F1 could hardly have had a tougher time last year. Before the season began, Honda announced that it would not race in 2009. Soon afterwards, the Formula One Teams Association (FOTA) threatened to set up a rival series. Then came the departures of BMW and Toyota followed by the revelation that former Renault team principal Flavio Briatore had allegedly fixed the result of the Singapore Grand Prix in 2008. Topping off the year, Renault announced in December that it would cut its involvement with the sport. Whilst it would be perfectly logical to assume that F1’s finances must have been battered by these blows the reality is very different.
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In late May F1’s commercial rights-holder, the UK-based company Delta 3, filed its financial results for the year-ending 31 December 2009 and they sent shockwaves through the sport. Delta 3 receives all the revenue from fees TV stations pay to screen F1 as well as the fees paid by circuits and sponsors of the sport. Remarkably, despite facing the worst recession in living memory last year, Delta 3’s revenue still rose 6.4% to a record $1.1bn with its operating profit more than doubling to $193.1m. If anyone thinks that the 79-year-old Bernie Ecclestone, chief executive of Delta 3’s ultimate owner Delta Topco, has lost his touch then think again.
Around $450m of Delta 3’s revenue comes from fees paid by broadcasters with another $450m from fees paid by GP promoters. The remainder comes from series sponsors such as F1’s official logistics partner DHL and financial services partner Allianz.
F1 lost an estimated $37.3m in revenue last year due to the departure of France and Canada from the calendar. They were replaced by Abu Dhabi which, according to F1’s industry monitor Formula Money, pays a blockbuster $45m annually but it still left the sport with 17 GPs – one race down on 2008. Nevertheless, the overall takings from GP fees increased with the average revenue per race up 12.6% to $66.2m. The secret to this is that the race promotion contracts contain a clause that escalates the price paid by 10% annually come what may. Not a bad trick to have up to one’s sleeve as the economy goes into free-fall.
The icing on the cake was Ecclestone’s signing of a new partnership with Korean electronics firm LG which became F1’s timing partner last year at an estimated annual cost of $15m. Videogame firm Codemasters also released its first F1 game and made an annual payment estimated by Formula Money at $20m. To cap it all, in March 2009 Ecclestone got Universal Music onboard paying around $5m to promote the F1 Rocks concert series.
The increase in turnover combined with aggressive cost-cutting led to an increase in Delta 3’s operating profit. The company’s biggest cost is a payment of 50% of its underlying profits to the top 10 teams in F1 but even this was lower than expected last year. The team payment only increased by 4.4% to $544m in 2009 and the accounts indicate that this is because BMW left F1 before signing a new contract to stay in the sport. Total costs, excluding team payments, fell 28.4% to $156.2m due to the lower overheads from hosting fewer races and lower oil prices reducing travel and freight costs.
Staff costs were also slashed with Delta 3’s total wage bill down by 11.2% to $26.9m in 2009 despite the company taking on eight staff to give a total of 257. The average salary fell by a massive $18,000 with the company’s highest-paid director, believed to be chief financial officer Duncan Llowarch, taking a gigantic $126,000 pay cut giving a salary of $667,000.
Llowarch owns 0.8% of Delta Topco but this did not give him immunity from the cuts. However, Ecclestone, a 5.3% shareholder in Delta Topco, seems to have emerged unscathed. He is on the board of Delta 3 subsidiary Formula One Management and is believed to be its highest-paid director on a $6.5m salary which did not fall on 2008.
Things were not so rosy on Delta 3’s bottom line. This is weighed down by interest payments on the debt which the company’s 63.4% owner, private equity firm CVC, secured from Lehman Brothers and The Royal Bank of Scotland (RBS) in 2006 to buy the business. The company now has $2bn left to pay and interest on this is charged at the interbank lending rate (LIBOR) plus between 1% and 3.5%.
As a result of the recession, LIBOR rates crashed last year to promote lending between financial institutions and this led to Delta 3’s interest charges being 54.7% lower than the previous year leaving it paying $67.5m of bank interest. In addition, it repaid $124.6m of the loan itself – up from $83.7m in 2008. The $2bn is fully repayable by 30 June 2014 but in 2008 CVC told The Paddock that its plan is to pay off a large amount by the deadline and refinance the remainder which would give the shareholders a significant windfall.
Perhaps the best indication of CVC’s confidence in F1’s prospects is that during 2009 Alpha D4, a subsidiary of Delta 3, bought $164m of the debt. The debt was syndicated soon after CVC secured it with RBS and Lehman Brothers preferring the cash in hand rather than waiting until the loan matured.
