F1's very own Brexit-like debacle?

16/11/2018
NEWS STORY

As the Brexit debacle drags on and on and on, F1 could be heading for its own version in terms of the Concorde Agreement.

The agreement is essentially what holds the sport together, it is the contract that binds the teams to Formula One.

To date there have been seven Concorde Agreements, the first in 1981 and the most recent in 2013, it is this latest version that runs out in December 2020.

The agreement dictates all manner of facets of the sport, but most importantly it dictates the terms by which the teams compete, most notably in terms of prize money.

Like that odd-job one keeps putting off, when Liberty Media first bought the sport, the need to agree a new Concorde seemed an age away, yet now, it is just two years.

While Chase Carey and his fellow executives were quick to criticise Bernie Ecclestone's "dictatorial" style of management, they are only now beginning to realise why such an approach was needed, for trying to keep ten teams in line and agreement is a lot harder than herding cats.

In April, Christian Horner said that the new Concorde had to be signed "within the next couple of months", adding; "at least they've put a target down to say we want this nailed within a couple of months".

In August, Carey said his "goal is to move this forward and try and get it done in the coming months".

However, speaking last week, the F1 boss appeared to contradict himself, stating that: "Everybody would like to have it done but there isn’t something that creates a pressure point to say it has to be done by 31 December 2018."

All of which sounds pretty much like an excuse to explain why it hasn't been agreed yet.

Of course, with no Concorde Agreement, much like no Brexit agreement, the sport is in limbo, and as a result the stock price has been affected.

Despite a positive reaction when Liberty Media first bought F1, the stock has since crashed 20.6%, effectively wiping 1.2bn ($1.5bn) off its value.

According to Forbes, in 2017, revenue fell by 9.3m ($12m) to 1.4bn ($1.8bn), the biggest fall of the past decade, driven by a number of factors not least the loss of a number of sponsors including Allianz and UBS and a reduction in the fee of the Brazilian Grand Prix.

Meanwhile, a number of initiatives including a plush new London HQ and a vastly increased headcount to fill it, not to mention the infamous logo and theme tune, have seen costs increase by 12.4% to 333m ($427m) leaving F1 with an operating loss of 28.8m ($37m) compared to a 36.6m ($47m) profit in 2016.

"Formula One is probably in some ways a building story," said Liberty's chief executive Greg Maffei last week. "We knew when we purchased it that there would be efforts that needed to be done. Investments to be made in headcount, investments to be made in a lot of areas where there was no personnel.

"Have there been, as always, surprises for the upside and surprises for the downside when you buy a business? Yes" he admitted. "I think the fundamental thesis is there and probably some overhang on the stock around the Concorde Agreement and the perception of uncertainty that is not positive on what it could trade at. I think we remain very bullish."

"I don't want to put out a specific deadline for it," Carey told analysts in August. "But I think our goal is to move this forward and try and get it done in the coming months."

However, last week the American admitted: "I'd rather get it done sooner than later though the challenge is that everything we are talking about is effective in 2021 and usually getting things done is helped by having a deadline.

"Obviously if all these changes are 2021 everybody would like to have it done but there isn't something that creates a pressure point to say it has to be done by 31 December 2018. I'd like to have it done just because I think it is sort of healthy for us to be focusing on the future."

Of course this Brexit-like wavering is having an impact on the stock price, not helped by some of Carey's other comments.

"It is sort of an organizational start-up and a business turnaround and whatever expectations were in there in the short term, our focus has been building for 2020," he said last week.

Really? A company with revenue of 1.4bn ($1.8bn) and a 36.6m ($47m) operating profit a "start-up"?

Furthermore, with revenue down and a 36.6m ($47m) profit becoming a 28.8m ($37m) loss can it really be described as a "turnaround"?

Indeed, despite some of the original predictions in early 2017, last week Carey was unwilling to make too many predictions.

"I think we do expect 2019 to be a step forward," he said. "In many ways 2017 and 2018, I think we described them going in as foundation building and I think as we go through 2019 we expect 2020 and 2021 to also be steps forward."

All of which was too much for a clearly frustrated Citi analyst Jason Bazinet, who demanded: "From the moment you bought Formula One, Liberty stock reacted very favourably because the buy side likes the asset, they have a lot of confidence in Mr Carey and the broader Liberty team but every quarter that you guys have reported, I think over the last five or six, have been disappointing even though you have been very clear about these being foundational years to build for long term growth.

"So my question is this: as we take these steps forward, as you describe it, in 2019, 2020 and 2021, what is a reasonable range of expectations for top line growth? Is it low single digit? Mid-single digit? High-single digit? Anything to help the buy side dimensionalize what success looks like, or what failure looks like, I think would be quite helpful."

Ouch!

"We have tried to be as clear as we can," replied Carey, "that our priority is, I think I said from the get-go, 'where are we going to be in 2020?' Where are we going to be in three-to-four years, not three-to-four months.

"It takes time to put an organization in place," he continued. "I think equally as you get into a business, and we talked about this a few quarters ago, or maybe it was last year, usually you always find a few surprises and you usually know the good things so it's something you find about a race in particular or a sponsor that was leaving. In some ways those are opportunities but they are opportunities to fix them."

To further confuse the issue, while FOM is making all manner of claims about destination cities and a 25-race calendar, warning that events with unfavourable deals will be dropped, the fact is that no less than nine current race contracts - worth an estimated 176.4m ($226.6m) in total - come to an end before 2020. And while, the sport's powers-that-be continue to congratulate themselves on the signing of Vietnam, there are question marks - sorry, asterisks - concerning a number of flagship events, not least Silverstone and Interlagos.

And then there's F1 TV, introduced to much fanfare earlier this year but subsequently found to be riddled with bugs and issues.

Carey subsequently claimed that this year was a "beta" year - even though fans were paying for it - adding that the service would be given a proper launch next year.

However, last week, claiming that the service is "targeted at hard-core customers", he admitted: "Certainly it is going to be early days next year, but next year really will be the first time we sort of take it to market as a commercial proposition."

As Theresa May does her best to convince her party, the opposition and the people that her Brexit is the correct Brexit, so Chase Carey has to convince the teams to sign on the dotted line, if only to appease the stock market.

As one watches the Brexit debacle - mindful of James Freeman Clarke's observation that "A politician thinks of the next election, a statesman, of the next generation" - spare a thought for Mr Carey, for in both cases the clock is ticking and much depends on a successful outcome... whatever that might be.

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Published: 16/11/2018
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