29/04/2012
NEWS STORY
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Next week marks the start of the biggest commercial change in the history of Formula One. It may sound like a lofty claim to make but it is no exaggeration and you read it here first. Back on 14 March, Pitpass reported that this change was coming and it all gets going soon. Writing in the Telegraph today, Pitpass' business editor Christian Sylt reveals that next week F1's boss Bernie Ecclestone will be officially lodging the prospectus to float up to 30% of his business on the Singapore stock exchange. It is an essential part of the flotation process and marks the point that it officially gets off the grid.
Once the prospectus has been lodged it will be reviewed by the Singapore exchange over a period of between four to eight weeks. During that time research analysts working for investment banks will write reports about their forecasts and opinions of F1's strengths and weaknesses. Once the F1 Group's board has rubber stamped the plan to float, the analysts will go on the road for around two weeks to warm up investors.
The board could decide against proceeding but, as Pitpass has previously reported, that seems unlikely to happen. Likewise, right up to the moment before the F1 stock is listed, CVC, the private equity firm which owns the majority of F1, could put the brakes on the float if it believes the price offered by investors is insufficient. A partial flotation of Manchester United on the Singapore exchange was dropped due to lack of interest last year but F1 seems to have much more support and is expected to be valued at £6.1bn ($10bn).
Earlier this week CVC and Ecclestone gave an eye-popping presentation about F1's finances to a group of leading media analysts at London's Savoy hotel. According to several analysts who were in attendance, it revealed that few other media businesses have as much financial visibility as F1. Sylt explains why.
The prospectus contains a breakdown of F1's finances to the end of December 2011 but this isn't the really interesting news. F1's turnover in 2011 of £950m (€1.169bn) is stated on CVC's website and the breakdown of it by region and source follows the model given by Pitpass in forecasts from 2012 to 2016. The BBC has given a similar breakdown of F1's revenues, profits and costs from 2006 to 2010 so these kind of numbers are nothing new.
However, the most surprising information to come out of the presentation is, as Sylt reveals, that F1 has £4.4bn ($7.1bn) of revenue already committed to it. This means that, without lifting a finger, Ecclestone can be sure that £4.4bn will be flowing into F1's coffers. It is down to Ecclestone's business genius.
It is ironic that F1 is generally being assessed by media analysts since television rights sales do not comprise the biggest component of the revenues of the business. However, as one analyst reminded Sylt, there are no other floated sports rights holders which is a tremendous selling point since it makes the business unique and means that, unlike sports floated teams, it does not compete with direct rivals. The downside is that since there are no similar companies to F1 it is hard to put it in a pigeon hole. Media analysts are quickly having to learn the ropes about F1 even though the real engine behind the business is race hosting fees.
F1's £4.4bn of contracted revenue is largely thanks to the long duration of its race agreements. Research by F1's industry monitor Formula Money reveals that the longest contract is for the British Grand Prix which will generate an estimated £278m ($452m) for the F1 Group by the time it ends in 2026. As shown in the box below this article, Grand Prix contracts provide £2.9bn ($4.7bn) of its guaranteed revenue and, in contrast, only £870m ($1.4bn) is committed from television contracts. This is because they were restricted in 2001 to a maximum length of five years following an anti-competition investigation by the European Commission.
The data shows that over each of the next 15 years the F1 Group will receive on average £291m ($473.3m) of annual revenue which gives investors good visibility. It makes even more of a mockery of the ill-informed initial reports which suggested that the business is not worth £6.1bn.
The F1 Group's risk profile is also lowered by its exclusive ownership of the commercial rights to the sport for the next 98 years; its positioning as one of the world's top series in terms of popularity and audience reach; the commitment of the majority of teams to race until 2020; and solid free cash flow generation thanks to low tax payments which came to just £7.4m in 2009. Overall, the F1 Group is projected to generate around £227.5m ($370m) of cumulative free cash flows in 2012 and 2013 thanks to low tax payments, very low capital requirements and generally positive working capital changes.