Last year the debt price plunged to a low of 48.7 cents in the dollar following the departure of Honda and the Delta 3 accounts state that the company bought the $164m stake at a price below par. It increased to a record 93.3 cents in the dollar in January this year as the sport’s outlook stabilised and new teams joined. The purchase gave Delta 3 a $13.1m gain which presumably also covers the lower interest payment that the company will need to make due to the reduction in its debt.
Delta 3 also gained $2m through the currency translation of non-dollar costs. Delta 3’s accounts are denominated in dollars so as the currency’s strength soared the company was able to get more bang for its buck when it came to buying in other countries.
It used the boost in its financial performance to put it in better shape for the future. Delta 3 made a huge cut in its creditors from $810.2m to $601.3m largely through halving its short term liabilities to $198.2m. This reduction was so large that it slightly overstretched the company with its net cash flow from operating activities falling 8.7% to $367.2m. Delta 3 drew on its cash in the bank to cover this deficit with its reserves decreasing $32.2m to $415.2m.
After interest payments on inter-company loans, Delta 3 finished the year with an after-tax loss of $497m – a $21m improvement on 2008. It is a long way from breaking even but that is not the aim. Since the company is based in the UK tax would have to be paid on profits and the inter-company loans put paid to that. Any profits could be paid by dividend to Delta Topco and would escape tax since it is based in Jersey. The goal for Delta 3 is to repay the debt and it is firing on all cylinders doing this.
It was never going to be so easy to increase the amount spent on corporate hospitality. The last thing that most companies wanted to be seen doing last year was guzzling champagne at the expense of their shareholders and, with tickets to F1’s exclusive Paddock Club costing as much as $4,520, it’s no surprise that takings were down.
In contrast to Delta 3’s fortunes, revenues of F1’s corporate hospitality provider Beta Holdings crashed by 18% last year plummeting $33.1m to $150.3m. Llowarch attributes the decline to “prevailing economic difficulties” and a reduction in the number of races on the F1 calendar from 18 to 17.
Beta Holdings makes 98% of its turnover from Allsport Management, the Swiss-based operator of the Paddock Club which treats guests to perks such as an open bar with champagne, a gourmet banquet, a masseur, beautician, hairdresser and driver appearances. Sponsors use the Paddock Club to entertain clients but several key Allsport customers slashed their hospitality budgets during the downturn.
One hospitality programme which reversed into the pits last year was that of the Royal Bank of Scotland (RBS), which has strong links with F1 as it is a sponsor of Williams and also provided CVC with much of the debt it used to buy the sport. RBS was one of the biggest spenders in 2008 when it entertained 400 people at the Singapore Grand Prix alone where entertainment included a cocktail party hosted by former F1 champion Sir Jackie Stewart.
Two former Allsport clients, ING and BMW, are also believed to have made significant reductions in their corporate hospitality spend before they both quit F1 altogether during 2009.
However, it wasn’t all bad news for the company. Despite the drop in turnover, operating profit was up by 73% to $8.5m as costs were reigned in by $36.7m. Lower attendance enabled a reduction in servicing costs and the drop in turnover meant that license fees to other companies in the F1 empire were also reduced. One area where money wasn’t saved was wages. Beta Holdings’ 21 employees were paid an average of $316,000, a boost of 8% on the previous year.
Like its sister company Delta 3, Beta’s bottom line was also weighed down by debt repayment. The company finished the year with $199m debt left on its books and the lower LIBOR rates led to Beta Holdings’ interest charges being 61.6% lower than the previous year leaving it paying $7.3m of bank interest. In addition, it repaid $53m of the loan itself – down from $61.4m in 2008.
Beta followed Delta’s lead with its subsidiary Beta D4 buying back $9.3m of Beta Holdings’ debt from third party lenders giving it a $743,000 gain. However, the debt that the company repaid during the year put an end to any chance of leaving it in the black and instead it finished the year with a $3.5m after-tax loss, down from a $1.3m loss in 2008.
The complete picture of F1’s finances is still shrouded in secrecy with the finances of GP2 unavailable for public inspection since its rightsholder, GP2 limited, is based in the British Virgin Islands. Likewise, the company Beta Topco 2 receives the revenues from F1’s trackside advertising but being based in Jersey, the secret of its revenues remains safe in the Channel Islands.
Nevertheless, the vast majority of the sport’s revenue certainly comes from Delta 3 and Beta Holdings and with two more races on the calendar this year, their revenues are set to accelerate even greater than before.