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How CVC Has Made $8.2 Billion From Formula One Auto Racing

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Private equity firm CVC Capital has made $8.2 billion from its investment in Formula One auto racing, according to new research.

CVC took a gamble when it bought F1 for $2 billion in 2006 in a leveraged buyout financed with two loans. The Royal Bank of Scotland (RBS) provided $1.1 billion whilst a further $965.6 million came from CVC’s $7.3 billion investment Fund IV. It came to 13.3% of the total amount available in Fund IV and was particularly risky since F1’s teams were threatening to start a new series due to a pay dispute.

The teams were pacified through a series of smart decisions made by F1’s chief executive Bernie Ecclestone. It led to F1’s revenues accelerating 31.7% to $1.6 billion over the past five years with net profits standing at around $378 million.

F1 is now understood to be valued at around $12 billion and CVC has got $8.2 billion of cash out and remaining value. It gives the private equity firm a return of 751.3% which is one of the highest it has made since it was founded in 1981 as the venture capital division of financial services firm Citigroup. Over the past 33 years CVC has invested in more than 300 businesses and secured $50 billion from investors including the California Public Employees’ Retirement System (CalPERS) which is the largest pension fund in the United States.

CalPERS invested $350.1 million in CVC’s Fund IV and data from the pension fund shows that it has made a 180% return on its money. In itself this shows that F1 is performing far better than some of the other businesses which the fund has bought. Indeed it is performing so well that F1’s teams are no longer talking about leaving but are instead considering investing in the series.

Last week Bloomberg reported that a group of the 11 teams is in discussion about buying a stake in the series. Although it did not name the parties involved with the talks, the most likely are the teams owned by Daimler, Ferrari and Red Bull. The most recent financial statements for these companies show that they have annual revenue of $162.6 billion, $3.2 billion and $8.8 billion respectively. They have more than enough resources to make a joint bid for F1 and although they have had numerous opportunities to do so in the past it has never led to anything.

“People say they are in talks about buying F1 but they haven’t got enough money to run the teams. Ferrari and Mercedes couldn’t buy it. There is no chance,” Mr Ecclestone told Forbes. It is no surprise that the teams have got their eyes on F1.

F1’s parent company Delta Topco is based on the British island of Jersey and it owns the licence to run the racing series until the end of 2110. This is incredibly valuable as it allows Delta Topco to grant the rights to host races and broadcast them on television. In 2001 Delta Topco’s subsidiary SLEC Holdings bought the 100-year licence for the bargain price of $313.7 million from F1’s governing body the Fédération Internationale de l’Automobile (FIA).

CVC is the biggest single shareholder in Delta Topco and it holds a 35% stake in it. The second-largest shareholder is Kansas-based asset management firm Waddell & Reed, which has 20.9%, followed by the estate of bankrupt investment bank Lehman Brothers with 12.3%. Mr Ecclestone’s Bambino family trust owns 8.5% with 5.3% in his hands and the remainder held by other banks, funds and management. There is a mighty financial engine beating under the hood of the business.

Delta Topco’s revenue generally comes from four main sources. Starting at the bottom, trackside advertising at each race and sponsorship of the series itself comprises 15% of the revenue. This comes from companies such as parcel delivery service DHL and luxury watch maker Rolex which are two of F1’s official partners. Next up is revenue from corporate hospitality, freight fees and two F1 junior series which provide around 20% of the total. Fees from F1’s TV broadcasting contracts bring in 32% of its revenue and are second only to the money received from the 19 races on the calendar. Together, the race hosting fees comprise 33% of F1’s revenue and come to a total of $512 million.

Just five years earlier the revenue from race hosting fees only came to $304 million but it has been boosted by more than $200 million thanks to a bidding war for the prized slots on F1’s calendar.

Getting on to the F1 calendar is no mean feat since Mr Ecclestone has committed to hosting no more than 20 races per year to limit the amount of time the teams are away from home and to cut costs. In turn this has put great premium on the calendar slots.

This year the inaugural race in the Russian resort of Sochi will take place and it is due to be joined in 2015 by Mexico which will bring the calendar to its limit. Another Grand Prix may have to be dropped as one on the streets of Baku, capital of the oil-rich country of Azerbaijan, is expected over the coming years. It isn’t the only one.

The waiting list is understood to include Argentina, Hong Kong, Poland, South Africa, Thailand and even cash-strapped Greece. This week it came to light that Greece’s Prime Minister, Antonis Samaras, has endorsed the country’s plans to build an F1 track in the Keratsini region. Mr Samaras has written to Loukas Tzanis, mayor of Keratsini-Drapetsona, saying the project would kick-start economic activity in the area.

