Honda F1 website

OCTOBER 12, 2004

What is the British Grand Prix fight all about?

Bernie Ecclestone's desire to squeeze more and more money out of the race promoters is something of a mystery and many people see it simply as greed. However, there are more logical explanations for Ecclestone's unwillingness to compromise. One can argue, for example, that Formula 1 is underpriced compared to events such as the Olympic Games, which charge cities collosal sums for events, particularly when it comes to the kind of infrastructure investment which the International Olympic Committee now demands.

Formula 1 cannot easily operate in that way because the demand for the Olympic Games is such that prices can go on rising. Formula 1 races happen every two weeks and so fundamentally the price is going to be lower than the cost of the Olympics, even if Formula One Management (FOM)'s seven-year deals with a 10% annual increase starting at $40m (as is the case for recent new races) the investment involved above and beyond infrastructure costs is around $380m. There is little chance to recoup the money from ticket sales unless the circuits can expand the grandstand space to Shanghai and Indianapolis levels and have the necessary road access to cope with such crowds. And that is assuming that the demand exists in the local population, which is not certain in places like Indiana or Shanghai.

The need to raise prices is probably not about greed at all as one can see a very sound theoretical argument as to why FOM needs more money at the moment. The group is saddled with a massive debt, which derives from the Eurobond which was issued in May 2000. That money went to the Ecclestone Family trusts. In other words the Ecclestones have already had their pay-off. This may be considered greedy by some but Ecclestone believes that he made the business and should be rewarded for it.

The problem with the Eurobond was it left FOM with a debt of $1.4bn, with that sum secured by the future profits of the company. The deal was structured in such a way as to make early repayment of the bond very attractive. Initial interest was kept at 1.3% but rose after two years to 2% and in May 2004 to 3%. The banks which issued the bond also retained $400m as a guarantee. It is not clear what happened to this money and it may be that FOM ended up borrowing only $1bn and is now paying that back. At the original rate of repayment envisaged a $1bn debt could be paid off as early as May 2007. If FOM accelerated the repayment schedule, by squeezing up revenues as much as possible, it could clear the bond in 2006, which would mean that Ecclestone could go back to the bond markets and raise even more money (having proved his creditworthiness) and raise finance to buy out the banks which hold shares in FOM's holding company SLEC at a price they will accept and bring all of the F1 business, notably Allsport Management, in-house. This would raise FOM's revenues and make it easier to pay off a second bond. It would also put Ecclestone in a much stronger negotiating position with the F1 teams, as he could raise the payments to them and thus calm the opposition that exists. FOM is unlikely to cede to the 80% of the revenues that the manufacturers would like to see going to the teams, but he could make life more palatable for all concerned which would get rid of some of the political problems, leaving Ecclestone to look at succession plans and restructuring to create a company with the necessary financial clarity to take the wind out of the sails of the GPWC while also creating a company which could be sold or floated in the future, which would land Ecclestone and his clan a second big pay-day.