The purchase of Formula 1 by U.S.-based Liberty Media has caused quite a stir this week, not least because the new owner has strong links in the sports and entertainment industries. But what does the sale mean for F1, and why exactly has Liberty bought into the sport?
For the moment, not much has changed. The F1 business has for years been owned by a myriad of shareholders, including various investment funds for which F1 is just another line on their balance sheets; the most unusual, for example, is undoubtedly the Texas Teachers Pension Fund.
However, the big player for the past few years has been the CVC Group. While it only owned around 35 percent of the shares, those shares came with crucial voting rights. So CVC could wield power, even over F1 honcho Bernie Ecclestone. Still, to the outside world, all CVC ever did with its investment was to make sure F1 ticked-over nicely while milking it for cash at every opportunity. It put nothing back into the business, made no attempt to grow it, and only reluctantly agreed over the years to allow the teams—which always spend every cent they can get—to receive more money.
When the Liberty deal is complete, CVC will still own more 24 percent of the re-jigged company, but crucially Liberty—with 35 percent—will have control. The big difference compared with the CVC era is how Liberty has made it clear from the start that it will not just observe from afar. It wants to use its know-how and industry connections to try to grow and improve a sport that has never had a formal marketing department, has rarely appeared to be subject to any proper strategic planning, and which in the eyes of many experienced observers could and should be even bigger than it is.
For the moment, Ecclestone is staying on board. He will retain his role as CEO for at least three years, and that’s entirely logical given that he’s been involved in race contracts and so on for more than four decades, from the time he represented the teams as the owner of the Brabham squad. Much of how the business operates is in Ecclestone’s head, and to download all of that—and prepare for the time when he really does move on—is going to take a while.
What has changed is that the previous chairman, the low profile and almost unknown Peter Brabeck-Letmathe, has been replaced. CVC nominated him to the job, but Chase Carey will now take the position. Carey is a Fox veteran with huge experience of the TV and entertainment worlds, and who intends to be hands-on. It will be fascinating to watch how he works with Ecclestone.
So what’s in this whole deal for Liberty? First, you need to understand how the F1 business generates cash. There are four main revenue streams, as Liberty handily explained in a Powerpoint presentation it issued to shareholders and other interested parties this week:
Race Promotion: Fees paid to host, stage, and promote events. Contracts typically have automatic escalators of 30-35 percent (5-10+ years)
Broadcasting: Contracts with 100 broadcasters. Average broadcast contract typically includes annual escalator of 30-35 percent (3-6 years). F1 has historically produced live feed for all races (excluding Monaco).
Advertising & Sponsorship: Global partners and official suppliers. Race-specific title-sponsorship. Trackside advertising.
Other: Includes hospitality (i.e. Paddock Club), freight, TV production and post production, and feeder racing series.
Thus the F1 business’s main partners (or customers) are the venues, the TV broadcasters, and the sponsors. There are just six global sponsorship partners (Heineken, Pirelli, Rolex, Tata, UBS, and Emirates), and four other race specific title sponsors (Gulf Air, Etihad, Singapore Airlines, and Petronas).
That list includes some blue-chip names, and bear in mind too that most of the venues are backed to a greater or lesser extent by local, state, or national governments. In other words these are not people who are likely to bounce a dud check on Ecclestone. Although having said that, politicians do come and go.
This solid revenue stream has attracted Liberty, and company bosses have made the startling revelation that $9.3 billion of future revenue is already guaranteed up to 2026 from contracts already in place. That doesn’t include the renewal of deals that run out before then, or any new business Liberty pulls in.
The business has some traditional overhead, such as running Ecclestone’s office and the TV broadcast facilities at tracks and in the U.K., which employ hundreds of people. But the main cost is the chunk of the company’s revenue that is paid out to the teams under the terms of what everyone in F1 has always called the Concorde Agreement. Since those figures are based on percentages of the sport’s total annual revenue, they go up and down with the overall revenue. Thus in effect a healthy profit margin is built-in and guaranteed because the team payments are not suddenly going to be greater than income. Liberty Media president and CEO Greg Maffei makes it sound like an exceedingly good deal.
“Those multiple revenue streams, which have over $9 billion of contracted revenue under long-term contracts which extend out to 2026, with staggered renewals, with many of the counterparties including high-quality corporates and governments, create an incredibly low risk business model,” he explained this week.
“And when you combine that with the fact our largest cost item is team payments, which are variable based on the revenues and profits of the business, it creates a model which is incredibly durable and strong.
