Feb. 16 (Bloomberg) -- Banker Gerhard Gribkowsky may have taken a $50 million kickback for engineering the sale of Formula One, the world’s most-watched motor sport, German prosecutors say. Who paid that suspected bribe, they aren’t saying.
That mystery has thrown a spotlight on the partnership between 80-year-old Formula One Management Ltd. Chief Executive Officer Bernie Ecclestone, a fixture of London’s tabloids, and the company’s buyer, CVC Capital Partners Ltd., one of Europe’s largest and most-private buyout firms. The case is also reviving the anger of media mogul Leo Kirch, who says the racing company he once owned was sold on the cheap. Meanwhile, Gribkowsky sits in a German prison that held Adolf Hitler.
“When investing in a company like Formula One and betting on a man like Bernie, you have to be prepared for high-profile scrutiny as the media are always looking for scandals and controversy,” said Mark Jenkins, author of a book on Formula One. “The timing may be tricky for CVC if the firm wants to realize its investment in the next years.”
The investigation is focused on the 2005 sale of a 48 percent stake in London-based Formula One to CVC by Bayerische Landesbank in Munich, which received a 10 billion-euro ($13.5 billion) government bailout following losses on U.S. subprime mortgages. That investigation is adding to uncertainties about Formula One’s future, making an exit more difficult for CVC, which manages 31 billion euros, including Europe’s second-largest buyout fund.
Gribkowsky, 52, a former risk manager at BayernLB who left in 2008, is in custody in Munich’s Stadelheim prison -- where Hitler spent time in 1922 for disturbing the peace and where alleged Nazi death-camp guard John Demjanjuk is being held -- because he may have taken a bribe to sell his employer’s stake in Formula One without first performing a “proper valuation,” prosecutors said in a statement on Jan. 5.
“According to the current findings, the suspect, in turn, received $50 million in payments disguised via two consultancy agreements,” Munich prosecutors said in the statement. A spokesman for the prosecutors declined to say who may have made the payments. No charges have been filed against Gribkowsky, who is being held while the probe continues. Ecclestone hasn’t been accused of wrongdoing.
The banker confided to people who worked with him that the $50 million was a consulting fee paid by Ecclestone, not a bribe, those people told prosecutors, German newspaper Sueddeutsche Zeitung reported Feb. 5, without saying where it got the information.
Barbara Stockinger, a spokeswoman for the Munich prosecutors, said in a Jan. 5 interview with Bloomberg News that the money was deposited in an Austrian trust Gribkowsky controlled called Sonnenschein, or sunshine in German. Austria dropped a money-laundering probe into the payments.
Gribkowsky’s lawyer, Reinhard Hoess, declined to comment.
Formula One said in a Jan. 21 statement that Gribkowsky received only $50,000 a year since 2006 as a non-executive director of the company. “The Formula One group and Mr. Ecclestone have no knowledge of, nor any involvement in, any other payment to Dr. Gribkowsky nor to anyone connected with him,” the company said.
In an interview, Ecclestone declined to say anything more about Gribkowsky or the investigation.
“I’ve been advised not to talk to anyone about it,” he said. “A person has been detained.”
CVC, based in Luxembourg, said in a Jan. 5 statement that it “has no knowledge of, nor any involvement in, any payment to Mr. Gribkowsky or anyone connected with him in relation to CVC’s acquisition of Formula One.”
CVC and the board of Formula One’s holding company, Delta Topco, have appointed Ernst & Young LLP and law firm Freshfields Bruckhaus Deringer LLP to investigate the circumstances surrounding the Formula One takeover in 2006, Sky News reported yesterday, without saying where it got the information.
The firm, whose chairman, Michael Smith, rarely gives interviews to the press, wouldn’t comment further on the investigation or Formula One.
BayernLB, Germany’s second-largest state-owned bank, is seeking to freeze Sonnenschein’s assets as it claims 200 million euros in damages from Gribkowsky for his role in the bank’s subprime losses and the acquisition of Austrian lender Hypo Alpe-Adria-Bank International AG, a Bavarian Finance Ministry spokesman said on Feb. 2.
