JUNE 13, 2002
The end of Kirch...
The commercial rights of Formula 1 have been a mess since Bernie Ecclestone started selling them off in the autumn of 1999. The initial deal was 12.5% for $325m to the German-owned merchant bank Morgan Grenfell Private Equity. This organization had an option to buy another 37.5% of the firm but failed to hit its deadline and so Ecclestone sold those shares to a San Francisco investment company called Hellman & Friedman for $725.5m.
Hellman & Friedman and MGPE then combined their shareholdings and formed a company called Speed Investment and sold this firm to German media company EM.TV in a deal which was worth $712.5m in cash and 10m EM.TV shares which were then valued at around $88 each. In addition EM.TV agreed to an option with Ecclestone to buy another 25% of the business.
At the same time a deal was struck for SLEC to pay $360m to the FIA for a 100-year lease on the commercial rights of the sport. This money ended up as the basis of the new FIA Foundation.
A few months after it bought Speed Investment the EM.TV share price dived amid uncertainty about the future of the company. MGPE lost hundreds of millions of dollars on the deal while Hellman & Friedman was wise enough to off-load its EM.TV shares before that business hit trouble.
In an effort to stave off disaster EM.TV agreed to sell 49% of Speed Investments (36.75% of SLEC) to Kirch Beteiligung for $586m. EM.TV boss Thomas Haffa and Leo Kirch then took up the option to buy the additional 25% of SLEC and paid $987.5m to the Bambino Trust, another Ecclestone Family trust.
Kirch later acquired the remainder of the Speed Investment shares as part of an asset swap with EM.TV. The money for the Kirch purchases was borrowed from three banks: the Bayerische Landesbank, JP Morgan and Lehman Brothers and gave Kirch what amounted to 75% of the business (although he failed to pay for all of the purchases and so EM.TV remains in control of 16.75% of the shares, although these are committed to Kirch).
The collapse of Kirch means that the shares are effectively in the hands of the three banks, which must now decide what to do. They will have to work with the legal administrator to find a solution.
Ecclestone and the banks may decide to work together to build up the business and then float the shares at a later date or there may be a sale of the shares immediately. One way or another a deal is needed which will enable SLEC to reach agreement with the automobile manufacturers as they are threatening to start their own World Championship and this is causing much instability in F1 as sponsors are not committing for the future - because they do not know what the future is going to bring.
The drop of TV revenues as a result of the failure of pay-per-view coverage and the fact that all TV stations are suffering from low revenues means that the sport is still going to struggle for a bit. It will help matters if the revenues generated by Allsport Management (which looks after trackside signage, VIP hospitality, official supplier programs and licenses merchandising at the race tracks) are brought into the group. It is unlikely that anyone has the money that Paddy McNally would like for this business but it makes sense for him to do a deal for SLEC shares.
The immediate problem is that the Formula One group needs to pay off the $1bn Eurobond issue (in effect a loan) which was issued in the Spring of 1999. This will continue to be a drain on the company until 2010, unless the bondholders agree to renegotiate terms.
When all is said and done, the Ecclestone family has made more than $3bn in the last three years and anyone else who has been involved has lost out. And at the end of it all the family is still in control of the business as Bernie Ecclestone has a deal by which he remains in charge until the end of 2005.
The administrators and creditors of Kirch will now have to decide what the SLEC shareholding is worth. Kirch paid $1.5bn and traded a profitable company for the stake. It is unlikely that the stake is worth more than $500m in the current economic climate and that may mean that the banks will decide to hold on and wait for the economy to improve before selling the stake.
The next couple of months are going to be busy with negotiations but the F1 world knows that by the autumn a decision needs to be made if the sport is to remain healthy in the long-term.