We reveal how F1 made billions for investor and owner CVC and the sport’s ringmaster, Bernie Ecclestone
Epic. That’s how this season in F1 will be remembered.
It started with seven different winners in the opening seven races and ended with Red Bull’s Sebastian Vettel scraping home to win this third title in a row. Fans of the macabre got their fill of crashes too, the picks being Sebastian Grosjean nearly decapitating Fernando Alonso in Spa (pictured above), and Michael Schumacher horrendously misjudging his braking in Singapore to the detriment of the Toro Rosso car in front.
And what about the finances of the sport? Bizarrely, some people think it had a bad year. There was the aborted flotation of Formula 1. Facebook’s iffy debut, and adverse market conditions, put a stop to that plan.
But research by LondonlovesBusiness.com shows the astonishing returns made by F1’s owners. We can show that the private equity house, CVC, which bought into F1 in 2006, has made billions. The other winner – naturally! – is the king of F1 himself, Bernie Ecclestone.
Here’s is the inside story on how the sport is run, and how a private equity firm (and a trawlerman’s son from Ipswich) racked up mind-boggling profits.
CVC is a giant of the private equity industry. It started life in 1981 as the venture capital division of financial services firm Citigroup and since then it has launched eight funds which have raised a total of $44bn from private investors. CVC has made over 290 investments, known as leveraged buyouts because they are usually backed by banks providing debt secured on the assets of the businesses which are being acquired.
The companies CVC has invested in have had a total value of $169bn and through selling stakes in them and receiving dividends it has given its investors an annual internal rate of return of 35.7% since its first fund was launched. It now has $37bn of assets under management in 61 companies worldwide including famous names such as luggage company Samsonite, Virgin Active health clubs and Merlin which runs the Legoland and Alton Towers theme parks. Together, the companies it owns stakes in have combined annual sales of over $136bn and F1 is the most racy.
CVC bought F1 in 2006 from the family trust of the sport’s billionaire boss Bernie Ecclestone and three banks – JP Morgan, Lehman Brothers and state-owned German lender BayernLB. The acquisition was financed with two loans – one of $1.1bn from the Royal Bank of Scotland (RBS) and another of around $965.6m from CVC’s own investment Fund IV. It came to 13.3% of the total amount available in Fund IV and although this was a significant commitment F1 had substantial assets.
F1’s most valuable assets are its commercial rights and they are owned by a Jersey-based company called Delta Topco. They are valuable because they allow F1 to grant the rights to host races and broadcast them. In 2001 Delta Topco’s subsidiary SLEC Holdings bought a 100 year lease on rights for the bargain price of $313.7m from F1’s governing body the Fédération Internationale de l’Automobile (FIA).
CVC is its biggest single shareholder in Delta Topco and it holds a 35.5% stake in it. Ecclestone has 5.3% of its shares with 8.5% owned by his family trust and the remainder in the hands of banks, funds and other management. There is a mighty financial engine beating under the bonnet of the business.
In 2011 Delta Topco had revenue of $1.5bn and it generally comes from four main sources.
1) Starting at the bottom, trackside advertising at each race and sponsorship of the series itself comprises 15% of the revenue. This comes from companies such as parcel delivery service DHL and electronics firm LG which are two of F1’s official partners.
2) Next up is revenue from corporate hospitality, freight fees and two F1 junior series which provide around 20% of the total.
3) Fees from F1’s 63 TV broadcasting contracts bring in 32% of its revenue and are second only to the money received from the 20 races on the calendar.
4) Together, the race hosting fees comprised 33% of F1’s revenue last year and came to a total of $512m. Just five years earlier the revenue from race hosting fees only came to $304m but it has been boosted by more than $200m thanks to a bidding war for the prized slots on F1’s calendar.
Getting on to the F1 calendar is no mean feat since Ecclestone has committed to hosting no more than 20 races per year to limit the amount of time the teams are away from home and to cut costs. In turn this has put great premium on the calendar slots and the waiting list is understood to include Argentina, Hong Kong, Mexico, Poland, South Africa, Thailand and even cash-strapped Greece. There is good reason why they want to get in on the act.
Holding an F1 race drives tourism by promoting the host country to a massive number of TV viewers. In 2011 F1 had 515m television viewers and this made it the world’s most-watched annual sport. The races are centre stage and not only do they focus attention on the host countries, they also put them on the global sporting map.
Over the past five years emerging nations, such as Abu Dhabi, India and South Korea, have woken up to the promotional power of F1. They have all beaten a path to F1’s door to occupy a slot on its calendar alongside wealthy developed nations like Britain and Monaco.
Governments of many emerging nations are prepared to bankroll the hosting fees for the races and this has fuelled a Grand Prix arms race between them. This struggle to get onto the F1 calandar has driven up hosting fees by $15.7m per race since 2003. The average fee came to $27m last year and this has priced many countries out of the running. It is a particular problem in F1’s traditional heartland of Europe where tourism is already strong enough in most countries so F1 is not needed to boost it. In many of these countries governments have refused to bankroll the hosting fees and so races have been lost in Austria, France and Turkey.
Making matters harder for them, most of F1’s key contracts contain clauses which increase the fee paid by up to 10% annually. This goes a long way to explain why F1 is one of few companies in any industry which has had consistently rising revenue over the past five years. It started at $1.07bn in 2006 then rose to $1.16bn in 2007 and since 2008, when revenue hit $1.39bn, it has increased at a compound annual growth rate of 3.1%.
Although the flotation has been given a red light CVC has found other ways of capitalising on F1’s accelerating fortunes to make a high-octane return.