The roots of the investigation date to 2002, when Kirch’s media empire collapsed after the German cable TV and publishing entrepreneur couldn’t make payments on $5.7 billion of debt.
Kirch, 84, used loans to fund multiple acquisitions, including Formula One. He became the controlling owner after providing $987 million in 2001 to fund an option to buy 25 percent of the firm from Ecclestone and purchasing a 50 percent stake owned by EM.TV & Merchandising AG, a German maker of children’s programs. Ecclestone held the remaining 25 percent.
Kirch’s ownership was short-lived as his lenders seized control of his assets a year later. BayernLB, Kirch’s largest lender, ended up with 48 percent of Formula One. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc., both based in New York, shared 27 percent.
Gribkowsky, representing BayernLB, became chairman of Formula One. He clashed with Ecclestone after the CEO claimed a single share in one of the racing company’s units gave him half of the voting rights. The banks sued Ecclestone, and the two parties settled their differences on the eve of a London trial.
Eight months later, in 2005, BayernLB sold its stake to CVC for an undisclosed amount. Gribkowsky, who became a member of the bank’s management board in 2003, ran the sale and stayed on the Formula One board as a non-executive director. By March 2006, CVC took over almost all of Formula One, buying the other lenders’ stakes as well as most of Ecclestone’s with $2.5 billion in loans.
Ecclestone, who remained CEO, said in an interview that he doesn’t hold any shares. He said his family’s trust, Bambino Holdings, whose beneficiaries are his former wife, Slavica, and his two daughters, reinvested some of the proceeds from the sale alongside CVC, owning less than 10 percent of the company now.
Ecclestone and his family trust received $67 million from BayernLB for brokering the CVC deal and the settlement of “an open claim,” Sueddeutsche Zeitung reported on Feb. 12, citing an unidentified person with knowledge of the bank’s books. Ecclestone didn’t return a call seeking comment on the report.
Formula One’s Value
The kickback case “has been a ticking bomb for at least a year now,” said Klaus Fleischer, professor of banking and finance at the University of Applied Sciences in Munich. “BayernLB is a money sink and is under enormous political pressure to clean up the whole mess of subprime, Hypo Alpe-Adria and Formula One.”
Gribkowsky didn’t run a competitive auction when BayernLB sold its 48 percent stake, two people with knowledge of the deal said. Kirch’s lawyers say the sale undervalued Formula One, according to a letter sent to the bank on Jan. 6.
Accounting firm KPMG valued Formula One at 5.5 billion to 7 billion Deutsche marks ($3.8 billion to $4.9 billion) in 2001, when Kirch weighed an initial public offering of his media group, according to the letter, obtained by Bloomberg News. In 2003, BayernLB CEO Werner Schmidt said the racing company was valued at 3 billion euros. The bank sold its stake to CVC in 2005 for about $860 million, the letter said, without citing where Kirch’s lawyers got their information. BayernLB must reclaim its “bargained away” stake, the lawyers said in the letter.
First Bridge, Lewington
CVC’s purchase wasn’t cheap, Ecclestone said. If anything, he said, it was too high. Threats from car manufacturers to leave Formula One because they were unhappy about the split of TV revenue were raging, making CVC’s bet riskier and lowering the price, he said.
“There were all sorts of dramas at the time,” Ecclestone said. “The car manufacturers wanted to march into the night.”
CVC offered the manufacturers’ teams better terms, quelling dissent, he said.
A unit of Gribkowsky’s Sonnenschein sent a letter to Ecclestone’s London office in December 2007 to complain about a delay in a $2.3 million payment, part of a $25 million fee, Sueddeutsche Zeitung reported Jan. 22, citing the letter written by the banker’s lawyer. The letter noted a contract with British Virgin Islands-based Lewington Invest Ltd., the newspaper said.
From 2006 to 2007, while part of BayernLB’s top management, Gribkowsky received another $25 million from Mauritius-based First Bridge Holding Ltd., the newspaper also reported.
