JULY 21, 2000

Ecclestone and the car industry

THE rumors that a consortium of automobile manufacturers are trying to buy a shareholding in Formula One is not a surprise given the recent agreement between Bernie Ecclestone and the FIA for the commercial rights to the World Championship to be leased for 100 years.

THE rumors that a consortium of automobile manufacturers are trying to buy a shareholding in Formula One is not a surprise given the recent agreement between Bernie Ecclestone and the FIA for the commercial rights to the World Championship to be leased for 100 years. It is a logical move if they wish to protect their investment in the sport and make it more profitable. The current trend in F1 is for manufacturers to buy or establish their own teams. Fiat owns Ferrari, DaimlerChrysler is an important shareholder in McLaren, Ford is represented by Jaguar Racing, Renault recently bought Benetton and Toyota is putting together its own team. It is possible that Honda will follow suit and that Peugeot may buy Prost Grand Prix. In addition there is talk that General Motors is looking at an F1 involvement.

The increase in manufacturer interest presents Bernie Ecclestone with a problem because although he is still able to control rebel teams, it is going to become more and more difficult when he tries to take on huge corporations which are have a great deal more money than he does.

At the moment - and until the end of the current Concorde Agreement in 2006 - the Formula 1 teams receive only 47% of the income from television. Ecclestone gets the rest and pays the FIA from his share. Teams receive none of the money raised from fees paid to Ecclestone by race organizers.

While the payments to the teams constitute a considerable sum of money - the big teams take around $15m a year from TV income - there is a strong feeling that Ecclestone is taking too much. Teams are also worried by his 100-year deal with the FIA but they know that they are only bond to Ecclestone until the current Concorde Agreement runs out in 2007. After that Ecclestone needs a new Concorde Agreement to tie in the teams and they are going to ask him for more money. He is unlikely to agree to hand over a bigger percentage.

There is, therefore, the potential for trouble ahead.

The reports that five motor manufacturers are looking to buy a share of SLEC, the holding company of Ecclestone's Formula One group of companies, should not, therefore, be a surprise. The car firms realize that they need influence over Ecclestone if they are to get a better deal. We hear that initial approaches have been made through an organization called the ACEA, which the European federation of car industry companies.

Ecclestone may not want to go into business with the car companies but such a move does make sense as it would have the effect of tying them to the sport for many years to come. Ecclestone may not wish to sell his share of SLEC as he would prefer to stay in control of F1. It might be possible to do a deal in which he would sell his shares but would retain executive control of the company, in a similar deal as Enzo Ferrari had with Fiat in regard to the Ferrari F1 team.

Ecclestone's problem is that the other 50% of SLEC is owned by the German media company EM.TV and it is vulnerable because it has made a series of acquisitions paid for with stock and loans.

In recent months EM.TV investors have been questioning whether the F1 acquisition was a good idea for a company which specializes in children's cartoons. There are also shareholders who feel that EM.TV paid too much to buy 50% of SLEC from the investment house Hellman & Friedman and the merchant bank Morgan Grenfell Private Equity which had bought the shares from Ecclestone. EM.TV paid around $1.6bn, of which $712.5m was in cash and $880m for 10m EM.TV shares. Last Thursday EM.TV shares fell to around $60 which means that the holdings owned by the two companies are worth considerably less than they were. Hellman & Friedman, for example, paid Ecclestone $1bn in cash. The company received $500m back in cash from EM.TV and seven million shares but the fall in the share price means that this stake is now worth only $420m and that means that Hellman & Friedman has made a loss on the deal.

Thomas Haffa, the founder of EM.TV, controls only 45% of his company and might be willing to sell his SLEC shares. This would provide him with money and could help rebuild the share prices the company would then be back in its traditional business. If not EM.TV could be vulnerable for a hostile takeover bid. The company is currently valued at $8bn but a consortium of car companies would be able to fund such a deal, particularly as after a takeover, the companies media assets could be sold off to market where media content is worth a great deal of money to large electronic media companies such as AOL Time Warner, Telfonica-Lycos, Vivendi Universal and Yahoo. The sale of the assets would reduce the expenditure necessary.

Buying EM.TV would give the car companies 50% of Ecclestone's earnings and so, in effect, they would not need to negotiate for an increase in TV income as they would be getting 75% of the money plus a 50% share of all of the other fees which Ecclestone currently does not share with the F1 teams. It would also prevent Ecclestone turning his business into a TV empire which would earn money from other sports, which might otherwise mean that F1 teams would be forced to pay for TV coverage.