F1 explained (long thread!)

Here we go......

FIA vs FOTA melt-down
Special report and insight page
Apologies for this Formula 1 specific newsletter, but the biggest bombshell to hit the sport in over sixty years probably deserves a little focus and analysis. I also apologise for its length, but there's so much that does not get into the mainstream press (MSP) but which puts everything into context.

I know I'm going out on a bit of a limb here, but I hope if you spend five minutes reading this you'll then understand why FOTA have done what they have done and why their way is the only way forward for the sport and how much better it will be as a result. However, if you're short of time, just scroll down the page a little to the bullet points. They should pull you up sharper than a triple double-shot expresso!

Of course, to put the crisis instantly to bed all it needs is for Max to announce he is not seeking another term of office come the November FIA elections. But I am not betting this will happen. Rumours suggest a vote will be called for Max's head at the World Motor Sport Council next Wednesday, but a call for a vote is far from certain, let alone the result.

Oh, and the other thing that needs to happen is that CVC Capital Partners fire Bernie and relinquish all control over the commercial rights to the sport, thus removing the $2.8bn debt millstone from Formula 1 and freeing up 50% of the sport's $1bn revenue - $500m - that currently goes out of the sport forever in debt repayment, so that instead it can be used to better the sport (such as young driver scholarships, circuit improvements, cheaper seats, etc, etc. There's quite a bit you can do with $500m...).

Yeah, right! In your dreams. But until then we're stuck with Max and Bernie...

In response to FOTA's breakaway series, Formula 1's governing body, the FIA, says it will begin legal proceedings against FOTA over its plans to set up a rival world championship next year.

The FIA statement included, "The actions of FOTA as a whole, and Ferrari in particular, amount to serious violations of law including willful interference with contractual relations, direct breaches of Ferrari's legal obligations, and a grave violation of competition law."

Note that the emotive hyperbolic adjectives in red are obviously penned by Max, typical of his provocative and confrontational style. As to a "violation of competition law", most people would surely interpret FOTA's actions as seeking to increase competition and choice.

Funny, a couple of days ago he said the FOTA teams were welcome to leave. Now that they've taken Max up on his offer he's decided that they can't leave, but he won't negotiate with them to participate, he'll use force.

Max had targeted fielding 13 teams in the FIA F1GP series next season to supplement the ten existing teams on the grid. They received 15 applications from brand new teams, vetted 12 of them, interviewed representatives of nine and a week ago chose three: Campos, Manor and Team USF1, to front with the then existing ten teams.

However, Friday's FOTA news that the 'FOTA 8' would not be on the grid next year meant the FIA F1GP grid was now down to a total of just five teams, causing the FIA to announce that, "Preparations for the 2010 FIA Formula 1 World Championship continue but publication of the final 2010 entry list will be put on hold while the FIA asserts its legal rights."

Clearly, delaying the publication of the entry list is an FIA ploy that gives the parties time for more manoeuvring as they search for a compromise over the issue. It's also a huge climb-down for Max.

But wait! There's more! Not content with the stirring he'd done so far, Max then went on to say that "Bernie, as the commercial rights holder, will sue [the FOTA teams] too. There is a quite a lot of money at stake for us but for Bernie it is a massive amount of money. The teams will all owe him money."

Max claimed every team in the FOTA group has been paid commercial revenues for the coming seasons in advance (something the FOTA teams would dispute), so Bernie would be asking for it back.

Interestingly, not a word about this has been heard from Bernie himself...

Interestingly, less than 24 hours after the FOTA bombshell was dropped, the FIA's F1GP circus is already beginning to unravel, with:

