Revealed: CVC's 8.4% take from Formula One

10/03/2014
NEWS STORY

Gracing the latest issue of Motor Sport magazine is a cover story which outlines a plan of how Formula One could change after the departure of its current boss Bernie Ecclestone. It is a fascinating piece and although it contains a significant error it happens to be highly thought-provoking in itself.

It is found in one of the key contentions in the article which is that "F1 generates about $1.5 billion a year, but roughly 40 per cent of that leaves the sport and is taken by the owners." To understand the flaw in this we first need to analyse the structure of the sport's ownership.

F1 has nearly 20 separate owners including the sport's governing body the FIA which has a 1% stake as Pitpass revealed last year. F1's largest single owner is the private equity firm CVC Capital which took over the sport in 2006 and has a 35% stake.

As Pitpass also revealed way back in 2007, CVC used a great deal of debt to buy F1. It used two loans - $965.6m from its $7.3bn investment Fund IV and $1.1bn from the Royal Bank of Scotland (RBS). This left F1 with annual debt repayments which come to tens of millions of dollars and many commentators have a strong emotional objection to CVC as a result. However, in fact, F1 has become more stable than ever since its arrival on the scene.

Before CVC bought into F1 the teams were threatening to start a rival series due to a dispute over pay which saw them share as prize money a sum which was only equivalent to around 25% of the sport's profits. In 2006 CVC signed an agreement with the teams which doubled their take and it has accelerated since then. The teams now receive around 60% of F1's profits which has led to claims about the remaining 40% going to F1's owners. In fact this is far from the case.

The claim raises the question of exactly what happens to the money made by F1. Where does it go? It is a question which is of direct interest to fans as well as anyone involved with the business of F1 and the answer has not been in the public domain until now.

An article in today's edition of the business newspaper CityAM reveals exactly where the money in F1 ends up and the most surprising revelation is that CVC only takes home 8.4% of the revenue. Combining the amounts made by all of F1's shareholders reveals that, in fact, 23.9% of the money generated by F1 leaves the sport and is taken by the owners. It is a long way off the reported 40% and it doesn't just go to CVC but to all of F1's owners from the FIA, Ecclestone and his family trust to the sport's management such as former hospitality boss Paddy McNally and chief legal officer Sacha Woodward-Hill.

To understand the why the actual figure is 23.9% rather than the reported 40% you first need to get your head around the business concepts at the heart of the matter.

The first terms to explain are revenue and profit. Revenue is the money which comes in to a company. In F1's case this is from sources such as race hosting fees, television rights fees, corporate hospitality tickets and trackside advertising.

As the CityAM article shows, F1's revenue comes to a total of around $1,580.4m annually and the costs of the company are deducted from it. Paying F1's 313 staff costs $39.8m with Ecclestone's salary coming to an additional $4.2m. All the other running costs (such as transporting freight to races and paying for the corporate hospitality) add up to $328m. After the costs have been paid, the company is left with the profit and the team prize money share is calculated from this.

So, to be completely clear, the owners' take and the teams' prize money does not come out of F1's revenue but from its profit. The amount taken by the owners can be expressed as a percentage of the revenue but it is not calculated from it. This is a crucial point because in order to get from the revenue to the profit you have to deduct costs. This isn't factored into Motor Sport's analysis as is revealed by one of its suggestions about how to improve F1.

It states that "the sport currently generates about $1.5 billion per year. Give each of the current 11 teams $100 million of that. That still leaves change of about $400 million per year for the owners." This fails to take into account F1's running costs, tax bill etc which comes to a total of $381.4m. On the argument presented in the magazine this would leave the owners with $18.6m not $400m.

The second term to explain is what is known as a dividend. This is a share of the net profits after all of the costs have been paid out including the teams' prize money. When a company decides to pay a dividend it goes to its owners as per their stake in it.

Aside from when CVC has pocketed money from selling stakes in F1, its only take from the sport comes from a dividend and this isn't paid out annually so some years the owners get zero. That said, they have a legal right to F1's net profits which come to $378m and are equivalent to 23.9% of its $1,580.4m revenue. As CVC has a 35% stake in F1 it is entitled to a $132.3m share of the net profits which is equivalent to 8.4% of the revenues.

In contrast, it is the teams which take more of F1's revenue than any other group by some distance. Their $698.5m prize money is equivalent to 44% of F1's revenue. It is more than four times the amount made by CVC and over 20 times the takes of Ecclestone and his Bambino family trust. Crucially, the teams' take is nearly double the amount made by F1's owners. It shows that the teams are already getting a far better deal than any other F1 stakeholder and in turn it seems hard to justify the magazine's claim that "the sport should be owned by the participants, not a third party that essentially rapes it."

It needs to be stressed that Motor Sport is by far and away not the only outlet which has assumed that since the teams take around 60% of F1's profits the owners must therefore get 40% of the revenue. In fact, Motor Sport's assessment is one of the most measured and its author Mark Hughes peppers his writing with some lovely anecdotes from F1's history. However, as always in F1, the devil is in the detail.

Christian Sylt

Article from Pitpass (http://www.pitpass.com):

Published: 10/03/2014
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