Does F1 have to be sold by 2018?


On Wednesday next week, CVC, the private equity firm which owns Formula One, will be holding a summit for its investors in London's luxury Landmark hotel. According to reports, some investors have indicated they may use the opportunity to grill CVC over the way it has handled the scandal surrounding F1's jailed former chairman Gerhard Gribkowsky. Pitpass has already reported on why the investors' concerns do not seem to hold any water and it will be interesting to see how they react when this is explained to them. In advance of the meeting, Pitpass' business editor Christian Sylt took some time to reacquaint himself with the mechanics of CVC's acquisition of F1 and he made a fascinating discovery.

The reason that private equity companies get their name is that they use money from high net worth people and businesses (the private sector) to buy shares (equity) in businesses which they usually sell several years down the line for a profit. The people/businesses are the investors in the private equity company and their money is put into funds which are effectively large bank accounts with specific terms. The terms of some funds may say that the money in them should only be used to buy certain types of companies and the terms also give important details such as the expected return from the fund, the strategy for increasing the value of the businesses it buys etc.

The CVC Fund which bought F1 is known as Fund IV, because it was the company's fourth major investment fund. The investors (known in the trade as 'limited partners') in Fund IV provided a total of $7.3bn (4.5bn) and $1bn (629m) of this was used to buy F1. The sport's other owners (JP Morgan, Lehman Brothers and the family trust of F1's boss Bernie Ecclestone) provided a loan of $300m 189m) and the Royal Bank of Scotland (RBS) also provided a loan of $1.1bn (692m). F1 cost $1.7bn (1bn) with its trackside advertising and hospitality division selling for a further $300m (188m). The remaining $400m (251m) is believed to have been used to clear a $321m (202m) loan taken out in 2001 to buy the 100 year rights to the sport.

Given that CVC uses such huge sums of other people's money to buy businesses it is no surprise that potential investors are presented with detailed terms when they are deciding whether to put their money in its funds. The terms come in what is known as a private placement memorandum and, just as the investors are known as limited partners, the funds themselves are known as limited partnerships. Sylt understands that the memorandum for Fund IV, the one which owns F1, states that the partnership's term is ten years from when it is fully-funded and this took place in 2005. Apparently, this term can be extended for up to three years with the consent of the majority of the investors and the purpose of this is to allow the partnership to liquidate and dissolve any investments remaining then.

It makes perfect sense that the fund investors might want a window of at most 13 years to get their return and this would seem to suggest that CVC has to sell F1 within that period of time. For example, CVC's Fund II, which was fully-funded 13 years ago in 1998, only has a handful of companies remaining in its portfolio now. These include Italian paper company Lecta, equipment company Hozelock, Spanish beauty product manufacturer Colomer and packaging firm Smurfit. All four of these companies have been up for sale this year which would indicate that they are being sold before the 13-year window closes.

However, a cursory look at the list of CVC's current investments shows that it has owned some of the companies in its portfolio since as far back as 1997. True, these are very much in the minority and these companies were bought with different CVC funds which could have had longer terms. However, it is perfectly possible for funds which were raised at a later date to buy into companies initially acquired by earlier funds to thereby extend their lifetime under CVC's wings. It is worth noting that this movement of a company from one fund to another is not just a transfer but is a sale at market value which may well have to involve an auction.

In short, it would indeed seem that F1 will be sold by 2018, even if this sale is to another CVC fund. Fund IV targeted a three to five year holding period for its investments but F1 is already past that as it was acquired in March 2006. Extending the term of the fund from 10 to 13 years requires the consent of the majority of its investors which brings us nicely back to Wednesday's meeting.

There is no doubt that the investors carry considerable sway. This is no surprise given that, according to the terms of Fund IV, individual investors have each had to put in at least €10m with companies (known as institutional investors) having to put in a minimum of €20m each. Indeed, investors holding 25% or more of the fund can demand a meeting with CVC every three months in addition to the annual summit which takes place next week.

There is absolutely no point in the investors wasting time discussing the concerns they reportedly have over why CVC has been quiet about the alleged bribe paid to Gribkowsky in connection to the sale of F1. Some have reportedly even said that they want to ask CVC "did you know anything about what was going on?" The answer to that is very simply: no, CVC did not know what was going on because there was nothing going on.

As the Financial Times reported, in its rather contradictory style, the chief financial officer of BayernLB, the bank which sold the F1 shares, has said that it has carried out exhaustive investigations internally and externally and concluded that "the sale was carried out properly, in accordance with the bank's regulations." Clearly, if a bribe had been paid in connection with the sale there is no way that the seller would say that it "was carried out properly, in accordance with the bank's regulations." In summary, it is no surprise that CVC has kept quiet about the bribe because there wasn't one. The investors will soon realise this and it looks like it will be some years before F1 races away from them.

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Published: 09/09/2011
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