“An F1 race in Greece would bring a big benefit to Greece. There would be thousands of visitors and it would give positive coverage to the country which is what it needs. The problem is that it isn’t cheap so I don’t know if it will ever happen,” says Dimitris Papadopoulos, a journalist who is based in Athens and is Greece’s leading expert on F1.

Holding an F1 race drives tourism by promoting the host country to a massive audience. In 2013 F1 had 450 million television viewers and this made it the world’s most-watched annual sports series. The races are center stage and not only do they focus attention on the host countries, they also put them on the global sporting map.

Over the past decade emerging nations, such as Abu Dhabi and Singapore have woken up to the promotional power of F1. They have all beaten a path to F1’s door to occupy a slot on its calendar alongside wealthy developed nations like the United States, Britain and Monaco.

Governments of many emerging nations are prepared to bankroll the hosting fees for the races and this has fuelled a Grand Prix arms race between them. In turn this has driven up hosting fees by $15.7 million per race since 2003. The fees now rise to more than $60 million annually and this has priced many countries out of the running. It is a particular problem in F1’s traditional heartland of Europe where tourism is already strong enough in most countries so F1 is not needed to boost it. In many of these countries governments have refused to bankroll the hosting fees so races have been lost in markets like France and Turkey.

Making matters harder for them, most of F1’s key contracts contain clauses which increase the hosting fee by up to 10% annually. This goes a long way to explain why F1 is one of few companies in any industry which has had consistently rising revenue over the past five years. CVC has made the most of it.

Over the past two years CVC cut its F1 stake by around half. Soon after its acquisition of F1 in 2006 it got back its $965.6 million loan courtesy of a $2.9 billion debt refinancing. However, the biggest gains have come over the past two years.

CVC got 2012 off to a bang when Waddell & Reed paid $1.1 billion in January for a 13.9% stake in Delta Topco. There was more good news in May 2012 when Delta Topco paid out an $850 million dividend with $420.8 million going to CVC in line with its shareholding which was 49.5% at the time. More acquisitions came later in May when US money manager BlackRock paid $196 million for a 2.94% stake followed by the sale of 4.5% for $300 million to Norges, the investment division of Norway’s central bank.

In June 2012 CVC announced that Waddell & Reed had invested a further $500 million which took its stake to 20.9%. Capping off a bumper year, in December 2012 Delta Topco paid out another dividend which this time came to $1.2 billion and was fuelled with income from another debt refinancing. CVC took home $421.1 million in line with its shareholding which had fallen to 35.1% following the stake sales.

Since then CVC has struck gold again as a $332 million dividend was paid out for 2013 and CVC took $116.2 million from this as it now has a 35% stake in Delta Topco. It brings CVC’s total payout from F1 to $4 billion but it doesn’t stop there as there is still tremendous value left in its shareholding.

Over the past few years CVC has been planning to exit through an Initial Public Offering (IPO) of F1 on the Singapore stock exchange. In 2013, a source close to CVC told British newspaper The Guardian that it was targeting a $12 billion market capitalisation for F1 which puts a value of around $4.2 billion on its 35% stake. It would give CVC a total of $8.2bn in cash out and remaining value which comes to a return of 751.3%. It is a far cry from F1’s value when CVC took over the wheel.

When CVC bought into F1 the teams were in the process of staging a revolt because they wanted more prize money. Mr Ecclestone and CVC had to take an unfamiliar route to head them off.

Private equity firms are not renowned for building up businesses but this is exactly what has happened since CVC took over F1. To ease the gridlock with the teams CVC brought all of F1’s key companies under one roof. Flush with the initial debt from RBS and the loan from CVC’s Fund IV, F1 bought the company which was running its trackside advertising and corporate hospitality divisions. It then acquired the junior series GP2 and set up GP3, an entry level series where average annual team budgets come to around $2 million compared to $211 million in F1.

By bringing all of F1’s divisions under one umbrella Mr Ecclestone was able to cut a deal with the teams which gave them a share of all of the revenue sources for the first time. He handed them 47.5% of F1’s earnings before interest, taxes, depreciation and amortisation (EBITDA) and this tempted them to stay in F1. It immediately doubled the teams’ F1 income but the payment to them also became F1’s biggest single cost. It came to $751.8 million in 2012 and has increased by 44.3% in the previous five years alone.

In fact, since CVC acquired F1 the teams have been paid a total of $3.7 billion in prize money which is nearly as much as the $4 billion that CVC has received from dividends and the sale of stakes in F1. If the dividends and share sales of the teams over the same period was included in their total along with the prize money there is no doubt that their haul would come to far more than CVC has made from F1. The teams really are the biggest winners.