Auto Racing: Speed Sells
Imagine you're pressed against a fence overlooking the back straight of a modern superspeedway. From a mile away, a wall of sound is building. Suddenly, the roar of 700-horsepower Ford and GM engines swells to a crescendo as 40 stock cars streak past you with a velocity that nearly rips your face off.
What did you see? Well, it was mostly a blur, but it looked as if the big Kellogg's Corn Flakes box was ahead of the orange Tide container. And the car done up like a yellow Kodak film package was nosing past the one festooned with McDonald's golden arches.
Naked commercialism that turns cars into 180-mph billboards--and attracts more sponsor dollars than any other sport. A soaring TV audience that makes media moguls go limp at the prospect of cheap, popular programming. Sold-out grandstands crammed with fans who think nothing of spending a weekend--and hundreds of bucks apiece--at a speedway. And poised to cash in on it all: aggressive racing conglomerates that are using millions raised from the equity markets to build new tracks and snap up existing ones. No wonder the racing biz is glowing hotter than an exhaust pipe after a 500-mile run.
How hot is that? Ask one of the new breed of racing entrepreneurs, such as O. Bruton Smith, William C. France Jr., or Roger Penske. Convinced that mega-speedways capable of holding upwards of 150,000 fans are the wave of the future, the trio has triggered a consolidation binge that's turning American racing on its ear.
STAR DRIVERS. The reverberations extend all the way to Europe. This fall, Bernard Ecclestone--the czar of the enormously popular Formula One racing format--plans to float shares in a new company that he hopes will extend Grand Prix racing's reach to the far corners of Asia. The prize, if Ecclestone manages to pull it off, will be upwards of $2 billion.
If you're wondering why rights to market Formula One could command such a sum, look at it from Ecclestone's perspective. A typical F-1 race--featuring ultrasophisticated $4 million road rockets and star drivers that tap into Europe's swelling nationalism--is watched by a television audience of 310 million. Only World Cup soccer and the Summer Olympics command a larger following.
The growing demand for sports programming in Europe makes F-1 especially attractive to broadcasters. Outfits such as Germany's DF1 and France's Canal Plus see Grand Prix racing as a lure for subscribers and are willing to pay handsomely for TV rights. As television contracts soar, so do profits. This year, F-1 projects pretax earnings of $139 million on revenues of $326 million. Ecclestone reckons that if only a tenth of current viewers fork over, say, $100 to get a digital broadcast featuring six interactive views of a race, revenues could double. "Very few businesses can forecast profits for seven years out," Ecclestone boasts. "I can."
Europeans first popularized motor sports and, truth be told, still look down on American variants as the boorish machinations of country bumpkins. Ecclestone sneers that U.S. oval racing is so stage-managed that it's more akin to "show business--like wrestling" than classic road racing.
Perhaps. But in candid moments, Euro-racers do credit U.S. entrepreneurs with the financial flair that underpins much of the sport's current burst of acceleration. Sensing that oval-track racing is poised to break out of its Southeastern and Midwestern base to rich new media markets, U.S. promoters have embarked on a massive construction binge. The financing source: rising television revenues and cash from stock sales.
In the process, the speedway kings are transforming American racing. Once the grimy pastime of fly-by-night promoters and scruffy amateurs, auto racing is mutating into something vastly more profitable--a button-down world of Wall Street financiers, megabuck sponsors, and corporate hospitality suites. True, the pin-striped set may never be totally comfortable rubbing shoulders with hard-charging racers. But with a business that offers operating margins of 30%, who cares?
CHARM SCHOOL. And the good old boys of summer who used to bang fenders on Tobacco Road? Bubba's had his teeth capped and gone to charm school. The new hero-driver model: stock-car champion Jeff Gordon, 26, who looks like a surfer and seems stamped from the same safe-and-sanitary mold as golfing star Tiger Woods.
It wasn't always this way, of course. In 1995, Smith, who started out flogging cars and real estate in Charlotte, N.C., had a revelation. High-tech start-ups were raising millions with initial public offerings. Why not racetracks? So he took Speedway Motorsports Inc. public, raising $75 million.
The IPO had an electric effect on the industry. The Daytona Beach (Fla.) France family, which controls the National Association of Stock Car Auto Racing (NASCAR)--the sport's top rulemaking body--felt the buzz. In short order, the clan issued new low-priced shares in its International Speedway Corp. (ISC), creating the first real market in ISC's once sleepy stock.
