F1 teams hold the keys to the sport's future

17/11/2008
NEWS STORY

It's not often that anyone other than F1's billionaire boss Bernie Ecclestone or FIA president Max Mosley has any real control over the future of F1 but right now the sport is at one of those rare crossroads. A report in the Telegraph newspaper by Pitpass' business reporter Chris Sylt reveals that although F1's commercial rights holder is in good financial shape at the moment, all it takes is for the teams to demand an increase in the amount that they get paid from the sport as prize money and the company could go bust.

The article explains that this could happen because F1's rights holder wouldn't have enough money to make repayments on a $2.3bn loan. As if this wasn't bad enough, the loan happens to come from the UK's Royal Bank of Scotland (RBS) and it is secured on F1's rights. This means that if the rights holder doesn't make its loan repayments then RBS can take over the sport. RBS of course happens to be owned by the UK government so if the sport were to end up in its hands the country's Prime Minister Gordon Brown would effectively become F1's ultimate boss.

Given how much of a balls-up the government made with the 750m Millennium Dome leisure facility, the mind boggles about what it would do with F1. And according to Sylt, this is far from a hypothetical scenario.

Costs have got so high in F1 that it is becoming too expensive for the few independent teams remaining and although the other teams have car manufacturer-backing, these businesses have been badly battered by the recent downturn in the economy.

The bulk of the spending by the car manufacturers involved in F1 goes on each building around 80 V8 engines each year. Mercedes, which co-owns the McLaren team, alone spent 80.7m last year on employing 425 people in Northamptonshire to do this. "Costs must be down by at least 50% by 2010," says Flavio Briatore, Renault F1's boss. The risks are already apparent.

F1's only team not owned by a billionaire or a car company is Williams and this recently posted a 21.4m net loss for 2007 with its net debt trebling to cover the hole. The majority of its 66.9m turnover comes from sponsors including RBS, yes, that RBS, and troubled Icelandic business Baugur.

"Costs need to be reduced to the point where a team should be able to live from the money it gets from FOM (Formula One Management). Sponsors would be a bonus," says Gerhard Berger, co-owner of Toro Rosso. Achieving this may not only require costs to be slashed but also increasing the prize money. It is an outcome which F1's majority owner, private equity firm CVC, needs to steer around if it is to stay in the sport's driving seat.

CVC owns a 69.6% stake in F1's commercial rights holder. To finance this purchase it took out the loan from RBS which the sport now has to pay back. "Total external third party net debt is around $2.3bn," Nick Clarry, CVC's UK managing director told Sylt and added that "in 2006, revenues for the group were $1.07bn and hit $1.15bn the following year. This year (2008) we expect it will accelerate to $1.35bn which is a healthy increase despite the downturn." The revenues come from TV rights, race hosting fees, trackside advertising and corporate hospitality.

Clarry explains that the F1 group's biggest single cost is the prize money payment to the teams - a 50% share of profits after the expenses of running F1 have been deducted. He says that this makes them "equal participants in the success and failure of the series. In a worst case, where profits fall, the impact on the bottom line is lessened by a reduction of our largest cost item."

Clarry says that this year, after the expenses of running F1 have been taken off , but prior to making the team payment, the sport will make a profit of around $1bn. The teams get 50% of this which leaves $500m to deal with the loan. Interest payments on the loan amount to around $260m and Clarry says half of the remaining $240m net profit will be spent on paying off the loan itself.

As the loan itself goes down, this accordingly lowers interest payments leaving more net profit to pay off the loan itself and the repayment cycle continues. "We expect to pay off $1bn in debt over the next five years," says Clarry adding that "we have no need to refinance until 2013 at the earliest."

In short, CVC's plan seems to be to get the business into a position where it can pay off a good chunk, though not all, of the debt by 2014 when the loans need to be paid off in full. It could then take out a similar loan to the original one so it could pay off the remaining $1.3bn and give itself a payout of around $1bn.

The spanner in the works however, would come if the teams' share of the profits increases. "Although the teams currently share 50% of F1's earnings, a formal request of increasing this sum to as much as 80% could be forthcoming. In the current economic climate it could be one way of ensuring that F1 continues to have a healthy grid," says an insider to the teams' negotiations.

If the teams' share increases to this maximum CVC would have to pay out a total of $800m to the teams leaving it with just $200m to service the loan. Since this is less than is required to make current loan interest payments, let alone pay off any of the loan itself, F1 would most probably fail to meet its debt obligations. If this were to happen, RBS would get the sport and it is no idle threat by the teams.

Whilst there is a memorandum of understanding about commercial terms, there is no legally binding contract committing the teams to race in F1 - it expired last year. This contract, the infamous Concorde Agreement, could be crucial to CVC when it comes to selling F1 since it lasts for five years and so would give a new owner some peace of mind.

However, not only do CVC and the teams have to sign the Concorde, but also the FIA and it too has been advocating that the prize money is increased. Clarry is hopeful that the Concorde can be signed at the current terms and this seems most likely. However, the FIA's alternative to ensure the teams survive is to demand they use a standard engine from 2010. The tender to produce this closed 10 days ago and the consequences could equally put CVC in a spin.

Although it would significantly reduce expenditure, it would lead to mass redundancies in the existing engine departments. It would also probably drive some manufacturers out of the sport since there is little marketing benefit from winning with a different company's equipment.

"If a standard engine is introduced to Formula One then we will certainly leave," said Toyota team's boss Tadashi Yamashina recently. Likewise, Ferrari has released a statement saying it "expressed strong concerns regarding plans to standardise engines" since they could restrict competition and technological development. It added that "should these key elements be diminished, it would have to re-evaluate the viability of continuing its presence in the sport." Having been involved with F1 since the sport was founded in 1950 Ferrari's departure could well drive F1 into obscurity.

If teams leave en masse there is a real question of how F1 would replace them. Earlier this year Super Aguri went bust and there is already a vacant slot on the grid after Prodrive failed to get an entry off the ground.

Bernie and Max may think they can replace them with re-branded GP2 runners or the like but one thing that looks to be even beyond them is paying off $260m in interest when only $200m is left in the pot. This gives the teams the ultimate bargaining chip to oppose standard engines, or pretty much anything else thrown at them by F1's power brokers. All they need to do is demand 80% of the profits and stick to their guns. For once, they really do hold the keys.

Article from Pitpass (http://www.pitpass.com):

Published: 17/11/2008
Copyright © Pitpass 2002 - 2023. All rights reserved.