Motoring through the downturn - F1 and the credit crunch

02/10/2008
NEWS STORY

With plaudits pouring in following Sunday's Singapore Grand Prix it's clear that the race was a resounding success. But as Pitpass' business reporter Chris Sylt explains, what's not so clear to see is how it is the cornerstone of a plan which is ensuring that F1 doesn't join a host of other big businesses and end up a casualty of the economic crash.

F1 is one of the world's best-sponsored sports with its ten teams each getting an average of 44.9m from corporate partners this year. But as purse strings are pulled tighter sponsorship and marketing becomes tougher for companies to justify in general and the level of expenditure required for F1 could become unaffordable. To make matters worse, financial services has been the most badly battered sector in the recent economic crisis and, after telecoms and technology, it provides the greatest amount of sponsorship to F1 teams this year at an estimated 74m. Likewise the soaring cost of fuel is sure to ramp up the cots of the globe-trotting teams. They don't have to look far to see what damage a downturn can do.

F1's closest brush so far with the credit crunch came last month when Lehman Brothers, the US investment bank, went bankrupt. Lehman owns a 16.8% stake in Delta Topco, the Jersey-based company which ultimately owns F1's commercial rights.

The sport's boss Bernie Ecclestone owns just 0.00001% of Delta's shares with the majority in the hands of finance firm CVC which may now be able to buy Lehman's shares for a discount since the bank will be welcome for revenue to pay off its debts. CVC is believed to have spent over 1bn to buy F1 in 2006 and will eventually want to offload its investment for a profit. An F1 co-owner going bankrupt is not the ideal image which CVC wants to give to prospective purchasers.

When CVC bought its stake in F1 it didn't pay for it with cash. Instead it funded it with a loan of 1.4bn from Royal Bank of Scotland and Lehman Brothers and this has made managing debt just as important to the F1 Group as managing motorsport.

In 2007 F1's UK parent company Delta 3 made a loss of 235 million partly down to a staggering 130 million in interest payments it made on the loan. It could be so different.

Roughly 220m of Delta 3's revenues come from race hosting fees with around 207m brought in by television rights fees. Neither incur high overheads except for staff and so the company has a huge profit margin of 54%. This gets burned up by the interest payments but it shows that boosting revenues would increase profits meaning that the debt could be paid off quicker. However, it isn't possible to do this by adding more races to the calendar since the F1 teams are unwilling to accept more than 20 Grands Prix each year. Instead, Ecclestone's strategy has been to take F1 to countries which are prepared to pay top dollar.

Governments of emerging countries, such as Singapore, South Korea and India, want to bankroll F1's huge hosting fees for promotional purposes. Few sports put countries on the global map like F1. There's the prestige of being on the calendar alongside alluring locations like Monaco, Malaysia and Bahrain. Then there's the exposure to F1's 597m annual viewers as well as the huge spending by tens of thousands of fans staying in the local area over the race weekend.

So whilst Silverstone is paying an estimated 9.4m per year for the British Grand Prix, Abu Dhabi and South Korea have reportedly agreed to pay 25m each for their races which join the calendar in 2009 and 2010 respectively. Such is the interest in using the races to promote the local country, the Abu Dhabi GP has even already agreed a title sponsorship deal with the airline Etihad and each of the five races this year in Asia has a title sponsor based in the host nation. This brings more money to F1's trackside advertising division and could even introduce local manufacturers to the sport. In contrast, the French and Canadian Grands Prix don't even have any company paying for their naming rights.

However, races bankrolled by deep-pocketed governments drive up the going rate to stage a Grand Prix. This makes it even tougher for European promoters to afford the fees which are already believed to increase by 10% annually - in itself good insulation against the downturn. European countries generally don't need the promotion offered by a Grand Prix to entice tourists so their governments tend not to cover the costs of a race.

The result is that this year there are more races in Asia than ever before. A decade ago the Japanese GP was the only Asian race on the calendar but now races on the continent make up a third of the total. This is just the beginning.

Hosting races on city streets weds the event to local landmarks giving maximum marketing exposure for the country and encouraging fans to return to the site of the on-track battles. And whilst purpose-built racetracks take years to build, street circuits, such as Singapore, take just over a year to prepare. This gives their hosts quick access to the attractions of F1 and takes less time to bring the bigger bucks to CVC. So it's no surprise that South Korea and Abu Dhabi's races will also be held on street circuits and this isn't the only characteristic they may share with Singapore.

Although F1 is becoming increasingly unsustainable in its traditional European heartland over a third of its TV viewers are in Europe. Not having a race to visit in their home countries is one thing but having to get up in the middle of the night to watch an Asian Grand Prix being held in the afternoon is another. Enter the night race.

Holding the Singapore GP at night allowed it to be broadcast live at prime time in Europe. Given its success, several Asian races could now be switched to a night slot with Japan and China two likely candidates and South Korea a possibility from launch. The effect should be a boost to European viewing figures allowing Ecclestone to charge even more for TV rights. This strategy is already bearing fruit.

The Singapore GP was watched by a healthy audience of 3.8m and 3.9m in the UK and France respectively with a massive 5.6m people tuning in in Germany. It's far from the 11m German TV viewers who watched the German GP in 2001, at the peak of Michael Schumacher's winning streak, but way ahead of 1.4m who tuned in to watch the Australian GP in the middle of the night last year. If the Singapore GP had been held in daylight these are the kind of viewing figures which would have been expected.

Ultimately the biggest blow that the credit crunch could deal out to F1 may be due to the man on his barstool. Ecclestone's plan of expanding F1 into Asia should keep the sport afloat through an economic storm but only time will tell whether European fans will make do with live night races on TV instead of more home races. And the few European races left will have to keep on hiking up ticket prices in order to fund F1's accelerating fees.

So all the empty seats in the pictures from this year's Belgian GP actually came to a total of between 5% and 10% fewer spectators than in 2007 which gave its promoter a loss of around 2.4m. Recouping this could mean increasing ticket prices further which could put off even more spectators. So although F1 may be able to stay afloat during the downturn whether spectators stay with F1 is another question.

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Published: 02/10/2008
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