the fund and the remaining value of its stake in it stand at £271.1 million. The money from Texas would give a further boost to FOA's revenues and profits which ultimately flow to the investors in CVC's fund including CalPERS.

It is ironic that the state of Texas, with its budget deficit of around £11.8 billion, will be spending taxpayers' money on a race which will ultimately help the state of California plug its own £12.6 billion budget shortfall. However, Ecclestone is confident that it will be worth it. Over lunch last week he told Sylt that "[the state of Texas] won't lose their money." He added that Full Throttle is "going to make an announcement shortly," about the backers behind the circuit which will be built to host the race. It will need them.

Ecclestone says that Full Throttle "are the only people we found in America who are going to build a world-class circuit." Construction of this will cost around £150 million and even if it is paid off by investors over a ten year period this would still come to £15 million annually. Money from ticket sales may cover this with the average revenue per race from spectators estimated by Formula Money to be £17.6 million. However, the catch is that the state funding is fixed at £16.4 million whereas the race hosting fee rises by 10% annually. By the tenth year of its F1 contract it is expected that Full Throttle will be paying around £38 million so that would leave a shortfall of £21.6 million after the Texas state has paid its contribution.

So who is likely to put up this money? Ecclestone would not say but according to some sources, Full Throttle's backers are believed to be American. However it may be more logical if they come from Mexico and this isn't just because of Texas' proximity to the country. Hellmund reportedly got money to fund his racing career from Mexican businessmen and his father, Gustavo Hellmund-Rosas, was president of Mexico's Grand Prix organising committee when the race was held in the late 1980s.

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