Features - Financial

FEBRUARY 22, 1999

Why are Formula One teams being sold?


Formula 1 teams used to exist solely as racing operations.

Formula 1 teams used to exist solely as racing operations. If they did have score good results they had trouble raising the necessary sponsorship and many of them went out of business because they could not find enough money to keep going. The sport used to have many teams run by rich men but gradually these faded out as the costs involved rose.

The character of the sport, however, was to change dramatically as Bernie Ecclestone began to renegotiate contracts with television companies in the early 1990s. The sport had grown very popular and there was competition for the TV rights in many countries. Ecclestone demanded more money - and the TV companies paid. At the time Bernie was selling what are known as the "terrestrial" rights to broadcast Grands Prix. This meant that the company that bought the rights could broadcast the races free of charge on their national networks. Companies such as Britain's ITV, Germany's RTL, Japan's Fuji TV, Italy's RAI and France's TF1 were persuaded to pay as much as $15m a year for those rights.

In addition Ecclestone invested $40m in interactive digital television. Today his Formula One Communications (FOC) company has a huge mobile TV facility - a huge silver-grey structure known in the F1 paddock as "Bakersville", after former Brabham mechanic Eddie Baker, who runs the show. It is staffed by 200 technicians, breaks down into 200 tons of freight and takes two Jumbo Jets to transport around the world.

This facility produces what is known as the "Supersignal", which features five different TV feeds, including a main feed, an incident analysis channel, in-car footage, pitlane footage and data. It is broadcast only by digital TV companies, which can beam all the signals into private homes by satellite on a pay-per-view basis. Subscribers can switch between the channels.

This was designed for real enthusiasts and Ecclestone was able to sell the idea to digital TV companies such as Germany's DF1, Italy's Telepiu and France's Canal Plus. Canal Plus is rumoured to be paying Ecclestone $60m a year for the digital rights to 60 countries around the world.

Ecclestone was making a great deal of money from the sale of all the TV rights and as a result there was a political struggle between Bernie and the F1 teams. In the end he agreed to pay them 47% of the money he earned from TV deals. This meant that the teams were suddenly receiving around $10m each a year. The new Concorde Agreement signed last year settled on a group of 12 teams (the current 11 and the planned Honda F1 operation) and in effect the teams became F1 franchise-holders. The TV money meant that teams were suddenly much more financially stable operations and could even produce profits.

Ecclestone plans to produce even more money in the years ahead with a concept known as "virtual advertising", in which the advertising billboards around the track will be used to display different messages in different countries. This will mean that sponsors can target their audiences and Ecclestone and his salesmen can sell each billboard around 200 times - once for each country in the world. Ecclestone hoped to float his company Formula One Holdings and gave the financial world an idea of just how much money was involved in F1.

These figures attracted the attention of venture capitalists, who were keen to make quick mid-term profits. Financial institutions found that the Jordan team, for example, was able to make a profit in 1997 of $7m on a turnover of only $60m. Last autumn a venture capitalist company called Warburg, Pincus & Co offered Jordan $60m for a 40% share in his company. It was a good deal for everyone. Jordan secured his family's financial future but retained a majority shareholding in the team; Warburg, Pincus & Co worked out that the investment would pay itself back in a few years and they would end up owning a very valuable share in a company which could be sold later and the money paid to investors.

In addition to the extra TV money which is expected teams are beginning to develop better marketing ideas and therefore will raise more sponsorship. McLaren has done a remarkable job with cross-marketing techniques which mean that their sponsors make a profit from the relationship by doing business with the team's other backers. There are many new ideas being tried. A team will raise money by offering free use of its driver's image to a supermarket chain if the company agrees to stock certain products. Such deals can be worth millions to the supermarket chains and to the suppliers and they will be happy to give the team a small percentage of that money to go racing. The signage on the car will be little more than an incentive to make the deal work.

Teams are also beginning to develop better merchandising operations and these are expected to produce big profits in the years ahead.

