Formula One insiders are used to twists and turns but this week even they were caught by surprise with the news that control of the sport’s parent company is expected to change hands for the first time in a decade in a $4.4bn (£3.3bn) deal.
Talk of a sale had been revving up for so long that some thought it would never happen but that all changed on Wednesday night when the American conglomerate Liberty Media announced a takeover of F1’s Jersey-based parent company, Delta Topco.
Bernie Ecclestone has been the driving force behind the sport for the past four decades and F1’s 85-year‑old chief executive will remain in the driving seat for at least the next three years. It gives the sport continuity as Liberty brings great change.
The glamorous F1 global circus is based in London and has failed to float several times. By contrast, Liberty’s headquarters are in the sleepy town of Englewood, Colorado. The cable TV and media giant is listed on Nasdaq and majority owned by the billionaire John Malone, nicknamed Darth Vader for his ruthless deal-making style.
In the year to 31 December 2015 Liberty made a $248m net profit from revenues of $4.8bn. Its big-name sports credentials have to date been limited to the Eurosport TV channel and the Atlanta Braves baseball team. The firm is not well-known in Europe but it is a power player in the entertainment world.
Liberty holds a 34% stake in the event promoter Live Nation, which in turn owns Ticketmaster. The sister company Liberty Global, which is also majority owned by Malone, owns Virgin Media plus the TV production company behind Midsomer Murders and The Only Way is Essex, and 10% of ITV. It also has a stake in the Formula E electric racing series alongside Discovery Communications. Malone owns 29% of the voting rights in Discovery, which is the parent group of Eurosport.
F1 is one of Liberty’s biggest single investments and, provided that the deal gets regulatory clearance it will end up with a 35.3% stake, with Malone personally holding 3.1%. Another 1% will be in the hands of Liberty’s chief executive, Greg Maffei, and 24.7% retained by the previous controlling owner, the private equity firm CVC.
The purchase is being fuelled with more than $1bn of cash together with payment in Liberty shares and $351m of debt. Liberty is also taking on F1’s existing $4.1bn in bank debt – meaning Delta Topco has an overall enterprise value of $8bn. It is high-octane and there is good reason for that.
F1 has three core revenue streams. Starting at the bottom, in the year to the end of December 2015 $250m came from selling trackside advertising at each of the 19 races and sponsorship of the series. F1’s partners include the parcel delivery service DHL and Heineken, which signed up in June, and will be handing over an estimated $40m annually.
There are two other major sources of F1’s revenue – fees from circuits that host races and broadcasting rights. They each bring in roughly the same amount and last year it came to a combined $1.2bn.
Along with $339.4m from other sources this gave Delta Topco total revenue of $1.7bn in 2015 – with underlying profits of $464m. In the decade that CVC has held the keys F1 has made total net profits of $3.5bn and it has a well-oiled formula.
F1 doesn’t own any tracks or teams so costs are kept under tight control. The company only has 356 staff and its biggest single cost is a payment of 63% of its gross profits to the teams as prize money. Over the five years to 2015 the prize money payment shot up nearly 30% to just over $900m due to the boom in interest in F1. It is a staggering sum but it isn’t the only trick under F1’s bonnet.
Ecclestone has promoted F1 to emerging markets, such as Singapore and Bahrain, which view the races as away to boost their global status or drive tourism through the sport’s 400m TV viewers. The limited number of slots on the F1 calendar has fuelled an arms race in the amount countries are prepared to spend to get a race with the highest hosting fees rising to nearly $80m annually.
To insulate against inflation, the key contracts contain an escalator clause which increases the amount paid by 10% annually. Only 10% to 20% of them need to be renewed annually as they have an average length of around five years. It gives F1 contracted revenue of $9.3bn up to 2026 which makes it very different to other sports because its financial performance is not related to the events on track.
And CVC has been the biggest winner. Since it invested in F1 in 2006 CVC has extracted $4.4bn from dividends and the sale of stakes in Delta Topco.
Pro rata, CVC’s 38.1% stake will give it $1.7bn in cash and shares in Liberty bringing its total haul to $6.1bn – that is a 532% return on the $965.6m that CVC invested in 2006 putting F1 in pole position to be its most profitable investment.
In contrast, CVC made a 314% return from its investment in gaming firm William Hill and 292% from stockbroker Collins Stewart. Although its biggest return is believed to be the 831% it got from the 2005 sale of a Spanish hospital business – but that only returned €222m in cash.
CVC can’t afford to take its hands off the wheel just yet though as the sale to Liberty is still far from the finish line. Perhaps the biggest hurdle is that the FIA has a 1% stake in Delta Topco which CVC granted it in 2013. The FIA paid just over $458,000 for the stake which is now worth $44m and, according to the share transfer agreement, it can only be cashed in when CVC sells its shares.
In order for the sale to proceed consent is needed from the FIA and the European Commission. The FIA has to decide whether Liberty is a ‘fit and proper’ owner of F1 but the EC may consider it to be conflicted due to its financial interest in the sale. Like any good F1 race a last-minute twist could still be on the cards.
