Formula 1’s Smaller Teams Struggle as CVC Targets $7 BillionAlex Duff
Formula One co-owner CVC Capital Partners Ltd. is rankling smaller teams as the buyout firm cashes in on its investment in the auto racing series.
CVC began selling its 63.4 percent stake last year after setting new terms with Red Bull, Ferrari and McLaren. Those teams, the three most successful over the last 15 years, share in $180 million of signing-on payments and each get a seat on the board of the series, according to a prospectus for an initial public offering that was suspended in June because of market conditions.
At the other end of last season’s 12-team standings, Spain’s HRT team folded and Marussia hasn’t agreed to terms for the 2013 season, two people familiar with the situation said. Giving the most powerful teams a more favorable deal is a “disaster” because it discourages new investment in Formula One, said Robert Fernley, deputy director of seventh-ranked Force India. The season opens this weekend in Melbourne.
“CVC is not interested in developing the sport, it’s interested in making as much money as possible and then selling it,” Fernley said in a telephone interview. “The income split doesn’t support Formula One.”
London-based CVC distributed $699 million of $1.5 billion of Formula One’s income to teams in 2011, according to the prospectus. The biggest teams typically get as much as 10 times as much as the smallest, said Xander Heijnen, a partner at CNC Communications & Network Consulting AG in Munich who has advised carmakers about the series.
CVC spokesman James Olley declined to comment on the firm’s distribution of income among other management issues.
Marussia said in a March 1 statement that it dropped Brazilian driver Luiz Razia for France’s Jules Bianchi to help secure its “long-term future.” Razia’s backers missed a payment deadline to Marussia, which is relying on drivers to bring sponsorships this year, autosport.com reported.
The team owned by Russian carmaker Marussia Motors was as of March 12 holding talks with series Chief Executive Officer Bernie Ecclestone about terms for the season, the people said. They declined to be identified because the negotiations are private. Ecclestone, 82, didn’t immediately return a call seeking comment. In an e-mail, Marussia spokeswoman Tracy Novak declined to comment.
To be sure, the biggest teams have for decades received more revenue than the smallest squads according to the “jungle law” in Formula One, Heijnen said.
“You’ll never get equality in Formula One, it’s a lovely dream but it isn’t going to happen,” Paul Stoddart, who sold the Minardi team in 2005, said. “All the teams know what they’re getting into” when they join the racing series, he said.
Stoddart said the compensation for middle-ranking teams like Force India has tripled to about $35 million a year under CVC’s ownership of the sport.
“I would have crawled over hot coals to get” what Force India gets, Stoddart said.
As some teams struggle, CVC is cashing in on its 2006 acquisition of Formula One. It sold stakes worth $1.6 billion to BlackRock Inc., Waddell & Reed Financial Inc. and Norges Bank Investment Management last year and, after suspending the IPO, arranged $1 billion of dividends for shareholders with a bond sale.
The buyout firm, which now owns 35.5 percent of the business, has reaped more than $4 billion on its original investment of $1 billion in 2006 and expects to make as much as $7 billion, CVC partner Donald Mackenzie said in an Oct. 29 interview. Formula One’s revenue increased at an annual compounded growth rate of 9.6 percent between 2003 and 2011, according to the IPO prospectus.
Fernley, whose team shareholders Vijay Mallya and Sahara India Pariwar are bankrolling the search for an Indian Formula One driver, said CVC hasn’t invested enough on developing Formula One. The series had falling television audiences in China, Russia and the U.S. last season, according to its internal broadcast report.
In 2011, CVC oversaw capital spending of 0.3 percent of revenue, which was mainly spent on TV production equipment, according to the IPO prospectus.
“You need to have an investor who gets a good return but one that also has an interest” in Formula One, Fernley said. “CVC has milked it and anyone investing in it should be looking very closely at what they’re getting.”