Over the past year CVC has cut its stake in F1 by around half. Between January and May US investment fund Waddell & Reed paid $1.1bn for a 13.9% stake in Delta Topco. It was followed by US money manager BlackRock and Norges, the investment division of Norway’s central bank, which together paid $500m to get a combined stake of 7.5% in May.
In June CVC announced that Waddell & Reed had invested a further $500m which took its stake to 20.9% and put a $7.1bn value on F1’s equity. That’s a figure which takes into account the $3.2bn of loans, and the $300m in cash it has in the bank (giving a net debt of $2.9bn). Strip those out the equation and F1 has an enterprise value of $10bn – a far cry from the sports value when CVC invested in 2006.
CVC took a big gamble when it bought F1 because the sport’s teams were threatening to walk away and set up their own series due to a dispute over the amount of prize money their received. CVC had to take bold action.
To ease the gridlock with the teams CVC brought all of F1’s key companies under one roof. Flush with the bank debt and loan from its fund, it bought F1’s trackside advertising and corporate hospitality divisions then acquired the sport’s feeder GP2 and set up GP3,
a grass roots entry-level series where average annual team budgets come to around $2m compared to $180m in F1.
By bringing all of F1’s divisions under one umbrella Ecclestone was able to cut a deal with the teams which gave them a share of all of the sport’s revenue sources for the first time. He handed them 47.5% of F1’s earnings before interest, taxes, depreciation and amortisation (EBITDA) and this tempted them to stay in F1. It immediately doubled the teams’ F1 income but the payment to them also became F1’s biggest single cost. It came to $698.5m last year and has increased by $154.8m in the past three years alone.
|HIGH-OCTANE PROFITS: How Formula 1 makes billions for its owners|
|Race hosting fees:||$512m|
|Trackside ads and sponsorship:||$222m|
|Team prize money:||$698.5m|
The gamble has certainly paid off for CVC. Through selling just 28.3% of F1 this year it has already made $2.1bn which is more than double the amount it paid to buy the business. Despite selling up numerous times CVC is still in control because its shares entitle it to appoint representatives known as I Directors who can outvote any number of other board members.
F1 has fully paid back the $965.6m loan to CVC’s fund thanks to a $2.9bn debt refinancing in 2006 and last year the sport had underlying profits of $474m (see box).
The terms of F1’s debt have prevented it from paying a dividend since CVC took over. However that changed this year due another refinancing. Around $1.8bn of debt was outstanding at the end of 2011 and CVC refinanced it with a $2.2bn loan in mid-2012. The $500m difference, along with $500m which was in the bank, was moved from subsidiaries to Delta Topco where it could be paid to shareholders. There was already $60m available in Delta Topco giving a total of $1,060m to be paid out. An $850m dividend was paid in April from which CVC took around $432.7m in line with its shareholding at the time. It left $210m available to be paid out with $74.6m of this due to CVC.
The $965.6m loan repayment along with the proceeds from the share sales have already generated $3bn for CVC giving it a return of approximately 317%. The April dividend took CVC’s return to 362% and its remaining 35.5% stake in F1 has a value of around $2.6bn. This gives CVC a total of $6.1bn of cash out and remaining value yielding a return of around 630%.
Source: Rex Features
In October F1’s owners, gave themselves an early Christmas present, borrowing a further billion dollars which is scheduled to be paid as a dividend. This transaction put a further $1bn of debt taking the total to its current $3.2bn. This additional $1bn is also expected to be paid to shareholders by the end of the year and CVC is entitled to $355m of it. It is understood that the remaining $74.6m, which was not paid out in April, will be added to this dividend meaning that CVC will get a total of $430m. If this goes ahead as planned CVC will have received $3.9bn in cash from F1 and it also has a 35.5% stake in it which is worth $2.6bn. That will give it a total of $6.5bn of cash out and remaining value which boosts its return to a staggering 675%.
It is far higher than the average for Fund IV. Data from CalPERS, the largest pension fund in the United States, shows that by the end of September last year it had received a multiple of 150% from the $348.2m which it invested in Fund IV in 2005.
Although CVC is set to get a higher than average return from F1 it is still some way off its top performing investments. They include IDC, one of the leading independent private hospital operators in Spain, which gave CVC an 831% return when it was sold in 2005. However, in contrast to the $3bn CVC has already banked from F1, IDC only returned €222m in cash. So although other investments may have made more in percentage terms, when it comes to cash returned F1 is likely to be on pole position in CVC’s record books.
Remarkably CVC’s return from F1 is on track to be even higher than the amount made by Ecclestone and his family trust. However, CVC’s profits from F1 are shared between the investors in Fund IV and ultimately flow to the millions of people who have a beneficial interest (such as the US pension plan holders). In contrast, the money Ecclestone and his family trust have made from F1 ultimately ends up in the hands of just four people. They are Ecclestone himself, his ex-wife Slavica and their two children Tamara and Petra.
By the time CVC bought F1 Ecclestone had already sold stakes in F1 three times raising $2bn for his family trust. Added to that is the $1.4bn proceeds of a bond which Ecclestone secured on F1’s future revenues in 1999 and the $478m CVC paid for his family trust’s stake in the sport before it reinvested. It means that Ecclestone and his family trust have cashed out $3.9bn so far which makes his £2.5m annual salary for running the sport look tiny in comparison.
Ecclestone and the trust received a total of $117.3m from the April dividend with another $167m expected from the payout which is due by the end of the year. Their combined 13.8% stake is worth a total of $1.4bn so all in all Ecclestone and his family trust have made a total of $5.6bn in cash out and remaining value from F1.
Now that really is a Grand Prize.