Big Formula One Bet Vaults a Buyout Firm to the Top

Why CVC Plans to Sell Its Formula 1 Stake
  • London-based buyout firm could sell stake within weeks
  • Suitors may include Sky and the Qatar Investment Authority

It was considered one of the riskiest private equity investments ever.

CVC Capital Partners, a then-mid-sized London-based firm, paid a steep $2 billion in 2006 to buy Formula One, the world’s dominant auto racing circuit. The timing wasn’t great. A number of racing teams were threatening to bolt in a pay dispute. The deal’s success also hinged on F1 founder Bernie Ecclestone, the famously domineering boss who would later sidestep bribery charges. 

Yet a decade later, Formula One has turned into a spectacularly profitable deal for CVC, catapulting the former Citigroup Inc. unit into a top global buyout firm. CVC has made about $4.5 billion on its initial $1 billion stake, a 450 percent return that’s twice the average for private equity. Much of that came when CVC loaded Formula One with debt to pay itself dividends -- too much so in the eyes of critics. 

Bernie Ecclestone.
Bernie Ecclestone.
Photographer: Lars Baron/Getty Images

Now the firm is looking to exit the investment, possibly in a matter of weeks. After an aborted initial public offering in 2012, it’s actively shopping the firm and has retained Goldman Sachs Group Inc. to solicit buyers. The price tag could be as high as $10 billion.

CVC, with a 35 percent stake, could walk away with a total return of eight times its original investment.

Likely Suitors

The most likely suitors are media companies hunting for programming content, rather than another buyout firm. Rupert Murdoch’s Sky Plc, the Qatar Investment Authority and RSE Ventures, chaired by Miami Dolphins owner Stephen Ross, are interested in investing, said people familiar with the matter, who asked not to be identified as the process is private.

“CVC took an opportunity that seemingly by virtue of circumstance and good stewardship is set to produce returns far higher than most deals of its size and vintage,” said Oliver Gottschalg, a professor at French business school HEC Paris.

Not everyone is as pleased with the outcome, citing declining F1 attendance in some markets and the large dividends to investors. Team ownership of Formula One is the “ideal model,” said Xander Heijnen, a former spokesman for the Grand Prix manufacturer association.

“Has CVC’s ownership been good for the sport? Not really,” he said. “They have improved the structure and governance, but ideally all of the money made within the sport should stay within it, and that isn’t the case with the financial investor model.”

CVC declined to comment. In a brief telephone interview, Ecclestone said that CVC is “pretty upfront” about its returns. “They buy and sell companies looking to make a profit,” he said.

Grand Prix

Ecclestone, once a used-motorcycle parts salesman, co-founded Formula One in 1978, selling TV and advertising rights for the series of races known as the Grand Prix. By 2006 the company was controlled by bank lenders, principally Germany’s Bayerische Landesbank, which was looking to dispose of its stake.

It wasn’t an easy sell. The asking price scared off a number of private equity firms, including Charterhouse Capital Partners and Apollo Global Management LLC, said people familiar with the matter. And potential buyers worried about Ecclestone’s departure or death. Then 75, he personally handled negotiations with racing teams, while maintaining lucrative relationships with countries that hosted the events.

Representatives for Charterhouse and Apollo didn’t respond to requests for comment.

At the time, CVC was a buyout shop little known outside Europe, with about $13 billion in assets under management. Founded in 1981 as Citigroup’s venture capital unit, it was spun out in 1993 as a standalone private equity firm.

But CVC did have some experience in the sports world, as owner of commercial rights for the world’s biggest motorcycle road racing series, FIM Road Racing World Championship Grand Prix (MotoGP).

Single Buyout

Led by co-founder Donald Mackenzie, CVC won the deal with a $2.1 billion offer that included nearly $1 billion in equity. That was a gamble in itself, as the $1 billion accounted for about 10 percent of CVC’s 2005 fund at the time, considered the upper limits of what investors find tolerable for a single buyout. It borrowed most of the rest.

Within a year CVC recouped most of its investment. The shop put $800 million in debt onto Formula One to pay itself and its partners a dividend. Another $2 billion in debt-backed dividends followed in later years. It also sold off shares to investors including BlackRock Inc. and Waddell & Reed Financial Inc.

Ecclestone, meanwhile, quelled the threat from some racing teams to set up a rival series. At one point during negotiations, team owners said CVC’s share, at 40 percent of earnings, should be no higher than 10 percent, according to Adam Parr, former chief executive officer of the Williams F1 team. That sharp a reduction likely would have left CVC struggling to repay its loans.

Split Revenue

Ecclestone eventually gave the teams a split of all F1 revenue, not just television sales. That has almost doubled some teams’ take over the past five years. In turn, the teams committed to racing only with F1 for another decade.

“I thought I knew how I could handle that situation and they allowed me to, which I subsequently did successfully,” Ecclestone said of the negotiations.

That stability allowed him to push the sport into new countries including Abu Dhabi, Bahrain and China. Sales of TV rights increased from $1 billion in 2010 to $1.3 billion in 2014, the most recent year available, according to filings at the U.K.’s companies house. Earnings before interest, taxes, depreciation and amortization rose from $818 million in 2006 to $1.1 billion in 2014, according to data provider Formula Money.
 
While Ecclestone was hailed for his strategic moves, he remained a reputational handful for CVC.

Charged, Sued

In 2013, Ecclestone was charged in Germany and sued in the U.K. for paying a German banker to influence the sale of BayernLB’s stake in Formula One. He was accused of paying the banker $44 million to steer the sale toward CVC, which had promised to keep Ecclestone as Formula One CEO.

Admitting the payment, Ecclestone said it wasn’t a bribe, but a means to silence the executive from disclosing possible tax violations in his family affairs.

The matter ended in 2014, when Ecclestone agreed to pay a $100 million fine in Germany. A London judge dismissed the suit, even while calling the payment “a bribe.” 

The controversy derailed CVC’s plan for an IPO in Singapore and saw Ecclestone temporarily removed from the Formula One board. Now, at 85, he’s fully back in charge, even counting the takings from concession stands personally during races, according to people familiar with the matter.

“I’m happy with things at the moment,” Ecclestone said when asked about his tenure at the company and a possible sale. “Let’s see how they continue.”

Brand Marketing

Former executives involved in the sport have said he should be spending more time marketing the brand, especially to younger consumers by using social media and mobile advertising.

Attendance has gradually declined in some of Formula One’s larger markets, such as Germany, contributing to the country losing its place on the fixture calendar in 2015, according to a report by sports marketing research group Repucom.

“The sport does need to be made entertaining,” said Nick Fry, a former executive officer of the Mercedes Formula 1 team. “It was relatively late to using the internet as a tool, for example, and a media company like Sky would add huge value.”

Ecclestone responded that the sport “is successful the way I run it.”

CVC has used Formula One as a calling card to raise more money from institutions including the California Public Employees’ Retirement System and Government of Singapore Investment Corporation, which took a stake in the firm in 2012. 

It has grown into Europe’s largest private investment shop and the world’s ninth biggest, with $85 billion under management, according to data provider Preqin, making inroads in the U.S. market with stakes in Pilot Flying J Inc., BJ’s Wholesale Club Inc. and Petco Animal Supplies Inc.
 
“CVC’s great strength has been to allow Bernie to get on with managing the company,” said Adam Parr. “Even during the bribery trial, where there was a chance for a coup, nothing changed. They got out the way and have reaped the rewards.”

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