What is going on with the commercial rights to Formula 1?

THE last few days have seen any number of reports in the financial newspapers about the future exploitation of the promotional rights of Formula 1 racing with the FIA seeming to have fallen out with Bernie Ecclestone.

Appearances can sometimes deceive.

At the moment the commercial rights of F1 are leased by the FIA to SLEC Holdings, which controls the Formula One group of companies. This deal lasts until the year 2010. The contract was negotiated late in 1995 and began in January 1996. Once that arrangement had been formalized the owners of SLEC, a variety of Ecclestone Family-controlled trust companies, tried to float a part of the company. That failed and so 50% of the shares in SLEC were sold privately (and separately) to investment companies Morgan Grenfell Private Equity and Hellman & Friedman.

This pair then combined their shareholdings and sold them all to German media baron Thomas Haffa of EM.TV. They took cash and EM.TV shares in payment.

Not long afterwards EM.TV suffered a cataclysmic collapse in share price. Haffa is now in the process of trying to save his company by offering to sell his SLEC shares to Leo Kirch, the man for whom he used to work before establishing EM.TV. Kirch is tough. He is offering $550m for the shares which Haffa paid over a billion dollars for. Haffa wants more but is in no real position to argue. He has the additional problem of an option he negotiated to buy an additional 25% of SLEC from an Ecclestone Family trust company called The Bambino Trust, which Bernie Ecclestone established for his two daughters Tamara and Petra. Under that option Haffa agreed to pay $1bn and until August Bambino has the right to force Haffa to pay up. Haffa cannot afford to pay $1bn so if Bambino exercises the option, EM.TV could go out of business.

According to our sources Kirch is so keen to get hold of the F1 shares that he has agreed to pay the $1bn if Haffa sells the SLEC shares for $550m. If that happens Kirch would control 75% of SLEC.

Bernie Ecclestone, who runs the Formula One group of companies, does not want that to happen. Kirch is one of the major contributors to the company as the owner of the digital TV rights for F1 in the German market. If he controlled SLEC he could reduce its income considerably but save himself a lot of money. Kirch is so keen on that idea that he is not only offering to pay $1.55bn for control of the commercial business of F1, but he is also willing to take on the commitment of paying off what is left of the $1.4bn Eurobond issue (in effect a loan) which Ecclestone negotiated for SLEC in 1999 with the West Deutsche Landesbank.

As we understand it, the bank kept $400m as a guarantee but the Ecclestone Family took away $1bn. This has to be paid back by whoever owns the company. If Kirch owned 75% of the company he would be liable for 75% of the loan repayments - and that would be somewhere in the region of $750m. Thus Kirch's real bill for getting control of SLEC would be in the region of $2.3bn.

That would still be a good deal if the contract with the FIA extended for 100 years.

However, the FIA is now saying that the deal agreed last summer under which the commercial rights to F1 belong to SLEC until the year 2110 was never completed because SLEC failed to make the first payment of $60m. It is not clear why the payment was not made. It may have been that Haffa was not able to come up with the money that was needed at the time. As half owner of the business he had to supply half the money for the deal.

The question being asked now in F1 circles is whether or not the FIA is serious in its comments about there being no deal beyond 2010 or whether this is simply gamesmanship in the struggle for control of the EM.TV shares. Obviously the FIA cannot be seen to be supporting Ecclestone but there is a solid argument for the federation to push for a change. Haffa has brought nothing to the F1 party apart from stories which reflect badly on the sport and if Kirch gets control of the shares he will actually be taking money out of F1.

The only other company known to be wanting to bid for the EM.TV shares is the San Francisco investment company Hellman & Friedman, probably in league with Morgan Grenfell Private Equity. Ecclestone is believed to be in favor of this bid as it would enable him to organize a situation in which ownership of the Formula One group of companies could pass through Hellman & Friedman to a new owner, and he would have some say in who that would be. If Haffa sold his 50% to Hellman & Friedman, Ecclestone would retain 50% of SLEC. The value of those shares would sky-rocket as the financial state of EM.TV would not be pulling down the value. Everyone could then make a profit by selling part of the company to the automobile manufacturers and floating the rest on the stock exchange. Such a deal could net Ecclestone $2bn, could make a neat profit for Hellman & Friedman and could bail MGPE out of the current situation where the company is sitting on a paper loss of around $400m.

It seems, however, that nothing will convince Kirch to give up on the shares.

However, if Ecclestone were to exercise his option and sell the extra 25% of SLEC to Kirch for $1bn and then SLEC was to lose the promotional rights to F1, Kirch's deal would suddenly look like a very bad one. The fact that the FIA is suggesting that this could happen would seem to be an attack on Ecclestone but in reality it would be an attack on Kirch as he would be the majority shareholder in SLEC. The Ecclestone Family would hold only 25% of the company.

If the FIA did deprive SLEC of the rights it would need to find an alternative organization and there would be nothing to stop Bernie Ecclestone starting another company and bidding for the rights. He has the experience and the respect of the teams and if he were to sell part of the new company to the car companies it would be very hard for the FIA to argue against awarding him the new deal. It would offer continuity and financial stability. There would, no doubt, be other bidders but Ecclestone's proposal would be hard to beat.

If that happened SLEC would end up with nothing but debts.

And if that sounds bad Haffa and Kirch could be faced with an even worse problem: the FIA has a clause in its contract with the commercial rights holder which allows the federation to cancel the contract if it deems the holder of the rights to be unsuitable for the sport. Haffa is facing the possibility of criminal charges resulting from the EM.TV stock crash and that could provide the FIA with the opportunity to cancel the contract immediately and sell the rights to someone else.

Faced by such uncertainties, Kirch may simply decide that he is wasting his time trying to hold on to the F1 shares.

And that would suit Mr. Ecclestone very nicely.

But then again, Ecclestone and FIA President Max Mosley might simply have fallen out over money.

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