Neither First Bridge nor Lewington could be reached for comment. First Bridge was listed as defunct by the Mauritius registrar of companies. Lewington Invest was registered in the British Virgin Islands, an official at the island’s financial commission said, without providing details. Neither a telephone number nor an e-mail address for Lewington was available.
CVC, whose investments include printing-inks supplier Flint Group, Evonik Industries AG, Germany’s largest specialty chemicals maker, and Merlin Entertainments Group Ltd., the owner of Madame Tussauds in London, isn’t new to motor sports. It sold MotoGP, the motorcycling equivalent of Formula One, for as much as 500 million euros to buyout firm Bridgepoint Capital Ltd. eight years after acquiring it for $82 million, two people with knowledge of the matter said at the time of the sale in 2006.
The buyout firm, the former European private-equity arm of Citigroup Inc., has delivered some of the industry’s best returns. CVC’s latest 10.8 billion-euro pool is showing a gain exceeding 30 percent, according to two people with knowledge of the situation. That places the fund in the top 25 percent of performers, according to research firm Preqin Ltd.
Since arriving at Formula One more than five decades ago as a driver, Ecclestone, who is 5-foot-2, has a mop of gray hair and wears round glasses, has turned the racing series into one of the world’s most popular sporting events. Last year, the 19 Formula One races attracted about 527 million television viewers in 187 countries. In 2009, it generated more than $1.1 billion in revenue, according to a company filing in May.
Ecclestone has become a billionaire, ranked 38th on the Sunday Times Rich List in 2010 with an estimated wealth of $1.4 billion pounds ($2.2 billion). The one-time auto dealer is known for his hands-on management style: He even organizes loans to keep teams afloat, former Minardi team owner Paul Stoddart said, recalling that Ecclestone agreed to a “multimillion” dollar loan in 2002 to enable his team to start the season.
The CEO is also popular with U.K. newspapers for his quotable style -- Hitler was “able to get things done” -- and his personal life, including his marriage and divorce from a former Croatian model 10 inches taller and 28 years younger.
“Bernie Ecclestone is a unique individual,” said Jenkins, author of “Performance at the Limit” about Formula One and a professor of business strategy at Cranfield School of Management, 50 miles north of London. “I can’t imagine one individual doing his job when he’s gone. There are so many aspects to his role.”
Since the CVC acquisition, Formula One has been plagued by a cheating scandal, and the global economic slump led Honda Motor Co., Toyota Motor Co. and Bayerische Motoren Werke AG to quit. The average race audience fell to 44 million in 2009 from 52 million in 2004 as younger people watch less TV, according to London-based Future Sport & Entertainment.
The sport is betting on growth in Asia and the Middle East after France was dropped from the schedule because it couldn’t meet the costs and Italy and Germany lost one of their two annual races. This year, the championship has 20 races, including one hosted by India for the first time.
Formula One Results
Since 2007, Formula One’s profit before interest, taxes, depreciation and amortization has changed little at $428 million, according to filings by Delta 3 UK Ltd., a CVC-controlled company holding its main assets. The company has posted annual net losses of about $500 million during those years, on non-cash debt interest charges, according to U.K. filings.
CVC recovered some of its investment through dividends after Royal Bank of Scotland Group Plc agreed to a $3 billion debt recapitalization in 2006, data compiled by Bloomberg show.
Buyout firms often look to exit their investments within five to six years of the acquisition. The investigation will make that more difficult for CVC, Jenkins said. Another issue, he said, is the renewal of an agreement with the teams in 2012 on how to share TV revenue. Most important, Jenkins said, is life for Formula One without Ecclestone.
“If Bernie Ecclestone isn’t there, that makes the investment vulnerable because of his incredible position in the industry, his ability to negotiate and resolve issues and tensions and protect the investment,” Jenkins said.
Ecclestone said grooming a successor isn’t on his agenda. “That would be like Frank Sinatra looking for another singer,” he said. “They will probably get three or four people doing what I do. It will be more corporate.”
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