Formula One race fans still don't have their public offering. Why? The equity fast track has many pit stops
Watching Michael Schumacher blur past the checkered flag at September's US Formula One Grand Prix might leave the impression that professional motor sports is all about winning car races. It is, of course, about much more.
In essence, it is a tool for communication. In 1999, individuals tuned in to Formula One auto races about 5 bn times worldwide, a demographic reflected in major corporate sports marketing budgets. Formula One's prestige and global reach mean it is the planet's most desirable advertising billboard. As tobacco companies trim sponsorships, teams are aligning with car makers, new economy companies, governments and institutional banking partners. Formula One is moving into a new gear.
The man moving it there is the man who has shifted F1's gears with an iron grip for more than 20 years. Bernie Ecclestone, riding a fortuitous wave of European media privatizations, almost singlehandedly turned a curious pastime for scarf-clad aristocrats into a sport of global appeal. In the process, mechanics became millionaires and Ecclestone, once a used car salesman, became one of the world's richest people thanks to his crafty hold on almost every commercial part of F1, including its profits from promoters' fees and TV rights.
Spurred by his stakeholders, Ecclestone, now in his 70s but showing no desire to retire, wants to pass the business into the right hands. He has reorganized his company, sold half his share of the commercial rights, and formed a family trust. All that's left is to float the company and 'realize the value of his business,' as investment bankers say. But there are a few wrenches in the works. First, a simmering anti-trust dispute between Ecclestone and the European Commission over the legitimacy of his F1 TV rights has frightened investors and effectively put the brakes on a flotation. Second, and probably more importantly, the market has concerns about Bernie.
Indeed, the road to an IPO has been long, winding, and rife with wheeling and dealing. When an attempt at a London Stock Exchange-listed offering in 1997 stalled, some observers pointed to the EC investigation. Others suggested that F1 team dissention over their stakes in a floated company caused the delay.
But F1 put a different spin on it. Spokesman Stephen Mullens succinctly addressed what he saw as the investor relations issue on September 28, 1998. 'The company needs the opportunity to specifically build investor awareness,' Mullens was quoted as saying. 'The earlier attempt at an IPO suffered from the City not understanding the company sufficiently.'
For his part, Ecclestone brushed off the aborted launch saying he'd been too busy to get the project off the ground. But he'd learned a lesson. He knew he'd have to spend more time introducing himself to the financial community next time around. Partly to get its attention, he decided to issue a bond.
Announced in September 1998, a Â£880 mn (US$1.4 bn) floating rate note would be secured by revenues from race promoters and on projected revenue from Ecclestone's 52 percent of the total TV rights (the teams split the rest). These 'Bernie Bonds' were to be used to create an Ecclestone family trust. However the paper was slow off the starting line. The bonds' announcement coincided with a Russian loan default and a global credit crunch. American institutions shied away. The EC investigation continued to hang over a deal.
American bank Morgan Stanley Dean Witter spent eight months shopping the bond around until March 1999 when German bank West LB was appointed joint lead manager and took 40 percent or more of a restructured issue. Most bonds are believed still held by underwriters and the paper is little traded.
Still, Ecclestone remained upbeat. The bond had made a splash in the structured finance biz, representing the first long-term TV revenue securitization in sport. He had, moreover, convinced the underwriters (at least) that the EC was no threat to a bond issue. Fitch IBCA rated it A, Moody's A2. 'We now build on the relations we have established with the investment community,' said Ecclestone in a statement afterwards. 'We look forward to the future stock market flotation of this exciting business.'
Until then however, there would remain a few more laps. And Ecclestone would indeed build on his investment community contacts, selling off a piece of his business and watching as its value ratcheted upward.
Investors, start your engines
The equity engines started in October 1999, when Morgan Grenfell Private Equity (MGPE), a Deutsche Bank unit, agreed to pay Ecclestone $275 mn for a 12.5 percent share in Slec Holding, the company which controlled the commercial exploitation of F1. MGPE also signed an option to buy another 37.5 percent of the company for $975 mn. If all went well, Ecclestone would be $1.3 bn richer – and still own half the company.
