Formula One reaches the midway point of the season at the Hungarian Grand Prix on Sunday: but the real action will not be on the track but off it as the race for ownership of the sport revs up.
The title battle looks to be between just two drivers – Mercedes team-mates Lewis Hamilton and Nico Rosberg. However, behind the scenes the bidding war for F1 is much less clear-cut, with the latest names to enter the fray being Qatar’s sovereign wealth fund and RSE Ventures, owner of the Miami Dolphins NFL team. They have made a joint approach to buy the 35% controlling stake in Formula One’s parent company owned by the private equity firm CVC.
New research shows that any investor might struggle to match the investment group’s return, however, even if it persuades CVC to sell. The private equity house has made more from F1 than any other owner in the sport’s 65-year history, including Bambino, the family trust of its chief executive, Bernie Ecclestone.
Formula One has a mighty cash-generating engine under its bonnet. The research shows that it has made more than $14bn (£9bn) for its various owners – driven by the sale of shares, dividends and a $1.4bn bond issue in 1999 – since the first stake in the sport’s parent company was sold in 1999 to investment bank Morgan Grenfell.
CVC is a relative newcomer to the race, having bought its stake in 2006 in a leveraged buyout funded with two loans – $965.6m from its Investment Fund IV and $1.1bn from RBS.
Over the past decade CVC has halved its stake to 35% and reaped a $4.4bn reward. That has given it a return on investment (ROI) of 351.8% and its remaining 35% stake controls the voting rights of F1’s Jersey-based parent company, Delta Topco. This gives the stake a valuation of up to $8bn – and if CVC achieves that price, it will push ROI to over 1,000%, making it the most profitable deal in the investment house’s 34-year history.
Not everyone has done so well. In 2001, impressed by the huge audiences in Germany that seven-time champion Michael Schumacher was attracting to the sport, German media giant Kirch borrowed $1.6bn from three banks to acquire a 75% stake in F1. State-owned German bank BayernLB loaned nearly $1bn, with Lehman Brothers and JP Morgan each providing $300m.
However, Kirch’s access to F1’s fortunes was restricted, as the terms of the 1999 bond issue prevented the business from paying a dividend. By the time Kirch collapsed under the weight of its debts in 2002, it had not made any money from F1 and to this day remains its only shareholder not to have generated a return from the sport.
The loans from the trio of banks were secured on the Formula One stake and when Kirch went into administration they took over the shareholding. However, in the vacuum, they were unable to exercise control over the business and sued Bambino.
When CVC bought F1 from the banks, it ensured that the mistake was not repeated. Buried in Delta Topco’s articles of association is the revelation that CVC’s shares entitle it to appoint representatives, known as “I Directors”, who can “exercise one vote more than the total number of votes exercised by the other directors.” The articles add that the purpose of this is “to ensure that the I Directors will always have sufficient votes to pass a resolution of the board”.
It puts a huge premium on CVC’s stake and those riches were unlocked with a debt refinancing which allowed dividends to be paid. Last year alone, F1 made underlying profits of $266.6m on revenue that rose 4.2% to a record $1.4bn, boosted by new races in Russia and Austria. Indeed, F1 is so profitable that it was one of the few assets retained by Lehman’s estate to pay off creditors after the bank went under.
CVC has already owned Formula One for double its typical holding period of five years. Last year it was in discussions about selling to media mogul John Malone’s Liberty Global and broadcaster Discovery; the talks stalled and the duo invested in the electric racing series Formula E. Now Qatar and RSE are in pole position to acquire the CVC stake – but still far from the prize.
CVC’s co-chairman, Donald Mackenzie, recently said there was no need to sell. “There is no end date. We have 12-year funds, which we have to return the original money [to]. We have already done that. So the pressure’s off. We like owning it; we don’t want to sell it. There are always some people who’d like to buy it: it’s a very good business.” For CVC it could prove to be the best.
