F1 gears up for life without Ecclestone

Bernie Ecclestone did not particularly want to float Formula One in the mid-1990s, the last time motorsport’s most prestigious series flirted with the idea. Nor is he keen on it now, says one person close to the plans for an F1 stock market listing in Singapore in June.
“He finds it tiresome, the idea of having to attend four board meetings a year,” the person says.

But the prospects for a successful $3bn flotation of F1 are more favourable than they were a decade and a half ago when the plans were pulled.
Mr Ecclestone, already a billionaire, does not need the money, but he is being pushed by the current shareholders, including CVC Capital Partners, a British private equity fund, and the estate of Lehman Brothers.
Mr Ecclestone, the one-time second-hand car dealer who turned F1 into a global sports franchise, still calls the shots with the inimitable dealmaking style that has served him so well for four decades.
But he is 81, his holding in F1 is just 5 per cent and there is now a realistic chance of finding an answer to the critical question that has dogged F1 for years: “What happens after Bernie?”.
What started off as a UK-centric sport run by a cadre of “blazerati” amateurs is now being pitched to investors as a global media business which no longer needs the entrepreneurial and outspoken Mr Ecclestone at the wheel.
In a 487-page prospectus to be sent to potential investors ahead of next month’s planned initial public offering, the company acknowledges that the loss of Mr Ecclestone could have a “material adverse effect on our business and results”.
But it also alludes for the first time to a post-Ecclestone era for F1: a succession plan crafted with headhunter Egon Zehnder that includes a contingency arrangement involving pre-identified candidates drawn from the top of large global businesses who are on standby to take over at a moment’s notice.
What F1 would look like without its ringmaster is unclear. A new board of 16 members is taking the reins, headed by Nestlé chairman Peter Brabeck-Letmathe and including representatives of the Ferrari, Red Bull and McLaren teams.
But the prospectus includes the thicket of F1 entities based in Jersey, Luxembourg and the British Virgin Islands among others that he has set up over several years to steer the franchise his way.
The main shareholders, led by CVC, are now trying to convince potential investors that F1 is a stable yet still growing business.
Convoluted structure

Investors looking to buy shares in Formula One when it lists next month will have to get their heads around a Byzantine structure which few are likely to fully grasp, writes Stanley Pignal.
F1’s corporate organisation includes no fewer than 31 entities below Formula 1 plc, the Jersey-based company whose shares are to be sold.
The organigram include entities 10 times removed from the holding company, a legacy of multiple takeovers where one corporate parent has superimposed its own companies on top of previous arrangements.
An added complexity will be that each share comes “stapled” with the beneficial interest in a loan note, which equates to subordinated debt which the company can reimburse or pay interest on. Alternatively, it may simply pay conventional dividends.
The arrangement is occasionally seen in Australia but will find a whole new audience among the global investors expected to subscribe to F1’s shares.
“The structure could have an adverse effect on the price of the securities that will prevail in the trading market,” the company warned in its initial public offering prospectus.
The convoluted structure will help F1 reduce its tax bill in the UK, where interest on shareholder loans are tax deductible, but different jurisdictions may balk at the arrangement.
“Potential investors are advised to seek independent tax advice,” the prospectus warns.
CVC’s main argument is that F1 has been a lucrative investment for itself. It has profited handsomely since 2006, when it purchased a majority stake for $1.6bn from a trio of banks that had themselves recovered F1 from a bust German media company.
Following repeated refinancing of the debt pile it took on to pay for F1, it has already more than recovered its original equity investment, with far more expected as it offloads the shares.
CVC’s eagerness for the flotation contrasts with Mr Ecclestone’s reluctance. The firm is in the process of raising its next pot of cash from investors and is keen to realise the value of its past investments.
Other investors, including the estate of Lehman Brothers, which has a 15 per cent F1 stake, are expected to cash in now.
To move the flotation along, CVC announced this week that it had presold 21 per cent of its stake to three institutional investors for a total of $1.6bn, giving the F1 group a valuation in the region of $10bn.
People close to the flotation plans say CVC is now drawing back from its active oversight of F1 and will eventually sell down its remaining F1 stake in tranches.
Whether the incoming investors get the same sort of returns as CVC depends on the direction F1 takes as a listed company.
On one hand, F1 is highly profitable, as the prospectus shows. In 2011, it generated $451m of operating profit on revenues of $1.5bn, mainly through television rights, payments from race organisers and sponsorship. Capital investments were negligible, and running costs are low: much of the marketing is done by the sponsors themselves.
There are other elements that will please investors. Unlike other sporting assets such as football teams, F1’s financial performance is not tied to unpredictable prowess on the field.
It has plenty of exposure to sought-after markets such as Russia (where a race is planned from 2014) and Turkey, and has putative plans for races further afield. Many of the key contracts it depends on have long lives and include generous “escalator” clauses each year.
Other parts of the business case look trickier to handle. Television revenues have remained high in recent years despite long-term falls in viewer numbers. That will also affect sponsorship income, which has already been dented by ever-stricter bans on tobacco and alcohol advertising.
More unpredictably for investors, F1 is a fragile ecosystem that periodically threatens to break down. Balancing the interests of the teams, sponsors, broadcasters and racetrack owners is as fiddly as steering its nervy cars.
The most fragile relationship traditionally has been with the dozen or so teams whose cars and drivers provide the main spectacle. Every few years, the teams threaten to create their own breakaway series, if only as a means to leverage better terms.
The strategy has worked: payments to teams have swelled rapidly to $700m as the F1 pie has grown and the teams have negotiated a bigger slice.
“Teams are in a much better position now than they were before, with a higher share of profits and more rights generally,” says Xander Heijnen, a consultant who has advised the manufacturers and teams on their relationship with F1.
Even with the shift in revenue sharing, not all teams are happy. Four out of 12 teams competing in the current season have yet to sign up beyond the end of the year. The series has also lost a clutch of manufacturers in recent years, including Honda, Ford and Renault, as they scaled back their marketing budgets.
Several people with knowledge of the flotation plans say these issues are surmountable. The quandary remains what F1 will look like after Mr Ecclestone. Several of the 19 pages of risk factors in the prospectus relate to him. The 81-year-old ringmaster remains the unknown quantity.