Meanwhile MGPE managing director Scott Lanphere, who had earlier taken the bank into F1 with a profitable stake in the Arrows team, sought to organize an investment group. 'There was enormous interest,' says Lanphere. 'But the size of the deal meant there were digestion issues, even for some of the big broadcasters. At the same time, there were EU-related risks and concerns about the complex nature of the trust. Ultimately, none of the deals came to fruition.'
When, MGPE declined to pick up its option in February, speculation arose over whether Ecclestone could attract other investors. However, the issue was settled only days later when, in a deal worked out a month earlier, Hellman & Friedman LLC, a San Francisco private equity firm, bought 37.5 percent of the shares for $712.5 mn. Another interested investor was German media mogul Thomas Haffa. He had expressed interest for some time, but according to one observer, 'couldn't move in MGPE's time frame'. Ecclestone had met him days earlier in Kitzbuhl, Austria, for a brief discussion.
In the London Times, Ecclestone denied Morgan Grenfell walked away, remarking, 'They thought they could play hardball and they couldn't. They missed the deadline on the option and I wasn't prepared to extend it. They are not as hard as they think.' That public statement was an investor relations error. It was not Bernie's first. Nor would it be his last. Private investors were already concerned about becoming partners in Bernie's business. Now he became poison.
'Bernie's comments were ill-advised,' comments MGPE's Lanphere. 'People investing in a business want to know they will be well taken care of by those in charge of that business. He made it clear that he didn't care as much about his partners once they were in the deal as he did about all the prospective investors he could talk up his price to.'
Meanwhile, Bernie's new partner, H&F, promised to be a hands-on investor and the goal remained to take Formula One public. H&F anticipated 'working with Bernie to ensure F1 continues to grow' and holding their stake for perhaps three years. However, those plans went on hold when H&F was offered a deal it couldn't refuse.
In an extraordinary twist to the F1 saga, both H&F and MGPE quietly flipped their stakes last spring for $1.65 bn in a cash and stock deal to Haffa's EM.TV & Merchandising AG, a darling of Germany's Neuer Markt. H&F got back the $712.5 mn it had invested plus some stock while MGPE got EM.TV stock only.
'The idea would have been to float it, but somebody quickly came along and offered us a substantial premium,' says Patrick Healy, a partner at H&F. 'Bernie liked it since EM.TV was a European strategic investor and was prepared to buy an additional 25 percent at a substantial premium [to the price at which we had invested].'
The private equity investors put in a good day's work and the Ecclestone family sat on an additional $350 mn in paper wealth. The teams and especially the car makers, however, were alarmed. Would EM.TV act in their best interest? Apprehensive, they wanted a bigger voice in Formula One racing.
For his part, Haffa too wanted more, starting with a further stake in Ecclestone's business within one year. Saying F1 was the 'single most important deal' in EM.TV's history, Haffa considered it a strategic acquisition. 'Formula One, as a brand, has never been fully merchandised,' says Michael Birnbaum, senior vice president of corporate communications at EM.TV in Munich. Birnbaum explains that EM.TV's philosophy is to bridge the family entertainment media and retail industries in a coordinated and global scale. 'Sports is family entertainment and F1 is the biggest brand in the sports business.'
Also, predictably, EM.TV planned to float the holding company. However, some EM.TV investors are concerned about the antitrust investigation, the fact that the company's stock was now owned by the two investment firms, and whether EM.TV has lost focus with its F1 involvement. Its stock price has also fallen, partly because of an overall drop in the Neuer Markt coupled with less-than cunning deals for F1 and, a few months earlier, the acquisition of The Jim Henson Company. Each deal let the new holders of EM.TV stock sell their shares immediately – which they did. While strategic investors were found to buy up those stakes, the millions of shares on the market depressed EM.TV stock. 'We learned,' concludes Birnbaum. 'Next time we won't do it that way.'
