Post the sale of Formula One, Joe asks where the sport goes from here. But, despite the uncertainty, there’s muted optimism…
The earthquake has happened. After weeks of rumouring, there was finally an announcement that the Formula One group, the company that exploits (and I use that word deliberately) the commercial rights of the sport, had been sold to Liberty Media. It was a wildly complicated deal that valued the company at $8 billion (when you count debt as being value), but the bottom line was that Liberty was willing to pay the price being asked – and take on the debt load as well. The deal, once completed, will give the current shareholders $1.1 billion in cash, plus 138 million newly issued shares in Liberty Media, worth in the region of $3 billion, plus some “exchangeable debt instruments,” which are basically debt-for-equity shares that will wipe out $351 million of the $4.1 million debt. There is about $700 million kicking around in the Formula One accounts, so the debt, in reality, will be down to about $3 billion after the purchase is completed.
What happens next will be that Liberty will complete the deal, change its name to Formula One and thus the sport will find itself listed on the NASDAQ stock exchange in New York. The existing shareholders will still own about 64% of the business, but Liberty will be the biggest shareholder, and, after a suitable period to calm the markets (probably six months), the current shareholders will be allowed to sell their shares. Lots of investment bankers, brokers and others are now scrutinising Formula One to see if they think it is worth buying the stock. A few days later, Citigroup changed its rating on Liberty from “neutral” to “buy,” and the company’s shares rose more than 16% in value as a result. Thus, today, Liberty Media is worth $2.28 billion, and so if CVC wants to sell its 25% share, it’ll get about $571 million more in cash to add to its pile of gains from the sport. The analysts reckon that Formula One is probably worth $12 billion. Whether this remains the case in a year from now remains to be seen, but the markets are reacting positively.
No one in Formula 1 will be unhappy to see the back of CVC Capital Partners. They came to F1 to make money and they will leave with their pockets stuffed. They had no respect for the sport and were involved solely for profit. The man who let them in the door was Bernie Ecclestone and even he was regretting that decision by the end. The sport has been milked of cash, loaded with debt and now the cowboys are moving out to asset strip other businesses.
The question that all the financial types in New York want to know the answer to is whether or not Formula 1 is underperforming when it comes to its revenues. The answer is probably yes. The pay-TV deals of recent years may have increased the revenues, but they have dropped the audience and that has had other impacts on the sport. With different strategies for TV sales, including digital streaming to mobile devices, and cheaper pay-TV, Liberty could definitely do a better job, particularly in the US market, where Ecclestone has never done well. When one has a consumer business (which F1 basically is), it makes very little sense not to be in the world’s biggest consumer market – which is what the US currently is, and will be for at least the next 30 years. Yes, it is good to be in China and other big economies, but if you want to make more money, you have to be in the US. This means that Liberty will be looking for more exposure in the US – in other words, more races. The more races there are in the US time zone, the bigger the sport can grow. At the moment, F1 has Canada, Mexico and Brazil, and the faltering US Grand Prix in Austin. It needs at least two more US events to create a better package, and, for the East Coast at least, the European races are still at a time that is not too painful for US F1 fans – who are six hours behind Europe, and so have to be up at eight in the morning if they want to watch the European F1 races live. Still, a few early mornings means that they will be able to watch at least a dozen of the races, which means that they can build an interest in the sport. It’s tougher for the West Coast as the races in Europe currently start at five in the morning, California time – and that’s for diehard fans only.
Liberty says that it will enhance the calendar, which means that they will either rearrange it to make more sense and drop some of the lucrative but dubious events, or that they will try and convince everyone that they should do 25 races. The F1 teams are opposed to this idea because they are already struggling with staff burnout and similar problems and they don’t want to expand the calendar. But, money solves most problems, and so we’ll have to see what they do.
A change in management (and style) may also help to boost the F1 sponsorship market because there are many companies who ought to be advertising in F1 but are not doing so. Why? It’s a good question, but perhaps it’s because they would prefer to be seen to be doing business with a more transparent and corporate business. Big corporations are more likely to spend money with a NASDAQ-traded entity, than with a company that is incorporated in offshore places, with less than perfect corporate governance, which is being investigated by competition authorities, and a history involving accusations of bribery and embarrassing public trials. CVC Capital Partners put up with the pain because the business poured cash at them, but the image of F1 suffered and big companies and governments were less keen to do business with the sport.
The good news for the sport is that Liberty now needs to negotiate commercial deals with all the other parties before the start of 2021, and, as the company must follow NASDAQ rules, there is potential for a much more stable and transparent sport in the future.
All things considered, there is reason to be cheerful about the future.
Joe Saward has been covering Formula 1 full-time for 28 years. He has not missed a race since 1988.
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