MAY 31, 1999

Bernie the billionaire

BERNIE ECCLESTONE has finally launched his Eurobond issue and announced last Friday that the deal is the first step towards the future flotation of his Formula One Holdings company. The Eurobond plan has taken nearly eight months to come to fruition but it has gone ahead despite the fact that the European Commission's Competition Directorate is still continuing its investigation into the way F1 is run. This is a major coup for Ecclestone who has obviously been able to convince his underwriters that Europe is not a threat to the bond issue.

A bond issue is basically a loan and in this case the loan to Ecclestone has been secured by the future profits which will be generated by the sales of Formula 1 TV rights by Formula One Holdings, which has an exclusive deal with the FIA to exploit all commercial and broadcasting aspects of Grand Prix racing.

The $1.4bn is coming largely from the German bank Landesbank although merchant banking firm MorganÊStanleyÊDeanÊWitter is also taking some of the bonds. The two banks will now decide whether to sell on the bonds to customers or carry the loans until Formula One Holdings is floated. We believe that West LB will hold on to its bonds but Morgan Stanley will sell its share within the next two or three weeks. The deal will give the banks around $70m in commissions.

The bond, which is rated by all the major - and highly-influential - rated agencies, has been issued by a company called Formula 1 Finance BV and will be listed on the Luxembourg Stock Exchange. The owners of the bonds cannot redeem them until May 2002 at the earliest. If they then wish to sell them they will be entitled to 1.3% interest per annum. If they sell between May 2002 and May 2004 that figure goes up to 2% per annum and from May 2004 onwards it will be 3% a year. The bonds will expire in November 2010.

The money raised by Formula One Finance BV is being lent to Formula One Administration and much of it will eventually find its way into the various different Ecclestone Family holding companies. There is little doubt, however, that Bernie will use some of the money to make new acquisitions in the motor racing world and there was considerable speculation in the Barcelona paddock regarding where Ecclestone may invest.

The strongest rumors were that he is likely to buy more racing circuits, in addition to Paul Ricard which he recently purchased. This will give him tangible assets which can be developed and, at the same time, enable him to create the kind of racing circuits that he wishes to have, without having to constantly be dealing with circuit owners. This will dramatically reduce the overheads of running Grands Prix as many of the installations can be permanent and will not have to be set up before each event. This would save many millions of dollars every year.

Ecclestone's plans to build an oval circuit at Paul Ricard has led to speculation that Bernie is planning to put together an FIAÊWorld Oval Racing Championship, probably in league with Indianapolis Motor Speedway owner Tony George and perhaps with NASCAR's Bill France and Roger Penske. If this is the case we would expect Ecclestone to buy facilities in the major European markets: Germany, Britain, Italy and Spain. In addition to providing facilities, the tracks will be important assets for FOH and given the right development could easily be converted into very successful businesses, with motor racing theme parks, hotels and merchandising operations.

Ecclestone's exact plans are not clear at the moment - he may move into other sports as well - but the most important aspect of the Eurobond issue is that it gives Grand Prix racing financial credibility which was previously denied and will go a long way to helping the company to be floated on one of the European stock exchanges within the next few years. If he is planning major expansion in the United States the business may also be floated on Wall Street.

"Now that we have successfully completed this transaction, we look forward to the future stock market flotation of this exciting business," said Ecclestone. "We can now build on the relations we have established with the investment community."

The deal is a groundbreaking one in many ways in the business world and represents the first major securitization of long-term TV revenues in a sport.

The Formula 1 team bosses will gain nothing from the Eurobond. Their income from the sale of the F1 TV rights is separate from that earned by FOH, which currently gets around 52% of the money. The teams split the remaining 48%.