CVC boss says RBS lent 1.6bn to F1 based on "pie in the sky" report


For the past month a court case connected to Formula One has been raging in London's High Court. The details at the heart of it are incredibly complex but, in a nutshell, it revolves around the value of F1.

German media rights firm Constantin Medien claims that Bernie Ecclestone and his Bambino family trust conspired with German banker Gerhard Gribkowsky to undervalue the sport when it was bought by current owner, the private equity firm CVC for 1.2bn ($2bn) in 2005. Given that the case concerns events which took place more than five years ago it is little surprise that much of the news which has come out of the trial has had little relevance to the world we live in today. One big exception is revealed in an article in today's Independent written by Pitpass' business editor Christian Sylt.

Last week saw the final factual witness in the trial. These are people who had a direct involvement with the events in the trial compared to expert witnesses, who are simply specialists in the subject under discussion (which, in this case is company valuation).

The last factual witness was Donald Mackenzie, the co-founder and co-chairman of CVC, and his testimony generated a lot of column inches. Most of them focussed on two issues which are typified by the following headlines: 'Court case put a brake on F1 float' and 'CVC would fire F1 boss Ecclestone if found guilty'. It's easy to see why these kind of subjects caught the attention of journalists who don't specialise in writing about the business of F1. They are easy to understand and make for nice headlines although, of course, there is nothing new about them whatsoever.

In May this year Ecclestone himself told Bloomberg that the lawsuits put a brake on the F1 float and said "it would be silly to go into the market, you don't want any single question" hanging over the sport. Likewise, at the end of last year Ecclestone told Sylt that if he is found guilty of paying a bribe CVC "will probably be forced to get rid of me."

Having seen the insipid headlines which were generated by Mackenzie's evidence in court Sylt decided to go through the transcript of the testimony with a fine tooth comb. As he specialises in writing about the business of F1 he wasn't looking for news which would look eye-catching on the sports pages but deeper issues underpinning the industry. He soon found something which ticked both boxes and it is hard to imagine how those journalists sitting in court managed to miss it.

Alarm bells should have started ringing when Mackenzie said that the Royal Bank of Scotland (RBS) and Lehman Brothers were "extremely careless" to lend 1.6bn ($2.7bn) to F1 in 2006. In itself it is surprising that Mackenzie made such a critical comment about the banks as they had lent a great deal of money to a company which he had bought. However, he didn't stop there and what followed was even more remarkable.

Mackenzie said that in order to grant the loan, RBS needed an "independent valuation" of F1 which was produced by the accountancy firm Ernst & Young. This valued F1 at 3.6bn ($5.9bn) and was described as an "independent view" but Mackenzie claimed that, in fact, it "was a value that the banks provided themselves to Ernst & Young." Constantin's claim that F1 was undervalued when it was sold for 1.2bn in 2005 is partly based on the fact that Ernst & Young valued it at 3.6bn the following year. Accordingly, Mackenzie's savage critique of the Ernst & Young valuation is at the heart of the court case making it even more astonishing that it went unnoticed until today's article. And it isn't as if Mackenzie just mentioned it in passing.

The subject came up in court as a result of Mackenzie alleging yet more failings on the part of RBS, Lehman Brothers and Ernst & Young. The banks gave the 1.6bn loan to refinance F1's existing debt which means that its previous loan was paid back and replaced with this new one. When the 1.6bn was paid in 2006 there was only one year left on the Concorde Agreement, the contract which commits F1's teams to race. The teams had signed a Memorandum of Understanding (MOU) but this was not legally binding. In court Mackenzie said that not only did the Ernst & Young valuation report claim that "the Concorde Agreement would stay in place for ever" but he added that RBS and Lehman Brothers "didn't read the MOU properly. They didn't quite work out that it wasn't a Concorde and they lent money against something that turned out to be very flimsy."

Here is a verbatim transcript of the astonishing exchange:

Donald Mackenzie: I would have tried to sell [F1]. If I had the Concorde Agreement signed I would have tried.

Philip Marshall (QC for Constantin Medien): The answer to my question is you weren't trying to sell it, were you? The answer is no, you weren't.

DM: I couldn't sell it. There wasn't something to sell at that time. It was a...

PM: You didn't try to sell it to anyone, did you? Did you?

DM: Did I try? If anyone would have listened, I would have tried.

PM: The answer is you didn't. Correct?

DM: Well, that's what your answer is.

PM: I'm asking you: did you try to sell it?

DM: Which particular year?

PM: Let's take 2006.

DM: No, I don't think we did try to sell it in 2006.

PM: Or 2007.

DM: No, because we didn't have a Concorde, remember?

