F1 was not sold for less than expected says BayernLB

31/08/2011
NEWS STORY

There has been some talk that investors in CVC, the private equity firm which owns F1, are likely to make complaints connected to the sport at its upcoming investor summit on 14 September. In particular, it is said they will complain about the way it has handled the scandal which saw German banker Gerhard Gribkowsky arrested in January on suspicion of receiving a 27m bribe to allegedly undervalue F1 when his former employer BayernLB sold a 47.2% stake in it to CVC in 2006. This theory originates in an article in the Financial Times by Daniel Schafer and James Wilson, two journalists who rarely cover the business of F1, and their report seems to contain somewhat of a contradiction.

As seasoned Pitpass readers will remember, Gribkowsky received 13.8m from F1's boss Bernie Ecclestone and 12.9m from Ecclestone's independent family trust Bambino. Ecclestone says the money was paid because Gribkowsky threatened that, if not, he would make unfounded allegations to the UK tax authorities about the F1 boss' relationship with Bambino. As part of the sale of F1, BayernLB also paid 15.3m to Bambino and 25.4m to Ecclestone himself. Ecclestone says that Bambino got the money to settle a previous loan it had given to F1 and his own payment was commission for arranging the sale to CVC. The prosecutor didn't see it that way.

Instead, the prosecutor initially claimed that the money received by Gribkowsky was a bribe for him to undervalue F1 and the payments to Ecclestone and Bambino were made to compensate for the bribe. "These payments would not have been asked for were it not for the bribes to be paid to the accused," said the prosecutor. Since the scandal began in January Pitpass' business editor Christian Sylt has covered at length the reasons which show that the prosecutor's argument seems to be pure fantasy. In a nutshell, F1 was simply not undervalued and now even BayernLB itself agrees with this.

In their report Schafer and Wilson quote Stephan Winkelmeier, BayernLB's chief financial officer, saying that "the sale of the Formula 1 stake has of course been checked by both the management board and the supervisory board of the bank, through an internal revision as well as an external revision by auditors." This tallies with Pitpass' report in May that the auditor, Deloitte, concluded F1 was not undervalued. Winkelmeier adds that the internal and external measures "have not revealed any problems and have shown that the sale was carried out properly, in accordance with the bank's regulations and with a price that was in line with expectations."

So, let's get take stock of this for a moment. The accusation against Ecclestone is that he paid Gribkowsky 27m to undervalue BayernLB's stake in F1. However the chief financial officer of the bank itself says that the F1 stake was sold at "a price that was in line with expectations."

Presumably BayernLB itself is the best judge of whether its property was sold undervalue or not and it is now confirming, on the record, that the price met its expectations. Given that BayernLB does not believe that the F1 stake was undervalued how on earth could the prosecutors possibly claim that Gribkowsky received a bribe to undervalue it? In short, this argument falls absolutely flat on its face and the view from experts in Germany is that the only charge which will stand against Gribkowsky is tax evasion. This is because he paid the 27m into an account in Austria instead of his native Germany where it would have incurred a higher rate of tax.

Given the conclusiveness of Winkelmeier's comment you would have thought that the FT: might have run it as a headline, maybe something along the lines of 'F1 was not sold for less than expected says BayernLB'. However, strangely, Schafer and Wilson buried Winkelmeier's comment right at the very bottom of their report. Instead, the headline they chose to run with was 'Investors to grill CVC over F1 deal'. This headline, and the bulk of the article, is based on comments from several investors in CVC who said that at the company's investor summit on 14 September they will be bombarding it with questions about the way it handled the alleged bribery scandal. This seems to raise the contradiction.

Pitpass does not at all doubt that the investors told the FT: that they plan to grill CVC about the Gribkowsky scandal but that doesn't mean to say that their concerns make any sense. The FT: itself has previously claimed that several investors in CVC have been "worried" about a lack of communication from the firm about F1 so by the paper's own evidence, the investors hardly have all the details about the situation. The biggest clue about whether the investors' concerns are valid is contained in the FT:'s latest article itself so you would have thought Schafer and Wilson might have elaborated on it.

The crucial piece of information is Winkelmeier's comment that BayernLB's F1 stake was sold at "a price that was in line with expectations." If BayernLB believes that the stake was sold at a price which was in line with expectations, and there is no indication that the bank thinks it should have got more, then it was clearly not undervalued. This of course is also the conclusion of its auditor, which is a completely independent company. If the shares were not undervalued then clearly a bribe could not have been paid for undervaluing them. No wonder that CVC hasn't spoken to investors about the alleged bribe because, going by the words of BayernLB's own chief financial officer, there wasn't one. There is no doubt that Bambino and Ecclestone personally paid Gribkowsky but CVC was not involved with this transaction.

As a comparison, purely for the sake of an example, imagine that X buys goods off Y and sells them to Z. X is then accused of stealing the goods off Y but Y says they were not stolen. Clearly it would be absurd for anyone to expect Z to comment on the theft because if Y says the goods were not stolen from him then quite simply there was no theft so there is nothing to comment on. So one can conclude from Winkelmeier's comment that no bribe was paid to undervalue F1 which means that CVC has no need to speak to its investors about it.

One of the investors quoted in the FT: article allegedly said that CVC will be asked "did you know anything about what was going on and, if not, what changes have you made at the company level after you have found out?" They aren't hard questions to answer, particularly in light of Winkelmeier's comment. As has been demonstrated above, there was nothing "going on" for CVC to know about so no changes were necessary at the company level.

The article quotes another investor saying "one of the larger, institutionalised private equity groups would have long dealt with it by changing F1's management and communicating openly." Again, one has to point out that, according to Winkelmeier and BayernLB's auditor, the F1 shares were sold at a price which met expectations so no bribe could have been paid to undervalue them. Accordingly, there was no "it" for CVC to deal with. It is also worth pointing out that, contrary to the investor's suggestion, Sylt understands that there has indeed been a new management appointment which will be revealed soon to Pitpass readers.

One wonders whether the media rumours about concern from CVC investors will stop now that BayernLB has gone on the record to say that both the bank and its auditor believe the F1 shares were sold at "a price that was in line with expectations."

In the past six weeks, the FT: alone has run three articles on the subject of investors in CVC being concerned about the Gribkowsky scandal. In addition to the latest article, one was printed in July entitled 'CVC urged to address F1 bribery allegations' and this followed another piece, just five days earlier, which was entitled 'Investors may fear F1 probe'. This was written by Mark Kleinman, the city editor of Sky News who became known in F1 circles for repeatedly claiming that News Corporation, the media company which controls his employer, would buy the sport.

Interestingly, although the FT: only occasionally writes about the business of F1 the latest article is far from its first on the subject which seems to contain a contradiction. On 18 August Schafer and Wilson were joined by their colleague Jane Croft to write an article about the recent lawsuit filed against Ecclestone (the F1 boss' view of the lawsuit can be found here) . Embarrassingly, although the article accurately claims that F1 was "sold by banks for $1.7bn," clicking on those five words brings up an article printed by the FT: on 25 November 2005 which claims that CVC bought F1 "for a sum understood to be about $1bn." That's not all.

By 2007 the FT:'s decision on the value of F1 had changed yet again when its leisure industries correspondent Roger Blitz wrote "CVC Capital Partners will not say what it paid for F1, although a reported estimate of $1.7bn is thought to be well short of the mark."

According to Sylt, who knows the FT: well, these kind of errors aren't the only unusual practices at the paper but that is a story for another day.

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

Published: 31/08/2011
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