Formula One: So Far, No Checkered Flag

Banks and carmakers haggle over the car racing circuit's future

Everyone knows who the champion of Formula One racing is these days: It's Michael Schumacher, a four-time world champion and the lead driver of Ferrari's racing team. But it's a lot harder to say who's going to end up with the broadcasting rights for the Formula One franchise. Whoever does will get a gold mine--but only after navigating some serious twists and turns in the road.

The scramble for Formula One is part of the fallout from the collapse of Leo Kirch's empire. A year ago, the German media tycoon secured $1.5 billion in bank loans to acquire a 75% stake in SLEC, the Swiss company established by Formula One impresario Bernie Ecclestone. Named after Ecclestone's wife, Slavica, SLEC takes in an estimated $1 billion a year from the sale of the media and commercial rights to Formula One. With 350 million viewers worldwide tuning into the races, these rights are highly coveted. And the audience is destined to grow. Formula One returned to the U.S. in 2000, and there are plans to move into Russia next.

But the humiliated Kirch no longer controls this piece of Formula One. And two parties with much at stake are trying to salvage their interests. In one camp are Kirch's creditor banks--Bayerische Landesbank, J.P. Morgan Chase, and Lehman Brothers--which want to recoup their money by finding a buyer for the SLEC stake that they hold as collateral. In the other camp are the carmakers that supply the racing teams--DaimlerChrysler, BMW, and Ferrari, to name a few--who want to ensure that SLEC does not end up in the hands of an owner that may want to restrict viewership, which is now mainly free of charge. That's what Kirch threatened to do when he floated the idea of airing Formula One races exclusively on his pay-TV system in Germany. That prospect was anathema to car companies, which need large audiences in order to ink lucrative sponsorship contracts for their teams.

Both the banks and the auto makers have strong incentive to hash out a deal. Yet price seems to be the main sticking point. The car companies believe SLEC was vastly overvalued by Kirch and his lenders. Some auto execs also worry that, like the rest of the Kirch empire, privately held SLEC might harbor hidden liabilities. "We certainly don't think we are going to get $1.5 billion [back]," admits one banker involved in the negotiations. In fact, Kirch's creditors may have to settle for half that. If the carmakers offer $700 million to $800 million, "I would think they should take it," says the head of one of the racing teams.

The carmakers are in a strong bargaining position. Last year, they threatened to pull out of Formula One after failing to obtain a bigger cut of SLEC's revenues. Mercedes, Fiat-owned Ferrari, and Ford-run Jaguar lavish million of dollars every year on their teams: Each time a race car flames out on the track, that's $7 million up in smoke. Yet under the existing agreement, the teams get only 47% of SLEC's revenues. In a bid to boost their share, Fiat, DaimlerChrysler, Ford, BMW, and Renault are proceeding with plans to set up a rival racing series in 2008--after the existing contracts with SLEC expire. Sponsors would be bound to follow the winning teams if they switched to a new series, tentatively dubbed Grand Prix racing. "If the car manufacturers leave, Formula One will vanish," says the head of Mercedes-Benz, Jürgen Hubbert.

That means the banks could be stuck with a wasting asset, unless they sell to the car companies. With Kirch's 75% share in SLEC, the auto makers will finally be in the driver's seat. They may even be able to cut a new deal to obtain 85% of Formula One media revenues. That would spell relief for the smaller teams, which are already creaking under the financial burden of Formula One.

A case in point is the Alain Prost team. Headed by a former champion and once outfitted by France's PSA Peugeot Citroën, the team filed for bankruptcy in November. Prost helmets and jumpsuits were auctioned off this month. A sad ending. The banks are praying they'll do better at their own auction of Kirch's Formula One assets.

By Christine Tierney with David Fairlamb in Frankfurt

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