July 29 (Bloomberg) -- Formula One racing teams, which receive $250 million from tobacco companies, can't kick their nicotine habit.

On August 1, a European Union ban on tobacco sports sponsorship comes into effect, and at least four of the 10 teams in Formula One say they'll scrub cigarette names off their cars while keeping the colors and designs associated with brands such as Marlboro and Lucky Strike.

The arrangement allows Formula One teams supported by Altria Group Inc. and British American Tobacco Plc to keep the cash and helps cigarette makers maintain a presence before the 150 million television viewers of the sport. Now Hungary is opting out of the ban and will let brand names stay on cars racing in its Grand Prix. The moves have outraged health campaigners and led to threats of legal action by EU officials.

``It's the latest dirty trick by the tobacco industry --it's quite deplorable,'' says Amanda Sandford, head of research for Ash, a London-based anti-smoking lobby group. ``For all intents and purposes tobacco advertising will continue.''

The EU directive prohibits the advertising or display of cigarette branding in any form within member states. With 10 of the 19 Formula One races taking place within the EU, it will be up to individual nations to decide how they enforce the ban, which might include refusing to broadcast cigarette-sponsored races held outside the trade bloc.

Financial Squeeze

The potential loss of sponsorship money comes amid a financial squeeze for Formula One, as several squads tussle with sport's commercial managers for a greater share of the $700 million in revenue generated by worldwide television contracts. The teams want to increase their 25 percent share of the broadcasting cash collected by Formula One Management Ltd., the London-based commercial unit managed by billionaire Bernie Ecclestone.

Four squads, including Formula One champion Michael Schumacher's Ferrari team, don't disclose their annual budgets. The six teams that make regulatory filings in the U.K. reported combined revenue of 454.2 million pounds ($798.6 million) in 2003, a 7 percent decline from the previous year.

Hungary is offering an exemption from the ban, citing the economic benefits of hosting a Formula One event.

The 20th Hungarian Grand Prix takes place this weekend in Mogyorod, outside of Budapest. The event, usually held in August, was moved forward this year to avoid a clash with the tobacco sponsorship restrictions. On June 27, Hungary's parliament passed legislation to exempt the event from the directive after the government said it couldn't afford to lose the $60 million a year the race brings to the local economy.

Economic Impact

``We're saying that it isn't a sports event but an event of outstanding economic significance,'' says Judit Toth, a spokeswoman at the Economy Ministry in Budapest. The ministry says the country's hotels and guest houses generate 8.6 percent of their annual revenue during the Formula One weekend.

Hungary could be taken to court by the European Union should it decide the nation is unlawfully giving the race special status, and has already been cautioned by EU Health Commissioner Markos Kyprianou.

``I would remind the government the costs of treating tobacco- related illnesses are a drain on public funds,'' Kyprianou said in a July 15 interview with Nepszabadsag, Hungary's largest- circulation daily. Implementing the ban will help cut health-care costs, he added.

While there is nothing explicit in the wording of the ban about teams using look-alike livery on their cars, the EU won't let tobacco companies get away with subliminal ads, says Philip Tod, a spokesman for Kyprianou.

``We won't allow the ban to be circumvented,'' Tod says. The EU must review the effectiveness of the directive by June 2008 and may look at ways of tightening the ban earlier, he added.

The Long Goodbye

Five of Formula One's 10 teams take cigarette money, which accounts for about 20 percent of their combined revenue of $1.2 billion, according to Philippe Tardivel, spokesman for Japan Tobacco Inc., which sponsors the top-ranked Renault team through its Mild Seven brand. Renault's star driver, Fernando Alonso, is the current leader in individual ratings and after the ban will take to the track in a car that sports Mild Seven's light-blue color.

The sport's money wrangles have made some teams reluctant to part ways with tobacco, says Christian Geistdoerfer, 52, marketing director of the Jordan-Midland Racing Team, which has been sponsored by Gallaher Group Plc's Benson & Hedges brand since 1996.

``Cigarette companies will still have a very strong association with the cars,'' says Geistdoerfer, 52. ``They don't want to say goodbye to Formula One -- there are not many other places they can go.''

Final Holdout

Formula One is the last major sporting organization to accept money from cigarette brands. The Olympic Games stopped accepting tobacco sponsorships in 1968 and international soccer's ruling body FIFA followed suit in 1986.

Philip Morris's Virginia Slims brand sponsored the Women's Tennis Association Championship from 1972 until 1994, helping make famous its mock-feminist motto ``You've come a long way, baby.''

Tobacco's pariah status has led cigarette makers to pay a premium to stay involved with Formula One, according to Jim Wright, marketing director of the Grove, England-based BMW- Williams team, which doesn't have a cigarette sponsor.