PM: What you did do was you refinanced, which is what you'd always planned to do; correct?

DM: We planned to refinance once we had a new Concorde. If you read my FIR, the final approval investment paper, it says there, "We will be able to refinance this business once we have a new Concorde." We got lucky. The banks were at the height of a banking boom. They didn't read the MOU properly. They didn't quite work out that it wasn't a Concorde and they lent money against something that turned out to be very flimsy.

PM: They lent against the valuation provided by Ernst & Young, which you engaged, which produced the value of about 5.9 billion.

DM: It was a value that the banks provided themselves to Ernst & Young.

PM: So you're saying that wasn't Ernst & Young's value then?

DM: Well, they certainly wrote a document with that value in it. But they only did that after they were requested to do so by the banks and they were given the answer before they did it.

PM: I suggest to you they put that figure in because that's what they genuinely considered the value to be.

DM: No, they, I think they put it in because, well, the client asked them to and because they could make the numbers work. They made all sorts of ridiculous assumptions in that document. That the Concorde Agreement would stay in place for ever. That earnings would go up endlessly for ever. And the risk of the whole business was as low as you could imagine. So they got it wrong. I think they had something like 70% of the value, the value that they put in that document, relating to the Concorde period after 2012. And we hadn't even signed Concorde from 2008 to 2012. So it was a very pie in the sky valuation, in my opinion.

PM: So did you regard the valuation they provided as misleading then?

DM: I laughed when I heard about that valuation. I laughed out loud as we all did in the office. It just seemed ridiculous that they had done it.

PM: Did you consider the valuation to be misleading?

DM: I thought it was certainly an inaccurate value of the company as it stood that day. But if people were willing to value it on those assumptions, you know, it was a technical valuation based on future cash flows. It was not based on the reality that we were in at that time it was written, not anything close to it.

PM: Did you do anything to indicate that the value was wrong?

DM: If I had been able to sell it that day for that price I would have.

PM: Did you indicate the value was wrong at the time?

DM: I certainly thought it was wrong.

PM: Did you indicate to the banks that the value was incorrect?

DM: No. I was not in discussion with the banks.

According to Mackenzie, the decision by RBS and Lehman Brothers to lend the 1.6bn was only partly based on the valuation from Ernst & Young. He explained that "the banks, frankly, were extremely careless because, in their financing offerings to us, they said they wanted a signed Concorde but actually, when it came to completion, they didn't have one. But nevertheless they went ahead."

The claim comes just days after RBS was referred to City regulators over allegations that it deliberately "forced vibrant businesses into financial trouble" so that it could charge them high fees and ultimately seize their assets. The allegations were made by Lawrence Tomlinson, an adviser to business secretary Vince Cable, who is convinced that RBS has driven some of its own customers under so that the bank could take over their properties at knock-down prices.

The risk of not having a Concorde in F1 came to light in 2009 when the FIA insisted that the teams agree to a 36.6m ($60m) budget cap and in response they threatened to leave and start a rival series. As Pitpass recently reported, Mackenzie said "there's no doubt in my mind they were prepared to wreck the current business and walk away from it."

In court Mackenzie said that the teams' ability to walk out highlighted that RBS and Lehman Brothers lacked security for their 1.6bn loan. "It still surprises me, to this day, that they went away on that basis because they really had nothing to rely on. And I'm sure they were extremely shocked and worried in 2009 when it all started to unwind. And we know they were worried because they came to see us and we were worried too at the time. But by that time it was too late, they'd lent the money."

Mackenzie disputes Ernst & Young's valuation and he said in court that F1 was in fact worth 1.8bn ($3bn) when the banks loaned the money. He added "I don't think we ever valued it around 5 billion until probably 2010, 2011."

Time will tell whether the judge agrees with this and we don't have to wait long to find out. With the factual witnesses done and dusted, only the expert witnesses remain. As they are not well-known names, and are not directly involved with F1, the media coverage has ground to a standstill except for today's revelation. The closing arguments will conclude on 13 December with judgement expected in early 2014.

If Constantin cannot demonstrate that F1 was undervalued then it cannot win the case and whilst we don't know what the judge thinks about this, we got an indication on the first day of the trial. This came after Constantin attempted to get him to acknowledge the details in the German bill of indictment against Ecclestone for bribery. The judge refused to acknowledge it and also prevented it from being distributed to anyone who is not connected to the case.

"It is not as if you would agree with a number of the arguments put forward in the indictment," he told Constantin. "It would be fatal to your case, wouldn't it, what they say about the purchase price?" That's a strong statement if ever there was one.

Article from Pitpass (

Published: 30/11/2013
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