25/08/2013
NEWS STORY
Over the past 24 hours media outlets all around the world have followed up the news that Bernie Ecclestone has dropped New Jersey's Grand Prix of America from the 2014 Formula One calendar. Nevertheless, there is little doubt that very few people were surprised by this development.
Pitpass' business editor Christian Sylt broke the news on the American television network CNN after doing a taped interview with Ecclestone who said that the race "is not on the cards for next year." It has since been confirmed by Sylt's former colleague Will Buxton who is now pit reporter for the NBC Sports Network which broadcasts F1 in the United States. On Saturday he Tweeted "New Jersey Grand Prix news appears to be true, sadly. My sources tell me there is still a fervent desire to hold it come 2015 however." The response to the news is telling.
In addition to his duties for Pitpass and outlets such as CNN, Sylt also produces F1's industry monitor {url=www.formulamoney.comFormula Money and links to his news reports are Tweeted on its @formulamoney Twitter page. In response to the Tweet about the CNN report, one reader said "can't say this surprises me in this slightest," another said "shocking nobody" and a third comment read "the sun rises in the east." There is good reason for these responses.
As Pitpass has already reported, the key hurdle with the New Jersey race plan seems to be the lack of state funding. Few races get revenue from F1 trackside advertising or the sport's corporate hospitality outfit the Paddock Club. It means that ticket sales are their largest source of income and this rarely covers the race hosting fee and running costs.
It explains why Vicky Chandhok, president of the Indian motorsport governing body, the Federation of Motorsports Clubs in India (FMSCI), recently told Forbes that "no Formula 1 circuit in the world will make money." Accordingly, it is understandably tough to get investment in a race promotion company.
Investors will provide funding if the business has assets which the money can be secured on. The most obvious asset is a circuit itself but of course it is hard for organisers to own the track in the case of a race held on public roads, such as the one planned for New Jersey. Government funding is usually needed to compensate for the difficulty of raising private investment and it gives the state a good return.
Permanent race venues are located outside city centres because building them requires large amounts of free land. As a result, few local landmarks are seen in the background when the race is taking place and in turn this limits the promotion it gives to the host nation. In contrast, street races are often located in the heart of the city and showcase buildings and attractions as the track weaves around them.
Governments pay handsomely to get this kind of promotion particularly if the race could not go ahead without it due to the lack of an asset to secure investment on. It is no coincidence that council funding was even granted to the humble Formula 3000 Superprix, which was held from 1986 to 1990 on the streets of Birmingham.
However, ever since the Grand Prix of America was announced, the organisers have made a point about the fact that they will not receive any public funding. Initially this may have seemed like a master stroke, as it means there are fewer regulatory hurdles to pass through, however if the race cannot go ahead without it then the organisers have scored nothing but a pyrrhic victory.
The lack of funding has already put the brakes on the race once before when Ecclestone tore up its contract after organisers missed payment deadlines. An exodus of managers followed and although Ecclestone gave the organisers a second chance, Sylt discovered that their plan to host the race in 2014 was dependent on investment bank UBS being able to raise £64.2m ($100m). Just a few weeks after that came to light, Ecclestone confidante Niki Lauda told Austrian media that the New Jersey race had been dropped from the 2014 calendar and replaced with one in his home country of Austria.
Bearing this background in mind it's easy to understand why fans were not surprised that the Grand Prix of America will not be going ahead next year. For the organisers however it was a different story.
Grand Prix of America spokesman Alex Howe told CNN "we don't comment on financial matters but we are on track for 2014 and will have a statement following the announcement of the official 2014 FIA Formula One World Championship schedule." If you think this sounds familiar then you're right.
After Sylt revealed last year that the organisers had missed payment deadlines in their contract a spokesman confirmed they were "still on track for a June 2013 race" and rejected the notion that the race would be delayed until 2014.
The boss of the company which owns a large part of the land where the race is due to take place even voiced frustration about Ecclestone's comments. Carl Goldberg, managing partner of Roseland Property, said "it's distracting for someone who appears to be outside the process to suggest that the schedule that we're all working toward is not a real schedule." He added "I think it's really inappropriate for him to suggest anything other than June 2013, not being here and on the ground and part of the planning that's going to execute this event here in New Jersey."
June 2013 has been and gone and the race did not take place. It didn't stop the organisers and you can't fault them for being persistent.
Pitpass can reveal that Port Imperial Racing Associates (PIRA), the company which hopes to host the Grand Prix of America, has recently hired a new chief marketing officer to replace Trip Wheeler who left in September last year. His replacement is Michael Williams, former vice president of marketing at the San Francisco 49ers NFL team and chief marketing officer at the New Jersey Devils ice hockey team.
Pitpass also understands that talks are still going on with potential investors and media interviews are being scheduled over the coming weeks with the promoter Leo Hindery junior, the billionaire managing partner of private equity fund InterMedia Partners. In short, it seems to be all systems go for the organisers although Ecclestone is unequivocal about their problem which he says is that "they haven't got any money."
Indeed, so keen are they to raise the required £64.2m that they are even prepared to give an investor 100% of PIRA as Pitpass has revealed. This revelation might have come as a surprise to some readers as there was reason to believe that F1 itself had invested in the promoter of the race.
This rumour started in an article written in May by Reuters' Formula One correspondent Alan Baldwin. Ecclestone told him that F1 has "put money behind it to pay a lot of the things off, a lot of their debts." A headline saying that "F1 has invested in New Jersey race, says Ecclestone" was then extrapolated from this. It would be perfectly reasonable to assume from the headline that F1 had bought a stake in the New Jersey race organising company which in turn raises the question of why it doesn't have enough money to go ahead. However, in fact, F1 has never bought a single share in the race organising company.
As the image on the left (click to enlarge) from the UBS investment memorandum shows, what actually happened is that F1 provided a credit facility (i.e. a loan) for the continued progression of the race plan. The loan is personally guaranteed by Hindery so there is little chance that F1 will not get the money back. In short, F1 has not bought any shares in the New Jersey race organising company as you might think from being told that F1 "has invested" in it. It did not buy the right to repayment of its debt, which could be classed as an investment. F1 simply gave it a loan and it will almost certainly get it back.
Granted, the piece was not a specialist business article but one shouldn't confuse a loan and an investment. The New Jersey organisers already have plenty of the former but little of the latter and that is precisely what they need to get the green light.