Penske, whose $6 billion empire includes Detroit Diesel Corp. and truck-leasing and auto dealerships, wasn't about to be left behind. Last year, he took Penske Motorsports Inc. public, raising $82.7 million.
Although Smith was among the first to sense the dimensions of the boom, the credit for setting the sport's dizzying pace goes to NASCAR. By staging supercompetitive sedan races that fans could identify with, it built a huge following of stock-car fanatics. Enter television programmers on the prowl for product. As major networks and cable operators such as ESPN, Fox Broadcasting, The Nashville Network, Turner Broadcasting, and the new Speedvision channel televise ever more races, the audience keeps on growing. Last year, 112 million households tuned in to NASCAR events, while attendance at its premier Winston Cup races hit 5.6 million.
Those numbers stoke sponsor interest, since advertisers view the massive exposure they get from racing as a cheap buy. Says Joyce Julius, head of Joyce Julius Associates Inc., a Dearborn (Mich.) sports-marketing firm: "We measured total ad images from the Winston Cup series last year and discovered there was nearly $900 million worth of sponsor exposure." The upshot, says Julius: "If, say, Valvoline oil writes a $6 million check to sponsor a race team, they're getting back nearly $30 million in advertising."
According to Jim Andrews, vice-president of IEG Sponsorship Report, a Chicago-based newsletter, NASCAR's corporate support is expected to grow to $441 million this year, up from $405 million in '96. Total motor-sports sponsorship could hit $920 million, up from $845 million last year. That tally is expected to grow at a 5%-to-10% clip, showcasing such brands as the Cartoon Network, Budweiser, and DuPont paint. By comparison, golf sponsorship was $555 million in 1996, and other major stadium sports racked up a combined $365 million.
And race fans don't just turn out in droves. They're intensely loyal to the brands they associate with the sport. According to marketing studies, 70% of the devotees of NASCAR and Indycar racing--which features fenderless, cigar-shaped racers that zoom around tracks such as Indianapolis--purchase some of the featured products. That's nearly double the brand loyalty for pro football, baseball, and basketball.
Smith wasn't the only promoter who had these figures burned into his consciousness. But he was one of the most aggressive when it came to cashing in on the phenomenon. That meant a big expansion of seating at his speedways, which include circuits in Charlotte, Atlanta, Bristol, Tenn., Sonoma, Calif., and a new $140 million, 185,000-capacity oval in Fort Worth. At Bristol alone, Smith took seats from 77,000 to 116,000. Seating at his tracks will rise to 525,000 this year, up from 289,000 in 1996. In July, he announced plans to raise $125 million via a private bond placement. The cash will retire debt--and pay for more seats.
New seats are crucial to a speedway's balance sheet. Typically, a promoter pockets $4 million or more for TV rights for a big event. (Teams and drivers are paid by sponsors and organizers out of a prize pool.) Parking, souvenir sales, and hospitality-suite rentals generate a tidy profit. But the big jolt to the bottom line comes from filling the grandstands. "It costs $400 to put up a new seat," says H.B. "Tom" Thomson III, an analyst at Wheat First Butcher Singer Securities in Richmond, Va. "At each race, you can get $60 to $100 per seat from a spectator, plus an average of $10 in concession sales. In just four races, you've earned back your investment."
EARNINGS CLIMB. This rapid return gives speedway syndicates operating margins of 27% to 38%. Says E. Breck Wheeler, a racing analyst at J.C. Bradford & Co. in Nashville: "These companies should be able to see 20% earnings growth over the next three years, no problem." Motor sports pros agree. "Tracks today are run like a business," notes Chrysler Corp. Executive Vice-President Francois Castaing, former chief engineer for Renault's Formula One team. Under the speedway kings, "they're a machine to make money."
That's certainly the way things look from where Smith is sitting. A recent June night finds him ensconced in a glass-enclosed suite atop his new Texas Motor Speedway, hobnobbing with celebrities and sizing up a crowd of 128,000 below. That's a lot fewer than the 185,000 who braved monsoon-like rains and monster traffic jams to attend his April NASCAR opener. But it's a big showing for the Indy Racing League, a struggling series that must make do with unknown drivers and low-budget race cars.
While Smith's guests help themselves to beer and brisket, race-goers are being revved up for the feature event. Ten Elvis impersonators parachute single file into the infield to whoops from the crowd. A trapeze artist twirls precariously from a helicopter. Fireworks fill the sky. "Pretty subdued for me," Smith says dryly. "Not blowing up much stuff tonight." No kidding. At Smith's Charlotte Motor Speedway, he once recreated the U.S. invasion of Grenada, complete with cannon, paratroopers, and attack helicopters.
