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NOVEMBER 23, 1998

Bernie and the Bond

THERE has been a lot of noise in Europe in recent days about Bernie Ecclestone's plans to borrow $2 billion from financial institutions in exchange for commercial bonds which will be secured by the income from the sale of F1's television rights. Ecclestone and his underwriters Morgan Stanley Dean Witter, the US investment bank, made presentations last week in London to hundreds of potential investors. They were supported by representatives from both McLaren and Ferrari.

This follows the circulation last week of a prospectus for the bond issue which promised a stream of income from the sale of F1's TV rights and merchandising which would generate $2bn of profit by the time the bonds mature in 22 years. It stated that the current income is around $330m a year, half of which is paid to the F1 teams.

Ecclestone told the assembled brokers that the bond issue is not under threat because of the investigation of F1 by the Competition Department of the European Commission.

Concern over the investigation was the primary reason for the failure of Bernie's plans to float Formula One Holdings for an estimated $3bn last year. The bond issue is the first step towards a new flotation within the next five years and bonds would then be exchanged for shares in FOH.

On the same day as Ecclestone was meeting potential investors there were allegations on British TV and in newspapers suggesting that Ecclestone's comments that there are only "a few minor issues" to be sorted out with the Commission are misleading and claiming that the FIA has been duped in the past by Ecclestone.

The Commission argues that motor racing is covered by the same competition rules which apply in the business world - this is disputed by the FIA - and as a result it believes that the 15-year agreement over F1's promotional rights between the FIA and FOH - signed in 1995 and renewable for 10 years in 2010 - is in violation of EU Competition rules. The abrasive EU Competition Commissioner Karel Van Miert was quoted last year as saying that motor racing had "layer upon layer of violations".

In normal circumstances the preliminary comments made by the Commission in December 1997 should have been followed by a formal statement of objections. This has not yet happened and the Commission said last week that it does not expect to make public its findings until next year.

Ecclestone rejected the media allegations saying that he believes that the concerns raised by the Commission can be sorted out. Morgan Stanley officials went on to point out that while the Commission can dispute the way in which F1's promotional rights are exploited it has no right to question the ownership of the rights. This was backed up by a statement from the FIA which underlined that FOH holds all the rights to exploit F1 because of: "long-standing arrangements with race promoters and ownership of historical property rights, as well as historical arrangements with the teams and the FIA".

Morgan Stanley also pointed out that if the Commission insists on shorter TV contracts this may work in Ecclestone's favor as competition between TV companies for the right to broadcast races will push the price up and Ecclestone backed this up saying that TV contracts are "fundamentally undervalued".

Whether the Commission likes it or not, it does not control the world and F1 can, as FIA President Max Mosley has threatened, reduce the number of races in Europe if the Commission continues to make life difficult for the sport.

The FIA is in the process of moving to Geneva and so will soon be outside the jurisdiction of the European Commission as Switzerland is not a member of the European Union.