F1's revenues stall but its debt repayment accelerates


The 2010 financial statements for the companies which run Formula One were released last week and, perhaps unsurprisingly, they led to several inaccurate reports.

The F1 company accounts certainly aren't straightforward and easy mistakes can be made by journalists who rush out their reports or don't understand the business behind the sport. Pitpass' business editor is on hand to set the record straight and, as he reveals in a report in the Daily Mail, F1's fortunes are stuck in reverse thanks to the recent recession.

Pitpass has already explained in some detail the deep flaws in one of the assessments of the accounts - that of Telegraph sports reporter Tom Cary who wrote that "Formula One has seemingly defied the economic downturn after announcing turnover once again in excess of $1billion (610 million) for 2010.". Cary's comment is laughable and demonstrates to editors why it is risky for sports journalists to cover business issues.

All of the key F1 companies filed their accounts last week but the figure Cary is referring to is the amount of money which flowed into the coffers of Formula One Administration (FOA) the company which directly owned the rights to F1 in 2010. FOA's revenue increased by 11.6m ($19m) to 661m ($1,082m) and contrary to Cary's understanding, there is very, very little positive about this. In fact, the increase suggests that F1 was so badly hammered by the recession that not only did it have to waive the 10% escalator which is usually applied to its race hosting fees every year, but several of FOA's clients didn't pay up. It's pretty easy to see that this is the case if you know where to look and Sylt does.

Let's start at the beginning. FOA gets it money from three key sources - TV stations, which pay to broadcast F1, sponsors which pay to be known as F1's official partners, and circuits, which pay to host F1 races. According to F1's industry monitor, Formula Money, TV contracts bring in around 275m ($450m) with 61m ($100m) coming from sponsorship and 325m ($532m) from race hosting fees. This makes up FOA's 661m ($1,082m) of revenue.

As any seasoned F1 business reporter will know, escalator clauses in the race hosting contracts increase the fee paid by 10% each year. This alone should have increased FOA's revenue by around 30m ($50m) and, of course, last year new races in Canada and South Korea were added to the calendar. These two events are believed to have annual fees totalling 37m ($60m). That's a total of 67m ($110m) in additional revenue which FOA should have got without its boss Bernie Ecclestone even lifting a finger. However, instead, its revenue only increased by 11.6m ($19m). It certainly doesn't fit the 'economic downturn defying' picture painted by Cary.

He didn't have to look far to find evidence that FOA still hadn't raced out of the recession as FOA's chief financial officer Duncan Llowarch writes in the accounts that the revenue from the new races "more than offset the impact on certain revenues of the continuing effects of the global economic downturn."

Indeed, to show just how bad FOA's latest financial results are, just consider that in 2009, when there was one less race than the previous year, the company's revenue rose by 51.3m ($84m) - far more than the increase in 2010 when two races were added to the calendar. Revenue in 2009 increased by 9% which is no surprise given the 10% escalator on the race hosting fees. The increase last year came to 2% which is the evidence that escalator clauses were waived and, most probably, several clients failed to pay FOA what they were due. It wouldn't be the first time that this has happened as the 2009 accounts for FOA's parent company Delta 3 revealed that 13.4m ($22m) in fees were still outstanding for the Canadian Grand Prix from 2006 to 2008.

Several races ran into financial difficulty last year with the organisers of the Belgian GP reporting a 2.4m ($4m) loss whilst the hosting fee for the German race was slashed by around half to 7.9m ($13m). This fuelled a 7% fall in the underlying profit per race compared to a 19% increase the previous year. Again, this is hardly something for F1 to be proud of.

FOA's total costs increased 13.2% to 451.7m ($739.9m) due to a 69.6m ($114m) increase in prize money payments to F1's teams. Their take from the sport increased as part of a new contract they signed in 2009 committing them to stay in F1. In addition, the new teams which joined F1 last year each received a signing bonus of 61m ($10m). It hit F1's bottom line badly.

