11/02/2011
NEWS STORY
We are just emerging from one of the worst recessions in living memory. Not one day goes by without public outrage over huge bonuses paid to fat cat bankers or exorbitant expenses claimed by politicians. Now we find out that because Williams' engineering director Patrick Head intends to retire this year he is floating the majority of his shares in the team. It could give him a retirement fund of as much as £40m and, as Pitpass' business editor Chris Sylt writes in the Guardian today, the team won't be getting one penny of it. Instead, if Williams does actually float, every single time that the public buys one of Head's shares their money will be going straight to his pocket.
Clearly we live in a time of public antipathy towards people who spend or receive a huge sum of money, even if they have earned it through hard work. So is now really the right time for Head to ask the public to give a fortune to him even if they get shares in the team in return?
There is absolutely nothing wrong with Head wanting to retire and sell his shares in the team he spent over 30 years building up. Countless other team owners have done this before - Eddie Jordan and Jackie Stewart to name but two. However, for example, when Jordan sold his team there was never any doubt as to the motivation behind the sale which was to make a fast buck. In the case of Williams the float has been trumpeted as being in the best interests of the team and Head's retirement has never even been mentioned in the team's press releases about it.
The float prospectus says that "it is the intention of Mr Head... to retire in the course of 2011 and therefore he wishes to sell the majority of his shareholding." So there we have it, straight from the horse's mouth: because Head wants to retire he is floating the majority of his shares. Indeed, in the prospectus this is listed in the section entitled 'reasons for the offering'. So why did Williams decide not to mention it in any of its press releases about the float? Good question.
In fact, Head could probably make more money from selling his shares to a high net worth individual, such as one of the numerous Oligarchs or Arabs looking to follow the example of Bahrain and Abu Dhabi, than would be raised in a float since the buyer would have a trophy asset. So one wonders why Head has chosen instead to float. It raises numerous issues which have never come up when teams have been sold to private buyers.
For example, unlike a private transaction, the amount which Head will receive is a matter of public record and it is expected to be £40m. The typical fan investor will be lucky if he retires with a state pension so it seems hard to see how he or she could understand why Head would need such a huge sum for his retirement. Head is hardly poor to begin with - he currently lives in the exclusive London borough of Chelsea and, until a few years ago, lived on the same square as F1's boss Bernie Ecclestone.
What on earth is Head going to do with £40m? On Tuesday he told Reuters that "even after the listing I will be a significant shareholder, around five percent, and I plan to retain that until I do retire." Head has said he intends to retire by the end of the year and, if so, in under 12 months he will have completely got rid of his 23.5% stake in the team. It makes one wonder why he didn't float his stake more gradually over a longer period of time.
Head's view may be that this is none of our business but some investors may well want to know answers to these questions before they buy a share and, since they are giving him their money it is perfectly reasonable for them to ask. For the sake of comparison, just imagine how the public might react if Bernie Ecclestone asked them for £40m for his retirement fund but didn't disclose what he was going to do with the money. True, Ecclestone is wealthier than Head but the same principle applies - the public would have questions aplenty about where their money was going. There is no obligation to answer them but likewise, it is perfectly understandable why they would be asked.
Often in floatations the company issues new shares so the proceeds go to it rather than the shareholders as is the case with Williams. "In any public offering, the first question that any portfolio manager will ask you is what are you going to do with the money," says Andrew Craig, former chief executive of Cart, the single-seater series which was floated on the New York stock exchange in 1998. He adds that "you need to be able to demonstrate that you are going to take that capital and increase its value." Since the money raised by Williams' float will flow to its owners the company won't be able to do this. This could be what puts off many fans from investing since their money will not go towards supporting and building the team they love. Instead, it will line the owners' pockets.
Williams has confirmed that anyone who has a shareholding of 1% or more will get access to a club with benefits such as access to the team garages at races and hospitality in the paddock. However, this stake will cost at least £2.3m which is around the same as Williams' sponsor, Reuters, is paying annually. For their money, sponsors get one-on-one time with the drivers, paddock passes and space on the car so it may be a more attractive option for some wealthy fans although it would require multi-year commitment.
Institutional investors (banks and the like) are driven by financial return and are unlikely to be as concerned as fans with the fact that Head would be pocketing the majority of the proceeds. Williams has made much of the fact that it has been profitable for the past three years but it has focussed less on its year-on-year performance. As Sylt reveals in the Guardian, in the 10 months to the end of October 2010 Williams' revenue fell 14.9% to £74.2m as it lost sponsorship from Toyota. It led to Williams' after-tax profit falling 41% to £3.9m and over the course of the previous five years it made total net losses of £31.5m. The results don't sound like they will set the financial world alight but they could be worse.
"Williams is currently in a strong financial position: we have been profitable the past three years, we have solid cash reserves and our 2011 budget is already contracted. We don't need new funds. Therefore investors are simply buying equity from existing shareholders - there is nothing unusual in this. Both Patrick and Sir Frank remain shareholders in the business and therefore their interests are aligned with any new shareholder," says a Williams spokesperson.
Williams says that its 2011 budget is already contracted but surely that doesn't mean to say that it would turn down more money or sponsors? At the very least they would cover the swathes of blue on its interim livery and we will have to wait and see if they remain on the team's race car.
In 2009 Williams had revenues of £108.3m compared to McLaren's £174.8m and £132.7m at Red Bull Racing so it certainly doesn't have the highest income of all the F1 teams. Even in the current era of the Resource Restriction Agreement (RRA), money is the driving force in F1 so it would be perfectly understandable for Williams to want more income even though it says its 2011 budget is already contracted. The float could have been an opportunity to raise more money, for a rainy day perhaps, but it is not to be.
As Sylt reveals in the Guardian, it is hard to say just how dependent Williams is on certain sponsors. According to the prospectus, the team's income from prize money and its three largest sponsorship agreements "represent between 80% and 90% of the group's contracted income." Given this degree of reliance on a handful of contracts, it would seem crucial to know how much revenue each brings in. However, investors won't find this in the prospectus.
This is because Williams will be floating on the Entry Standard, an unregulated segment of the Frankfurt stock exchange which lacks the stringent investor protection regulations and transparency requirements of the key European exchanges. This will allow Williams to continue to produce accounts under the British GAAP accounting method rather than IFRS - a system required by regulated markets which would force the team to disclose the value of its sponsorship deals.
Contrary to another online report, Williams is not floating in Germany because if it were to float elsewhere it would have to publish the Concorde Agreement, the confidential contract which commits it to racing in F1. If every company which floated had to publish all the confidential contracts it had signed then very few companies would float. Indeed, F1 itself would not have considered the option as it did in the late 1990s. Williams is planning to float in Frankfurt so it doesn't have to disclose the fees it receives from specific sponsors. Time will tell whether or not this is a significant hurdle.