On Wednesday, John Malone’s Liberty Media Corporation confirmed it is to purchase Formula One in a deal that values the world’s leading motorsport series at US$8 billion.
The agreement – which, to be strictly accurate, gives Formula One an equity value of US$4.4 billion and involves Liberty assuming US$4.1 billion of debt – ends a years-long search by owner CVC Capital Partners for a buyer. Yet while the identity of the sport’s new backers has now been revealed, the destiny of the sport is less clear. SportsPro takes some time to consider a few of the more pressing questions.
What happens now?
As of Wednesday, Liberty Media had acquired an initial 18.7 per cent stake in Formula One from the championship’s various owners – led by private equity firm CVC Capital Partners, which previously held a 38.1 per cent controlling stake – for US$746 million in cash. 21st Century Fox vice chairman Chase Carey has been installed as chairman of Formula One; Bernie Ecclestone remains in place as chief executive.
From here, it gets a little more complicated. Liberty Media expects to complete a 100 per cent acquisition of the shares held by Formula One’s Jersey-based parent Delta Topco by the first quarter of 2017, subject to anti-trust clearances and other checks. The shares will be transferred into a new entity called Liberty Media Group – which will later become Formula One Group.
The acquisition will actually be completed through the issue of over US$2.9 billion in new shares in the group, with the sellers actually holding 65 per cent of shares in the new entity. While these will be of the non-voting variety, the likes of US fund manager Waddell & Reed, LBI Group and Ecclestone will be represented at board level, as will CVC.
Liberty Media, however, will assume full control of the future direction of Formula One.
Is this good business for Formula One’s current owners?
Ownership of a controlling stake in Formula One has been fairly lucrative for CVC. The group paid around US$1.7 billion for control of the series in 2006, and has since taken what is left of the cash coming in each year after the teams have been paid and the costs have been covered. According to the Daily Telegraph, the ultimate owner of Formula One of which CVC holds 35 per cent, Delta Topco, boasted turnover of US$1.7 billion in 2015, with its profits rising by US$76.3 million to US$329.9 million.
Earlier this year, as CVC prepared to mark a decade in the sport, the Telegraph also reported that the group had earned between UK£2.8 billion and UK£3.5 billion through those annual payouts.
For all the frustrations inherent in following Formula One, it remains a money-making enterprise of the first rank. According to the gushing investor deck Liberty Media released to announce the creation of Formula One Group, the championship has US$9.3 billion revenues confirmed over long-term contracts in the years ahead.
There will be some misgivings about the eventual enterprise value of Formula One upon CVC’s exit. When the group was working to bring about an initial public offering (IPO) of Formula One stock in 2012 and 2013 – the plans for which were later dropped – its valuation of the company as a whole was around US$12 billion.
Even last year, a US-Qatari consortium led by Stephen Ross was said to have shaken hands on a deal worth US$8.5 billion. In a sports and media landscape where a relative startup like the Ultimate Fighting Championship (UFC) can change hands for US$4 billion, there is a sense that the Liberty deal is confirmation that Formula One has been falling short of its potential.
Still, as Forbes noted last weekend when it became apparent that the deal with Liberty Media was imminent, CVC may have made around US$7.6 billion in total from its investment in Formula One – 6.9 times its initial outlay. That makes this one of the most successful pieces of business the firm has ever concluded.
Where does this leave Bernie Ecclestone?
The diminutive frame of Bernie Ecclestone has loomed over Formula One governance for close to four decades, but for at least a quarter of that time there has been speculation over when and how he will choose to bow out. The primary reason for that is obvious enough: Ecclestone will be 86 by the end of this season. But the Englishman has proved resistant to every challenge to his authority – from previous takeovers to a 2014 German bribery trial, which he paid US$100 million to settle despite denying any wrongdoing.
For so long the ringmaster, Ecclestone personally owns a significant chunk of Formula One through a vehicle set up in his own interest and another that operates as a trust for daughters Tamara Ecclestone and Petra Stunt. His career in Formula One was famously ignited by an ingenious moment of insight in the 1970s, when he spotted that the broadcast rights were undervalued and transformed the earning potential of the sport, while enriching himself considerably in the process
The path that the championship has taken in recent years suggests that the capacity for long-term strategic foresight is something that has either deserted him or that he is no longer interested in exercising.
Nonetheless, Ecclestone remains a master at exploiting the arcane and sometimes chaotic business conditions that he has done so much to create. He has kept the money coming into the sport by whatever means available, and it is often his intervention that is decisive in resolving conflicts between teams or keeping Grand Prix hosts on the calendar.
John Malone is not a man with a reputation for avoiding conflict: there may be a political element to Liberty’s retention of Ecclestone, but he has also made himself difficult to dispense with.
Ecclestone, who notably acquiesced to a profile on the Formula One website just before the takeover was announced, has already insisted that little will change in how the sport is run.
What can we expect from Liberty Media?
The weaknesses in the Formula One business model – and its sporting model, for that matter – are not difficult to spot. The sport was one of the biggest sports media success stories of the 1980s and early 1990s – and to its critics it still feels that way. Its audience is getting older and narrower, its relevance as a showcase for motor industry tech is becoming more tenuous, its tinkering around the edges of competition regulations have alienated potential fans while the championship has actually become less competitive.
Those issues may not have concerned CVC, whose primary interest in Formula One was as an asset to be flipped, but Liberty Media may have sensed an opportunity to improve the performance of the series as a media product.
While Malone’s group is the owner of Major League Baseball’s (MLB) Atlanta Braves, its primary interests are in media and live events – its assets include a 34 per cent stake in entertainment and venue giant Live Nation, as well as minority holdings in the likes of Time Warner and Viacom, while it has links through Liberty Global to some of the biggest names in cable television.
New chairman Carey is a News Corp veteran with close links to Rupert Murdoch, whose CV includes the launch of Fox Sports and negotiated its groundbreaking US$1.6 billion deal with the National Football League (NFL) in 1993.
Already, it has identified the distribution of digital content as an area for development, though it remains to be seen how it will do so in an era where Formula One coverage has migrated behind the paywall in several key markets.
The sport has been slow to embrace digital media but its vast wealth of video content makes some kind of OTT offering an intriguing proposition in the long term. Liberty also aims to broaden the base of Formula One partners – perhaps taking its cue from the US$200 million deal signed by Heineken earlier this year – and grow the contribution sponsorship makes to overall revenues from its current share of around 15 per cent.
No doubt Liberty will view bolstering the negligible central marketing efforts of Formula One as one means of achieving this, but it may soon learn that doing things from the middle is not always the easiest approach in the sport.
The near-annual disputes between teams about revenue sharing and rule changes are something the new owners will either want to resolve or need to get used to; a still vague offer to participants of a stake in the holding group could be a first step to a more stable long-term model.
Hosting fees have represented an increasingly important source of income in the past decade as the size and shape of the calendar has changed dramatically. There will have been 21 races in the 2016 Formula One season, with the lengthening of the series presenting enormous challenges in terms of logistics and car development.
More pertinently, that championship calendar has often been constructed in two ways: by indulging in brinkmanship that seemingly leaves at least longstanding race host unsure of its future each year, and by accepting state money from regimes with dubious ethical standards. Liberty has already intimated that it will ‘evolve’ the calendar, and the addition of Grands Prix has not been ruled out, but it will be interesting to see how far the approach will now change.
Perhaps the most important question for Formula One is that of identity. The championship has been in a kind of lucrative stasis in recent years, but for all the efforts of other promoters it remains best placed to capitalise on the R&D needs of its car industry partners and on the opportunities presented by the new media environment.