It surprised no one here at Pitpass that shares in Williams received a lukewarm response when they opened for trading on the Frankfurt Stock Exchange on Wednesday. By mid-morning they had fallen 5% on their launch price which was at the bottom of the initial range of €24 to €29. On their second day of trading the shares closed 1.37% down at €24.05.
As Pitpass' business editor Chris Sylt explains, the company's financials are far from pole position. In the 10 months to the end of October 2010 Williams' revenue fell 14.9% to £74.2m, its after-tax profit reversed 41% to £3.9m and over the course of the previous five years it made total net losses of £31.5m. However, it is the team's championship position which is likely to guide the share price.
Sitting on the trading floor of the Frankfurt stock exchange as the opening bell rang was a Williams car from 1997, the last year that the team won the world championship. Its purpose may well have been to remind the public of the team's glory days but it didn't bring a boost to its share price. It's no surprise since Williams' winning ways are long gone and its last race victory was way back in 2004.
Investors' eyes are sure to be glued to the screen during this year's season-opening Australian Grand Prix and if Williams' performance in the race this year is anything like 2010, they could be in for a roller-coaster ride. Last year Barrichello finished in eighth place with Hulkenberg retiring following a first lap accident. Given that the Williams shares fell 5% on the first day of trading one wonders what effect a race result like that might have on their price. There is very good reason for this.
The prospectus for the team's flotation revealed that its income from prize money and its three largest sponsorship agreements "represent between 80% and 90% of the group's contracted income." Prize money and sponsorship are both intrinsically linked to the team's position in the standings: the higher it finishes, the more prize money it gets and the more attractive it is to sponsors. The more revenue it gets, the higher its profit is likely to be and so the more money will be paid to investors as a dividend. The lower the profit, the less the dividend is likely to be.
In short, the lower down the standings that the team finishes, the lower the dividend investors are likely to receive. The prospectus makes this quite clear: "If the Team's competitiveness and sporting performance were to decline significantly, this could have a material adverse effect on the sources of income of Williams (and, as a result, those of the Issuer), and as a consequence, on their respective profits, balance sheet and financial position."
The reason for this is that, despite all the talk of diversification in Qatar, Williams is still mainly an F1 team and this is how it makes its money. Accordingly, it is hard for the team to ramp up business in other areas to compensate if there is the dip in its F1 revenues due to a drop in performance. In contrast, for example, if the toy manufacturer Hasbro loses the contract to produce the action figures for Marvel comics characters then it would lead to a fall of revenue for the company but it would still have other brands, such as the transforming robots Transformers, which appeal to the same audience and could compensate for the loss. For Williams at least 80% to 90% of its income comes through F1 and only F1.
Last year Williams finished in sixth place so again, one wonders what would be the impact of it finishing lower than that in 2011. If this were to lead to a collapse in its share price it could make the team look less attractive to sponsors and it would already have less prize money than the previous year as a result of finishing lower down the standings. Coupled with the fact that engineering director Patrick Head is due to retire this year, it wouldn't put Williams in the best place to deal with the following season. And of course, the worse prepared Williams looks, the lower its share price may fall.
Laymen may think that in times of need the team could fall back on the money raised through the float but, as anyone who has followed it closely will know, this is not the case because the money it raised went straight into the pockets of its owners. The biggest winner regardless will be Head who has floated 14.5% of his shares in the team and thereby added around £31m to his retirement fund. Now that is a nice little earner.