The Jordan deal with Warburg, Pincus & Co was the first major deal of its kind, although Ferrari did sell a small percentage to a banking consortium in 1996 to raise money for modernization at Maranello.

The second major deal of its kind was the purchase of Arrows. The team was not doing well and had collected large debts during the 1998 season. With many staff leaving and no money to build a new car, Walkinshaw was looking for an injection of capital into the team. According to the team he was approached by a wealthy Nigerian Prince Malik Ado Ibrahim, who followed motor racing and wanted to buy the team as an investment He convinced Morgan Grenfell Private Equity Ltd to back the project.

The team was half-owned by Jackie Oliver and some of his partners from the old days of Arrows. Oliver and his three partners received around $8m each for their 49% shareholding and Tom Walkinshaw - who controlled 51% of the shares - is understood to have received a similar. As part of the deal Tom acquired 25% of the new company, using the staff, facilities and technology as his stake. The investment company Morgan Grenfell Private Equity Ltd is believed to have paid around $78m for a 45 percent shareholding while a littleknown Nigerian Prince called Malik Ado Ibrahim acquired another 25%. The remaining 5% was left for a share ownership scheme for the Arrow staff.

Morgan Grenfell Private Equity is one of nine divisions of Deutsche Morgan Grenfell, the investment banking arm of Germany's second biggest bank Deutsche Bank AG.

Deutsche Bank, which has been doing business since 1870, is a powerful player in German industry and is the biggest shareholder of Daimler-Benz.

DMG was created when the bank bought the Morgan Grenfell company, which can trace its history back to the 1930s when the heirs to JP Morgan's banking empire split and Harry Morgan established his own investment bank. DMG now deals with every aspect of investment banking. The Private Equity Division was established in 1989 to make investments in unlisted British companies. Usually these deals resulted in the companies being floated on the London Stock Exchange and there were some early successes with MGPE investments in the British School of Motoring and in the Taunton Cider company. MGPE now has an investment portfolio of around $1bn.

DMG is not expected to have any direct involvement with the Arrows team and this will be left to Walkinshaw and Prince Malik.

Malik is something of a mysterious figure. He is 38 and has spent most of his life in Britain where he was educated. He studied business management at the University of Southern California and has since been involved in a variety of different businesses including Nestle Nigeria, Mitsui and Arcadia. According to Arrows he brokered the sale of Lotus Cars to the Malaysian car company Proton and is now a big player in the Nigerian telecom industry. His business interests are administered by the discreet legal firm Mishcon de Reya. He says his main aim is to develop the team's marketing by broadening its appeal in unexploited areas, notably Africa, the Middle East and America.

The trend in Formula 1 is towards similar deals in the future as the old F1 team bosses cash in on their success. Some will go on running the companies but others - such as Ken Tyrrell - will retire with the money. Ultimately one can foresee a situation where all the big teams will be listed on Stock Exchanges. Sources in Italy say that the Ferrari company is being built up by FIAT and will eventually be floated on the Milan Stock Exchange.

At the moment the teams fall into three categories. Those owned by a motor manufacturer; those owned by consortiums or wealthy individuals and those which are still owned by the team founders.

Ferrari, the new Honda team and the planned Toyota team fall into the first category; McLaren, Sauber, Minardi, British American Racing and Arrows are all controlled by wealthy companies or individuals but they are left to be run by managers with F1 experience. The best example of this is McLaren which is controlled by the Ojjeh Family but run by Ron Dennis.

The third group is made up of teams which are still controlled by the racing people: Williams, Jordan (despite the recent sale of equity), Stewart and Prost Grand Prix. It is likely in the years ahead that this group will gradually disappear as the owners are offered lucrative deals by companies wishing to invest in the sport. It is strongly rumoured, for example, that Stewart will eventually become part of the Ford Motor Company.

The sport is gradually moving towards a future where it will be controlled by big business and the only racing people involved will be the managers and participants. If a sport creates enough money it is inevitable that this will happen.<\#026>