After FOA had paid its costs how much profit did it and F1 make overall? On this point, Cary repeats an error made by Alex Duff, a reporter for financial news service Bloomberg which should know better. Duff says "CVC's loss from Formula One widened to $660 million (402.9m) last year," but in fact this is far from true. Duff's claim implies that FOA's majority owner, the finance firm CVC, lost 402.9m on F1 during the year. Presumably, Duff draws this conclusion from the fact that Delta 3 had a net loss of 402.9m and although this may seem like decent evidence for his claim, in F1 things aren't always what they seem.

Many of the CVC-owned F1 companies are located in offshore tax havens such as Jersey and Luxembourg and they are there for good reason. They have loaned huge sums of money to the CVC-owned F1 companies which are based in the UK, such as Delta 3. The money wasn't loaned to buy anything external or because it was needed, it was part of a very elaborate, and perfectly legitimate, tax avoidance scheme.

The UK-based F1 companies have to pay the loans back to the offshore F1 companies at a huge rate of interest which stood at 15% per day in 2010. So why would CVC's left hand take from its right hand?

The answer is that the UK-based F1 companies are allowed to pay back the interest before their corporation tax bill is calculated. The huge interest payment forces them into an artificial loss which they can then use to offset against corporation tax whilst the offshore F1 companies don't pay tax at all. It makes the accounts almost unintelligible to anyone but specialists and it explains why Delta 3 made a 402.9m loss. This deficit came as a result of loan payments made to other F1 companies owned by CVC so it certainly was not a loss made by CVC as Duff and Cary wrongly reported.

So did CVC really lose any money at all on F1 last year? When working this out there is obviously no point in taking into consideration the interest payments being made between one CVC-owned company and another. However, the real expenses can be grouped into four categories: running costs, interest paid on bank loans, repayment of bank loans and tax. Deducting this total from the revenue gives the net financial result. Formula Money has worked this out for all of the CVC-owned F1 companies which file UK accounts and it gives a net loss of 128.2m ($210m).

However, that doesn't mean to say that CVC lost 128.2m on F1 last year. The reason for this is that the results from the CVC-owned business which sells F1's lucrative trackside advertising hoardings are not included in this total as it does not file UK accounts. Ecclestone says that it has costs of around 27.5m ($45m) on revenue estimated by Formula Money at 164.8m ($270m) so this would give F1 an overall net profit in 2010 of 9.1m ($15m). CVC itself got 63.4% of this - a sum of around 5.8m. It may not sound like much but it is a far far cry from the 402.9m loss which Duff and Cary carelessly claimed CVC got from F1 last year.

There was a simple reason that CVC's overall net profit was not gigantic last year. As seasoned Pitpass readers will know, CVC bought F1 in 2006 with a 1.8bn ($2.9bn) loan from the Royal Bank of Scotland (RBS) and Lehman Brothers. The accounts show that last year F1 paid off a total of 206.7m ($338.5m) of the loan compared to 110m ($180.2m) in 2009 so this explains the smaller than expected overall net profit. It also explains why Ecclestone told Sylt that all of F1's debt "should be cleared by 2014."

As Pitpass reported back in 2008, CVC's previous target was to pay back 610m ($1bn) of the debt by 2014 but with annual repayment now doubling it is no surprise that it will be cleared sooner than forecast. Obviously, F1 will be extremely valuable if it is debt-free and this could well spark more talk of CVC looking to sell. Indeed, a Reuters report last week claimed that CVC is conducting a strategic review of F1 for a potential sale. However, Ecclestone told Sylt that although "people are knocking at their door all the time, CVC is not looking for any exit over the next two or three years."

F1 still has 1.2bn ($2bn) of debt to clear but the less that is left, the lower are its interest bills and so the more money it has to pay off the loan itself. It has had an unlikely ally in this process. The interest rate on the debt is between 1% and 3.5% on top of what is known as Libor which is the rate set for banks to lend to each other. This rate crashed during the economic downturn in order to stimulate lending between banks and F1's interest bill fell accordingly. As more of the loan itself was paid off less interest was charged and in 2009 F1's interest payments were nearly double the 36.1m ($59.2m) it paid last year.

So although F1 itself has been battered by the economic downturn, its owners have benefited from it. It's pretty much the opposite of what has been reported about the accounts so far but in F1 the devil really is in the detail.

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

Published: 11/04/2011
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