Italian Grand Prix

The first European race to take place after ban will be the Italian Grand Prix in Monza, Italy, on the weekend of Sept. 3-4. Some tobacco companies have confirmed they will be there in appearance.

In an e-mailed statement, Altria Group, the world's largest cigarette maker, said it would continue to back Ferrari, which is owned by Fiat SpA. The team's cars will sport the Marlboro brand's distinctive red and white colors but won't carry the brand name, according to Luca Colajanni, a Ferrari spokesman.

``There are some countries where sponsorship-related tobacco advertising is not permitted,'' the Lausanne, Switzerland-based press office of the company's Philip Morris International unit said. ``In those countries, we will continue to support Formula One and the Ferrari team without branding.''

London-based British American Tobacco, sponsor of the BAR- Honda team, has already prepared team cars that include the distinctive red target associated with the Lucky Strike cigarette line without the brand name, says spokesman David Betteridge.

`Be On Edge'

Weybridge, England-based Gallaher Group has already explored the frontiers of subliminal marketing before for its Benson & Hedges brand. At the French and British Grand Prix events in July, the Jordan-Midland team raced a car with the sound-alike phrase ``Be On Edge,'' and used similar lettering found on the Benson & Hedges packaging.

The EU and Formula One officials agreed in May 2001 that the sport would abandon tobacco sponsorship after the 2006 season. The deadline was moved up two years to July 31 amid lobbying by health campaigners, prompting Formula One's Ecclestone to protest that teams would be forced to break contracts. ``It would be disastrous,'' Ecclestone, 74, said in an April 23 interview. ``It doesn't take a genius to work that out.''

One tobacco sponsor says it won't pursue a brand-free presence on Formula One cars in compliance with the ban.

Imperial Tobacco Group Plc, whose Gold Leaf brand became the first Formula One sponsor in 1968, is ending its West cigarette's eight-year association with the McLaren-Mercedes team. The company says it wasn't sure if appearing on cars in non-EU races broadcast in the U.K. would leave the company open to financial penalties. ``We wanted to make sure we were watertight,'' says Simon Evans, a spokesman for the Bristol, England-based company.

McLaren-Mercedes is replacing Imperial Tobacco with Diageo Plc's Johnnie Walker whisky brand. The world's biggest liquor maker didn't disclose terms of the agreement, nor did the team.

$25 Million Engines

Tobacco cash is crucial to remaining competitive. Teams typically spend up to $25 million on engine technology alone, according to former driver Pedro Diniz, co-owner of the Prost squad that went bankrupt in 2002. There are additional costs for recruiting car designers, engineers and support personnel such as the chefs, pit-stop crews and maintenance staff who travel with the team and move equipment across five continents.

Most Formula One teams have forged alliances with car companies to curtail costs. Munich-based Bayerische Motoren Werke AG, the world's largest maker of luxury cars, announced its purchase of Swiss-based Sauber team on June 22 for an undisclosed sum. It has supplied engines to Britain's BMW-Williams team since 2000. Toyota Motor Corp. and Honda Motor Co., Japan's No. 1 and No. 3 automakers respectively, each own stakes in Formula One teams. Toyota owns its own team and Honda holds a 45 percent interest in BAR-Honda.

Big Budgets

Maintaining a racing fleet can run to more than $400 million a year, according to Paul Stoddart, manager of the Faenza, Italy- based Minardi team. Bottom-ranked Minardi gets by on as little as $40 million, Stoddart says. Ferrari was the top-ranked team last year, and its lead driver Schumacher is a seven-time Formula One champion. Ferrari's Colajanni declined to disclose the current budget for the team, which won the championship last year.

BMW-Williams sought alternative levels of funding after ditching tobacco sponsorship in 1999. It has attracted Anheuser- Busch Cos.' Budweiser, the world's biggest brewer, and Hewlett- Packard Co., the No. 2 personal-computer maker.

``We had to work blooming hard,'' says BMW's Wright. ``Non- tobacco companies have a lot more choice where they advertise.''

In the meantime, television viewers are certain to respond to car designs that echo Marlboro's bold red packaging and Lucky Strike's circle, says Jez Frampton, chief executive officer of London-based brand consulting firm Interbrand. The firm rates Marlboro as the world's 10th-best-known brand.

``People will spot it, without a doubt,'' says Frampton, 40. ``Design is powerful. That's why companies spend a lot of money on corporate identity.''

To contact the reporter on this story: Alex Duff in Madrid at at aduff4@bloomberg.net.

Last Updated: July 28, 2005 19:06 EDT