Ferrari's special deal - no surprise there...
Honda F1 website
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DECEMBER 22, 2008

Ferrari's special deal - no surprise there...

Bernie Ecclestone and Ferrari boss Luca di Montezemolo are usually singing from the same songsheet. It is in their interest to work together, but last week Montezemolo questioned the way F1 is run - and Ecclestone responded waspishly by saying that Ferrari gets $80m more for winning the World Championship than McLaren would have done.

This is not really big news because everyone knows that Ferrari has a fairly outrageous special deal, which basically bought the team's loyalty during Concorde Agreement negotiations five years ago. At the time Ecclestone was under threat of a rival series from the Grand Prix Manufacturers' Association (GPMA). Splitting Ferrari away from the other manufacturers ended that threat as everyone understood that in the eyes of the public, Formula 1 is where Ferrari races.

The scale of the extra money is no surprise either. Indeed we are surprised that the figure is as low as $80m, as our sources mentioned that the extra money was in the region of $100m. It may be that it is worked out on a points basis as this year was a low-scoring season.

What is interesting is not the number but rather the fact that Ecclestone is talking publicly about it. The only way to read this is that Ecclestone is trying to use the question of money to once again split Ferrari away from the other teams, in an effort to break up the Formula One Teams' Association (FOTA), which is powerful as long as the teams all stick together. This suggests that Ecclestone may be worrying about the demands for more cash that are being heard more and more at the moment.

As things stand the Formula One Group takes 50% of all the revenues generated. The teams split the rest, based on a number of different financial schedules, which relate to results and also historical value. The breakdown of the money is a secret.

Ecclestone's problem is that while the teams are in unison he is in a weaker bargaining position because in 2013 they could simply go off and run their own championship, particularly (for example) if Ferrari was to take over A1GP, which could very easily serve as a structure for a new manufacturer-led series. In the past attempts to threaten rival series have flopped because they never seemed credible, being without calendars, TV coverage and so on. With A1GP - for which Ferrari is the engine supplier - everything is in place and F1 is thus more vulnerable. And without the big name teams, F1 is dead. You can try to dress up GP2 teams to look like F1 but that would be as credible as putting children in business suits and sending them in to run the Bank of England.

The FIA is the theoretical owner of the commercial rights of F1, although these were leased away to the Formula One Group for 100 years for what was little more than a nominal sum. The FIA could play a role in the negotiations as it has the right to veto changes of ownership of the commercial rights.

It is interesting to see that FIA President Max Mosley has recently started to say things that will please the teams, not least that they should each get a minimum of $50m from the commercial rights holder in order to keep F1 healthy. There are some who argue that the FIA also needs to negotiate a better deal for its member clubs as they get no real benefit from all the money that has been swilling around the sport and F1 does next to nothing to promote the sport as a whole and help it develop.

The other problem is that there is not much room to negotiate because the owners of the Formula One group, CVC Capital Partners, borrowed large sums of money, secured on the future earnings of the sport. Most of the available profits being made are now needed to meet interest payments and reducing the share of the revenues would hurt. This is probably why there is a big push going on to secure official partner deals for the sport, to generate more money which is designed to, in effect, buy off the teams for the period of the next commercial deal as well, which begins in 2013. The CVC investment is not expected to continue beyond 2015, which will be 10 years after the CVC European Equity Partners IV Fund was established. This is a typical length for such an investment vehicle. Thus far the fund has produced an impressive returns, largely thanks to F1. After borrowing the money to buy the commercial rights to the sport CVC cashed in and refinanced, taking out hundreds of millions of dollars and then aiming to spend five years paying back the loans and building up the revenues before taking out another loan to extract more cash from the business in 2010-2011 and then selling the whole business on to a new investor, to extract the last drops of value from the cash cow.

The plan was designed to net CVC and its investors a return of perhaps $7.5bn on a $1bn investment.

The problem is that as the work together they become stronger and realise that their power can change the situation. And thus there is pressure on Ecclestone and CVC and it is in their interest to try to break up FOTA before it becomes stronger. The revenues cannot change before 2012, as there is a contract in place, but if FOTA stays together CVC may decide to try to get out early and try to find a buyer willing to take on less lucrative deals in the future.

Thankfully in the current economic climate that will be tough and so a compromise is perhaps a wiser response. CVC might have to take less money, but no-one in F1 is going to weep for the money men.

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