“It’s virtually unparalleled to be able to bring as much cash to the bottom line, as a percentage of dividend, that F1 does. This durable business model, combined with the long-term contracted revenue and high cash-flow conversion enable the business to support relatively high financial leverage, a Liberty hall mark … ”
Indeed, Liberty handily gave us some numbers to demonstrate how profitable F1 has been in recent years, showing just how much is left in the pot after the teams are paid:
Number of races: 19
Pre-team share (PTS) earnings before interest, taxes, depreciation, and amortization (EBITDA): $1,248,000,000
EBITDA: $478 million
Number of races: 19
Pre-team share (PTS) earnings before interest, taxes, depreciation, and amortization (EBITDA): $1,317,000,000
EBITDA: $482 million
Number of races: 19
Pre-team share (PTS) earnings before interest, taxes, depreciation, and amortization (EBITDA): $1,340,000,000
EBITDA: $464 million
Number of races: 21
Pre-team share (PTS) earnings before interest, taxes, depreciation, and amortization (EBITDA): $1,446,000,000
EBITDA: $479 million
As you can see there was a slight glitch in 2015, but Maffei has an answer for that: F1 paid a little more to the teams than it planned for. He’s probably referring to a bonus Mercedes earned through winning a second world championship, something Ecclestone agreed to but didn’t expect to happen. For once, he lost a bet.
“Revenues have increased pretty nicely,” said Maffei. “Partly driven by some increase in the number of races, but also increases in broadcast revenues, increases in advertising and sponsorship, increases in fees paid per venue per event. At the same time, due not only to some renegotiation of the Concorde Agreement and some bonus payments that were made to certain teams, less of that increase in the revenue fell to the bottom line.
“But we think that’s absorbed, we’ve gone through that cycle, and we remain confident that certainly to 2020 and the next Concorde negotiation we don’t have an unusual bump and there will be a much more linear relationship on the increases between revenue and the cost side.”
What we have yet to hear is any detail of how Liberty will grow those revenues. The cynical view is that it might try to bump up sanctioning fees, which will see venues struggle even more to break even, and ticket prices will go up, which is hardly good news for fans. There’s also the possibility to add to the current schedule of 21 races, though most teams will agree F1 is already at a logistical breaking point.
The optimistic view is that Liberty has some marketing ideas that will grow F1’s fan base, bring more people to the sport, encourage more sponsors to come in, and so on.
“So what do we see as the opportunity?” says new chairman Carey. “The opportunity is to grow and develop this sport for the benefit of the fans, teams, partners, and our shareholders, by increasing promotion and marketing of F1 as a sport, and brand.
“Enhancing the distribution of content, especially in digital, currently a very small percentage of revenue. Evolving the race calendar. Establishing a broader range of commercial partnerships, including sponsorships. And leveraging Liberty’s expertise in live events and digital monetization, to make our events bigger than ever.”
Carey admitted he wants to develop new markets, but he’s been careful not to alienate fans in Europe. Classic racetracks like Silverstone, Spa, and Monza have all been deemed crucial.
“In terms of developing markets, clearly new markets are opportunities,” he said. “It is a global sport, and we’re excited about the opportunity, to continue grow the sport, expand the sport, in places like the Americas and Asia. Those are opportunities.
“But I want to be clear that certainly the established markets that have been the home and the foundation for F1, I guess Europe in particular, are of critical importance. Certainly building the sport in Europe, building on that foundation, has got to be second to none. We do want to continue to take advantage of the global footprint of this sport, and there are growth opportunities. We certainly do want to focus on it.
“Longer term, markets like the U.S., and key Asian markets, are an opportunity for us to develop. They won’t develop overnight. There are huge audiences there that I think have a real appetite for the excitement, the stars, the team, the brand, the technology.
“If we develop and reach those fans using digital platforms, and some of the tools that probably to date haven’t been exploited aggressively, we can build a whole new generation of fans in places that have not historically been a significant a part of the F1 fanbase.”
Not insignificant, Liberty has a stake in or strong connections with a vast number of intriguing names, from Live Nation to Trip Advisor to Sirius XM, never mind the entertainment- and broadcasting-industry connections Carey built while running Fox. Again, it will be fascinating to see what the newcomers bring to the party—and how Ecclestone reacts to any changes they introduce.
Source : http://www.automobilemag.com/news/formula1-liberty-media-purchase-analysis/