EM.TV also learned a bit more about Ecclestone. Even as EM.TV was trumpeting its grand plans to help augment the value of the business, Ecclestone was undermining the German firm's significance, pointedly commenting that he, and only he, remained in the driver's seat. 'Basically, Bernie was saying to the market that EM.TV had bought in but they were to sit in a corner and he wouldn't let them do a fucking thing,' comments one observer. 'Getting in bed with Bernie may put you in a dangerous position.'
Under the hood
While Bernie won't take a backseat for anyone, one place Bernie would like to be is in tight with US investors. Institutions, generally keen on media plays, would have to be shown where the growth is and why it is worth allocating money to. A retail crowd, on the other hand, might be enticed simply to the F1 name, even though it is not quite the same as owning a sports franchise.
Yet while a strong US reception would be critical for an IPO, F1 hasn't been much of a factor in the US sporting world for decades. 'Your average motorsports fan in the US probably couldn't find an F1 race on TV,' says Glen Read, an analyst at Bear Stearns which launched comprehensive coverage of the motorsports industry in August 1999. 'But there are probably a decent number of US fans who would want a piece of it. Their demographic profile is completely different to your average [stock car] fan's profile.'
Indeed, even if Ecclestone targeted the investors of the US's two most popular motorsports leagues – Nascar and Cart – he wouldn't necessarily be siphoning them off. Formula One's market capitalization still dwarfs anything the other two racing circuits could offer, thus attracting different sorts of institutions. Moreover, according to Edward Williams, a leisure products analyst at Gerhard Klauer Mattison in New York, 'When you bring larger companies into a peer group space, you end up increasing the focus on the space so it is an overall positive for everybody.' Like many US analysts, Williams looks on motorsports as a sub-sector of the leisure industry – which also includes cruise lines, museum companies and theme parks.
F1 attracts 'leisure industry' investors and others because of its high performance operating characteristics. Ecclestone's business is reported as earning some $200 mn profits in 1999 on annual revenues of about $400 mn, mostly from the sale of television rights. 'There is plenty of US appetite for a company with so few cash requirements and such prodigious cash flow,' says Gary Cooper, an analyst at Banc of America Securities in San Francisco.
At last report, the teams and motor manufacturers were in motion to buy stakes from either EM.TV and/or Ecclestone. If rumors are correct (note, however, that in the F1 arena, rumors are never correct), their bids would place a total value on the company of some $6 bn. When MGPE first acquired its 12.5 percent, the total value of the company would have been $2.2 bn.
Ecclestone has denied that pressure to soothe regulators would trigger a sale to car makers, and he anticipates a quick resolution to the antitrust issue. Until then however, he remains aware that investors would discount a public offering's valuation. Nor does Ecclestone seem in a hurry to stop the staircase of increasing value that, despite the EC investigation, the company has enjoyed as it is transferred among private owners.
Moreover, an IPO would mean Ecclestone faces the challenge of opening up his heretofore secret business dealings to public scrutiny. Until now, Ecclestone has done all he can to keep a wall between his business fiefdom and that scrutiny. And, while information in his bond prospectus shed some light, questions remain about how F1 is run. 'There is the perception among the investment ranks that there is some funny business that goes on behind the scenes,' says Bear Stearns' Read. 'F1 would have to be a lot more open about how contracts are set up and how the money flows.'
'The business is clean,' adds one insider. 'The problem is that they believe disclosure is inherently evil. That makes it rather difficult for the company to go public.'
If Ecclestone is unwilling to play by the rules of a public company, maybe F1 shouldn't be taken public. And, while he's been stirring the pot for at least three years, maybe Ecclestone isn't hell-bent on the idea. After all, he's already made a bundle. And there is certainly no need to raise capital for the business. Still, Ecclestone knows that the more owners F1 has, the more the value of his share – and the more power he will retain. While previous IPO plans centered on Europe, American investors were no doubt in mind when Ecclestone chose the legendary Indianapolis Motor Speedway to showcase F1's return to the US after a nine-year absence. For Ecclestone, only the most prestigious brand name will do. And that's something investors anywhere like to hear. The question is, is Bernie willing to tell them anything else?