SEPTEMBER 15, 2006

The cash cow moos

The latest accounts of Formula One Administration (FOA), covering the year 2005, have revealed a pre-tax profit of $435m, up from $413m the previous year. The turnover increased from $705m to $787m, an increase of more than 10%. This is more impressive than it looks as the 2004 figures were artificially bumped up by a $93m one-off payment by the Interpublic Group in order to get out of its contract to run the British Grand Prix. Bernie Ecclestone's salary dropped from $4.6m to $4m. The figures will no doubt make CVC Capital Partners a little happier as it looks to get some return on its investment in F1, which is believed to have been around $1bn, with an additional $300m paid to buy Allsport Management. CVC may be pushing for more increases in profit but it is hard to see how this will happen as the Formula One company must start paying out much bigger sums to the F1 teams in 2008. Its overheads are already low as it employs only a small number of people, its prices are high and competition is increasing from potential rival A1 Grand Prix. There are areas of the sport which are not being fully exploited, notably merchandising and licensing of products. The company is also failing to make the most of the Internet, leaving the field open for large numbers of largely amateur websites that are, in effect, little more than blogs. There are also suggestions that the company would make more money in the longer-term if it re-thought some of its philosophies: notably if it took less in fees for races in order to allow promoters to invest more in infrastructure and thus be in a position to attract more fans. At the moment many promoters argue that they have trouble enough keeping up with changes needed for safety, let alone increasing the capacity of the tracks and thus being in a position to lower the ticket prices for the fans. Having more fans at the races would increase the possibility of earnings if merchandising were more developed and concessions were increased and improved.

The problem for CVC is that the failure of the various parties to agree to a new Concorde Agreement has meant that the venture capital company has not yet been able to raise a bond against the future earnings of the sport and thus recoup the initial investment.