Ferrari feedback unearths 445m Red Bull budget error

02/12/2013
NEWS STORY

Last week Ferrari's infamous Horse Whisperer reappeared with a small article that left many scratching their heads in confusion.

The piece was entitled 'Slow on the uptake with summer blunders' and it stated that "when the championship finishes, the moment arrives to take stock. If it's enough in sport to look at the points standings, in business some trust in summer valuations, even if they are carried out under a parasol. For that reason, months later, a reconstruction of the budgets of Formula 1 teams developed by an Autosport colleague has transformed itself into journalistic fact. It's a pity that the cited figures are largely fantasy and they can draw even distinguished newspapers into conclusions that are wildly erroneous."

When Pitpass editor Chris Balfe saw the Horse Whisperer's piece he asked business editor Christian Sylt to see what all the fuss was about. He soon found follow-up reports saying that the Autosport article in question was called 'The true cost of Formula 1' and was published in print and on its website on 31 August. It fits Ferrari's description as the article does indeed contain a reconstruction of F1 team budgets and was written several months ago. It claimed that Ferrari has a budget of 250m including engines and although the Italian manufacturer suggests that this is wrong, it is nothing compared to the error that the article makes about this year's champions Red Bull Racing.

Austrian energy drinks company Red Bull owns two F1 teams and they are run by completely different companies. Italian company Scuderia Toro Rosso SpA runs Toro Rosso whilst its flagship team, Red Bull Racing, is run by two UK companies. The author of the Autosport article has read their financial statements, which have been lodged with the UK authority Companies House, however he does not seem to have understood them.

The first of the two companies is Red Bull Racing (RBR) and its financial statements say that its 'principal activity' is "the management of a Formula One motor racing team." The second company is Red Bull Technology (RBT) which owns 100% of RBR. The financial statements for RBT state that "the principal activity of the group is the design, development and manufacture of Formula One racing cars. The principal activity of its subsidiary is the management of a Formula One motor racing team."

RBT is the highest-level company involved with Red Bull Racing within Red Bull itself. We know this because the financial statements show that 100% of the shares in RBT are owned by Red Bull GmbH which is the actual drinks company.

Crucially, RBT's financial statements clearly state that they "consolidate the financial statements of Red Bull Technology limited and its subsidiary undertaking(s)." This is why the financial statements refer to RBT as "the group."

You don't have to be a financial genius to find the definition of consolidated in a financial context. Even a standard dictionary gives a pretty good indication. For example, the Oxford English Dictionary defines it as to "combine (a number of financial accounts or funds) into a single overall account or set of accounts: (as adjective consolidated)consolidated accounts."

What this means in practice is that the turnover (which is another term for revenue) shown on the consolidated accounts for a company includes that of the subsidiary companies. Accordingly, in simple terms, if company X has turnover of 1m and is owned by company Y, which itself has turnover of 2m, then the consolidated accounts for company Y will show turnover of 3m.

As the turnover shown on RBT's financial statements is consolidated it already includes the turnover of RBR. Adding RBR's turnover to this again would be completely inaccurate as it would be duplicating it. However, this is precisely what is done by Autosport.

The reconstruction of Red Bull Racing's latest budget involves combining the 2011 turnover of RBR and RBT and then adding 10% for good measure. The article states that "Companies House records RBT's 2011 turnover as 215m (declared profits 4m), while RBR registered a bottom line of 640k on 177m spend. Adding 10 per cent for economics (2010/11 turnover increased by double that after RBR withdrew from FOTA/RRA activities) provides a global spend of 445m."

Most worrying of all is that Autosport then draws conclusions about the team's budget from this error. It claims that Red Bull Racing's "actual spend... lies between RBT's turnover and the total, pointing to 250m annually for the overall RBT/RBR F1 operation." Given that this is based on an error it is not surprising that the conclusion too is flawed. As previously stated, RBT is the highest-level company involved with Red Bull Racing within Red Bull itself. Accordingly, it is hard to see how Red Bull Racing's "actual spend" could be higher than that of RBT.

Sylt says that the catalogue of errors in the article did not surprise him. The author is an industrial engineer by training who later moved into journalism and at the same time set up a travel company offering trips to F1 races. Given the complexity of the subject it is no surprise that mistakes are made by writers who don't have a long track record purely writing about the business of F1. The error simply muddies the waters of reporting on the business of the sport and should really have been weeded out by Autosport's group F1 editor Jonathan Noble. Clearly it has gone too far when Ferrari itself has to step in.

It is far from the first time that the author has made a significant blunder when writing about the business side of F1. Earlier this year Pitpass wrote a piece entitled 'Why there will be no change to F1 if the Concorde Agreement isn't signed' which referred to a report about a meeting between F1's boss Bernie Ecclestone, Ferrari, Red Bull Racing, Mercedes and McLaren. The report said that they met "with the main discussion point being the need for a Concorde Agreement; whether F1 without Concorde - and, by extension, without FIA involvement - is viable. Thus the FIA could effectively lose control of its own championship, which would in future be known not as the 'FIA Formula 1 World Championship', but simply as the 'Formula 1 Championship'."

As Pitpass pointed out, F1 was without the Concorde, the contract which commits the teams to race, for all of 2008 and half of 2009 yet the FIA did not "effectively lose control of its own championship" and the sport did not lose the FIA from its title.

The report even seemed to contain flaws with basic facts about the takeover of F1 by current controlling shareholder, the private equity firm CVC. It claimed that "when the teams in the early noughties threatened to set up their own breakaway series unless their demands (75 per cent of revenues) were met, CVC Capital Partners... agreed to a broad fifty-fifty split." CVC only agreed to buy F1 in November 2005 so how could it have agreed to a deal with the teams when they threatened to break away in the early noughties? It is the kind of head-scratcher which spurred Ferrari to take action and it has at last set the record straight in a very public way.

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Published: 02/12/2013
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