Smith makes no apologies for productions that push the envelope from the merely tacky to the utterly tasteless. When it comes to cashing in on America's fascination with speed, he believes there's no business like show business. "A race is just a race," Smith says from his Charlotte office, waving at stock cars rumbling below. "I want a spectacle."
Smith's gung-ho style makes NASCAR overseer Bill France cringe. Nonetheless, France's International Speedway Corp. seems eager to copy his rival's "build 'em and they will come" approach. ISC is adding more seats at its tracks in Daytona, Darlington, S.C., and Talladega, Ala. And it just acquired control of the road course at Watkins Glen, N.Y. In July, ISC bought Phoenix International Raceway for $46 million. Days later, France teamed with Penske to buy control of South Florida's new Metro-Dade Homestead track for $23.6 million. Next targets: building ovals near Chicago, Kansas City, and Sacramento before Smith can get there.
Midway between Smith's high-roller style and France's more measured approach is Roger Penske. A meticulous executive who raced sports cars before he traded his helmet for a briefcase, Penske has moved swiftly since Penske Motorsports went public last March.
In May, he bested Smith for the right to buy a controlling interest in North Carolina Motor Speedway in Rockingham, and, in late June, he rubbed salt in the wound with the triumphant opening of his $100 million California Speedway, located between Los Angeles and Palm Springs. The track seems like a cross between Daytona and Disneyland: There are plush facilities, racegoers are called "guests," and uniformed host workers circulate to make sure fans are having a quality experience.
Racing IPOs don't just attract the circle-track crowd. Road-racing aficionados also want in on the action. Seattle money manager Andrew L. Evans, a wealthy chum of Microsoft Corp. CEO William H. Gates III, recently bought the top U.S. sports-car racing organization and snapped up circuits in Sebring, Fla., and Mosport, Ont. Evans aims to build the audience for road racing by bringing top European racers to the U.S., and with them $1 million McLarens, Porsche GT1s, and Mercedes CLKs. Evans may go public in 1998. "What's needed now," he says, "and what Ecclestone, Penske, France, and Smith are trying to do, is to professionalize this sport."
Ecclestone couldn't agree more. "People talk to me about a chain of theme restaurants," he says. "No time for it. Merchandising? Don't get a penny--too busy. It's time for racers like me to give way to the businessmen in suits who can do all these things."
What might the suits do to give F-1 the interstellar dimension Ecclestone dreams of? For starters, IPO cash could market the F-1 brand more assertively. The model is NASCAR, which sells nearly $770 million a year worth of racing merchandise. Ecclestone also could recoup some of the $88 million he sank into mobile-TV production and filming facilities, which he ships to races aboard two 747 cargo jets. Above all, he wants to expand Grand Prix racing's foothold in Asia. Ecclestone is eyeing $200 million government-subsidized circuits planned for Malaysia and South Korea, plus an existing facility in Zhuhai, China. F-1 has staged a race in Suzuka, Japan, for several years.
NEW KID IN TOWN. Heady stuff, this race biz. And those fat profit margins certainly make speed syndicates look like winners. But investors who dream of a quick trophy need to proceed with caution. Although Fidelity Investments and other small-cap funds have taken positions in the U.S. companies, the shares aren't keeping pace with the Dow. "We're a new phenomenon to Wall Street," shrugs France. "It's going to take time for those folks to understand our business." Says Scott Barry of Raymond James & Associates Inc. in St. Petersburg: "The stocks are not inexpensive. The underlying economics are fantastic, but the market seems to view speedway stocks as long-term growth plays."
Beyond that, potential saturation of the airwaves with race programming and the rush to build tracks in the few remaining markets mean that at some point, the speedway kings may have to downshift. But don't tell that to Smith, France, and Penske, who are busy planning grander circuits, more corporate suites--and more cash flow. "The new financial guys coming into the sport are smart," says Smith, "and they're helping racing grow. But you've still got to have guys like me in the trenches."
Smith still daydreams of putting a dome over Bristol--he hasn't quite worked out the bugs in the exhaust fans yet--and of building a New Jersey track that would loom as a golden detour on the road to Atlantic City casinos. And just to get under the skin of those oh-so-proper Europeans, he's thinking of bringing stock-car iron to a new oval developers plan in Germany.
"See, we get these giant Russian Antonov-124 airlifters, the biggest cargo jets in the world," Smith says dreamily, "and then we just load our cars on them and..." Surely, the man is joking. He is joking, isn't he?