Share trading in F1 - what does it all mean?

In July we suggested that a group of European car manufacturers were bidding to buy shares in Bernie Ecclestone's Formula One group of companies via the Association des Constructeurs Europeens d'Automobiles, the European federation of car manufacturers. The car manufacturers had a meeting at the recent Salon de l'Automobile in Paris and EM.TV, the German media firm which currently owns 50% of SLEC, the Formula 1 group's holding company, is now admitting publicly that it has received a letter of intent from the ACEA stating that the organization wishes to buy EM.TV's share in SLEC.

In July we suggested that a group of European car manufacturers were bidding to buy shares in Bernie Ecclestone's Formula One group of companies via the Association des Constructeurs Europeens d'Automobiles, the European federation of car manufacturers. The car manufacturers had a meeting at the recent Salon de l'Automobile in Paris and EM.TV, the German media firm which currently owns 50% of SLEC, the Formula 1 group's holding company, is now admitting publicly that it has received a letter of intent from the ACEA stating that the organization wishes to buy EM.TV's share in SLEC.

The remainder of SLEC (the name of the company is short for Bernie Ecclestone's wife Slavica Ecclestone) is owned by a Ecclestone Family trust company called The Bambino Trust. This is designed to provide for Ecclestone's two daughters Tamara and Petra but is currently controlled by Slavica Ecclestone as both girls are still in their teens. EM.TV has an option with The Bambino Trust to buy another 25% of SLEC but the conditions of such a sale are not known and it is unlikely that Bernie Ecclestone would have agreed to such a deal without there being a number of clauses which ensure that he remains in charge of the company. Whatever the case EM.TV is in no position at the moment to buy more of SLEC.

The aim of the ACEA appears to be to buy Haffa's shares in SLEC and then establish a holding company. It will then divide the shares in that company between the 12 Formula 1 teams which are signatories of the Concorde Agreement. These are the current 11 teams and the planned Toyota Motorsport operation. This means that Williams, British American Racing, Jordan, Sauber, Prost, Minardi and Arrows (the teams not currently owned or part-owned by car manufacturers) would be offered the chance to own a share of the business.

It is our understanding that teams which cannot afford to buy into the holding company would be offered deals to buy the shares based on future income with the purchase underwritten for the moment by the rival car companies. The cost of this would obviously depend on the cost of the purchase of the SLEC shares from EM.TV. Things may be complicated by the fact that Haffa is currently saying that he wants to build a structure in which Ecclestone, the car manufacturers and EM.TV all own one third of the business.

	Thomas Hoffa © The Cahier Archive

Haffa's continued involvement in Formula 1 makes little sense at the moment as his grand plans to centrally-market the sport have flopped as several of the major teams refused to be involved in his schemes. This could change if they were all partners in the same business but whether it is worth Haffa trying to negotiate this rather than selling his shares and using the money to build up EM.TV in its core markets remains to be seen. Given the collapse in the firm's share price at the start of the week, it might be a good moment to redefine the aims of the business in addition to restructuring the management. The collapse in share price, which was triggered when the firm admitted making mistakes in its accounting for the first half of the year, is expected to result in Thomas Haffa's bother Florian being replaced as chief financial officer. He is expected to be named deputy chief executive.

The problem for Haffa is that he is not in any position to demand the $2bn he was asking for his shares before the collapse of the EM.TV share price. Haffa paid $712.5m in cash and $880m in shares (when they were valued at $880m) to buy his share in F1. He is unlikely to sell the SLEC shares for less than he paid, but he is unlikely to get more. One route would be for the car manufacturers to buy as many shares in EM.TV as they can get and then offer to swap them with Haffa in exchange for SLEC shares. At around $40 a share the car manufacturers would be able to buy a large chunk of EM.TV for less than $2bn and that would threaten Haffa's position.

If Haffa settled for $1.6bn this would mean that the purchase of SLEC would cost each team $135m. This may seem like a lot of money but it would bring an important increase in income to each of the teams.

According to the most recent documents available the TV revenues collected by Formula One Management in 1999 amounted to $241m, which was slightly less than expected. Of this 47% of the money goes to the teams. The division of the money is complicated by various scales based on results on the length of time in which teams have been competing but this means that the average F1 team receives around $10m a year from FOM. The TV revenues are expected to rise as TV deals are renegotiated.

In addition the purchase of a part of SLEC by the teams would mean that they would have access to revenues being paid by race promoters. The current fee for staging an F1 race is around $9m a year but this is rising at about 10% a year. With 17 races on the F1 calendar this nets FOM around $150m a year. Thus if the teams controlled half of SLEC they would get more TV money and a share of the fees for promoting races. Using the 1999 figures this would mean that TV income for the teams would rise to around $175m and there would be a further $75m a year from races. This would mean that the team would divide up around $250m rather than the current $120m. This would mean that the average team would get twice as much money as is currently the case and that would rise as new deals are negotiated. This would mean that spending $135m to buy into the sport is not an outrageous idea as the purchase could be paid off within the next 10 years and then team owners would have a valuable "franchise" to sell on to others at a later date.