The F1 Group also benefits from a flexible cost base that protects margins to a degree if revenues contract. This is largely because the biggest cost of the business is the prize money payment to teams which reduces if its underlying profits go down and increases if they rise. However, its bottom line is likely to be more squeezed in future than ever before because the payment to the teams is increasing.
The prize money currently comes to around 50% of the group's earnings before interest, taxes, depreciation and amortisation (EBTIDA) and also includes a fee to Ferrari due to its historical status. The prize money payments are set out in F1's commercial agreement, the Concorde Agreement, which expires at the end of this year. The new contract runs from 2013 until the end of 2020 and gives additional payments to any team which has competed since 2000 without changing to its name with further fees paid to past championship winners and back-to-back champions. Ratings agency Standard & Poor's expects that the increased team payments will reduce the F1 Group's margin of EBITDA to revenue by five percentage points from 2013.
Further pressures on the F1 Group's bottom line include the continuous need for the business to maintain its high audience share, the existence of substitute entertainment products which compete for similar audiences, potential succession risks given that Ecclestone turns 82 this year and some exposure to economic downturns, mostly at contract renewal times. This clearest evidence of this risk came with the announcement last month that the South Korean Grand Prix promoters had negotiated a 50% reduction of their race hosting fee to £16.1m ($26.2m) and this came despite it being a long time before their contract expires.
The F1 Group's profits are also under pressure from accelerating interest payments on debt from the Royal Bank of Scotland and Lehman Brothers which CVC used to acquire the business in 2006. Interest payments came to £36.4m ($59.2m) in 2010 and at the end of that year the business still had £1.2bn ($2bn) outstanding which was due by 2014. This is now being refinanced as the deadline was looming.
At the end of this month CVC will finalise a new £1.4bn ($2.270bn ) loan and it is expected to lead to increasing interest payments. This is because far less than £1.2bn is believed to be outstanding on the previous loan but the total is now going up to £1.4bn. Loan repayments in 2011 are understood to have brought the remaining amount down to around £720m ($1.170bn) because sources say that the new £1.4bn loan will not only refinance the old one but will also allow F1 to make a one-off cash payment of £680m ($1.1bn). This may be paid out as a dividend giving F1's shareholders a further boost before the shareholder.
Under the terms of the new debt the F1 Group will need to repay by 2017 a £43m ($70m) revolving credit facility and a £850m ($1,382.5m) term loan which will be syndicated meaning that the lender will sell on the right to repayment. Another £503m ($817.5m) term loan will be due in 2018 bringing the total to £1.4bn.
It remains to be seen precisely how much the annual interest payments will increase by but the jump is likely to be significant. According to several sources, the F1 Group's ratio of gross debt to EBITDA at year-end 2012 will be 4.2 times. This ratio is used to measure how many years it would take for a company to pay back its debt from EBITDA and the large amount of contracted revenue alone makes a default extremely unlikely. Given that the ratio is 4.2 and the debt is £1.4bn, it puts the EBITDA at £332m ($540m).
This roughly tallies with the 2010 F1 Group results which show the team payment to be £405m ($658m) including the fee to Ferrari. According to Formula Money's research, the Ferrari fee brings the total team payment to 55% which means that the EBITDA is £331m ($538m). In short, this shows that the debt can be paid off within 4.2 years which is precisely what is needed since it is due between 2017 and 2018. However, it doesn't tell us how much interest will be due annually under the new loan which is what will determine whether the F1 Group's profit will be squeezed more than has been in recent years when £36.4m was paid.
The guaranteed revenue makes F1 incredibly secure bet but the new loan means it is not likely to generate blockbuster net profits over the next few years. However, once the debt starts to be paid down, the bottom line will soar again. It makes F1 an ideal long-term play for investors looking for safety. And that's something we never thought we would say.
Contracted Formula One Group revenues 2012-2026
| Revenue Source | Amount |
| Race Sanction Fees | £2.9bn ($4,654.7m) |
| Television Rights | £870m ($1,410m) |
| Trackside Advertising | £450m ($729m) |
| Sponsorship | £170m ($271.5m) |
| Total | £4.4bn ($7,065.2m) |
Source: Formula Money