* Lola and N.Technology have now withdrawn their FIA applications and together with Prodrive (Aston Martin) they have already been talking with FOTA. If agreement was reached, this would mean at least 11-12 teams on the FOTA grid;
* At least three TV broadcasters are talking with lawyers about being stranded with expensive rights to an F1GP series that is devoid of the star names next year, with Italy's Sky Italia apparently having a 'no Ferrari -- no contract' get out clause;
* Nico Rosberg, who is out of contract at the end of 2009 and openly looking for a new seat, has suggested he'll not be driving a Williams next year, "I believe the FOTA championship would be more attractive than the Formula One championship if all the big teams and drivers are there";
* Monaco is understood not to be contractually committed to the FIA F1GP series, so is free to do what it wants. Prince Albert of Monaco strongly hinted in a BBC interview that he could not envisage his race without Ferrari, so Monaco is likely to host a round of the FOTA series, leaving the FIA without the jewel in the crown.
* Donington Park boss Simon Gillet has said cancelling its contract to host the next 17 British F1GPs from next summer if the major teams break away is on the cards. Gillett said the situation is already causing "a little bit of a slowdown" in the search for investment and suggested that the contract with Bernie would allow him to pull the plug if the major teams are missing. So will be at Silverstone again next year after all?
* FOTA will begin formal preparations for its new championship as early as next week, after Ross Brawn made it clear the teams were focusing flat out on their breakaway series rather than finding a compromise deal with the FIA. When asked if he believed that a compromise would be put together that resulted in teams signings up to F1, Brawn said: "No that won't happen, I mean the decision has been made by FOTA. FOTA now has to press ahead with its ideas and plans. We can't wait until January and decide which way it is going to go. As each day passes, and each week passes then the options for reconciliation will reduce."
* And there's speculation that the FOTA series will return to Adelaide, causing concern that the breakaway Formula 1 series could threaten the Melbourne Grand Prix <http://www.news.com.au/heraldsun/story/0,21985,25662116-11088,00.html> which is already on shaky finances, having lost A$35m last year. In Adelaide's last year in 1995, it achieved the biggest crowd in Formula 1 history, with a four-day attendance of 520,000 people and a race day crowd of 210,000 (vs Melbourne's 2009 numbers of 286,900 and 105,000 respectively (but still three times more than Istanbul's 36,000)). But then Bernie could not have been too bothered when he said, "Our costs are very high in Australia and we get a lot less money. It's bloody bad for us. We've got quite a few places on the list which would like to have Formula One and as it seems your guy (John Brumby) down there doesn't want Formula One. We can make him happy."
* Force India is leaving open the door to the FOTA alliance, despite signing up unconditionally to the FIA series. They initially submitted a conditional entry together with the other FOTA members, but their bank was not happy about the cash-flow implications of this, so it was reluctantly changed to unconditional at the last minute. It's not clear whether contractually they are now tied to the FIA series or not (latest indications are that they are not, so they could join FOTA);

Very quickly it is becoming apparent that just the very real threat of a viable FOTA series could cause the FIA's F1GP 'cost-cap' series to implode before it has even started.

Roll on Mad Max and Formula Cosworth...




Okay, lets turn this farce on its head
The real story behind the Formula 1 crisis There are so many stories behind the headlines that the mainstream press do not go near, so I'll start:

The British taxpayer will end up owning Formula 1

Strange but true. Bear with me on this, for the finances of Formula 1 are complicated, to say the least. To understand how we got to where we are today, we need to rewind the tape to 1978.

Bernie became chief executive of the Formula One Constructors' Association (FOCA) in 1978 with Max as his legal advisor (kinda ironic, don't you think, that both were the other side of the fence then?). Together, they negotiated a series of legal issues with the FIA and the then President, Jean-Marie Balestre, culminating in Bernie's famous coup, his securing the right for FOCA to negotiate television contracts for the Grands Prix. For this purpose Bernie established Formula One Promotions and Administration, giving 47% of television revenues to teams, 30% to the FIA, and 23% to FOPA (i.e. Bernie's own pocket); in return, FOPA put up the prize money - grand prix could literally be translated from French to "big prize".


Television rights shuffled between Bernie's companies, teams, and the FIA in the late 1990s, but Bernie emerged on top again in 1997 when he negotiated the present Concorde Agreement: in exchange for annual payments, he maintains the TV rights. The contract with the various teams expired on the last day of 2007, and the contract with the FIA will expire on the last day of 2012.

However, in 1996 Bernie transferred his ownership of Formula One businesses to his wife, Slavica Ecclestone, in preparation for a 1997 flotation of the group. Over the next year chunks of the business were sold to various private equity groups which ended up with a German mob called Speed Investments (aka EM.TV) owning 50% of Formula 1 for 1.1 bn pounds.

But EM.TV stupidly way over-reached itself and, struggling with its debts in 2000, the share price dropped 90%. In February another German company, the Kirch Group, agreed to rescue EM.TV in return for a stake in the company and control of Speed Investments (Formula 1 bust #1).

Bizarrely, the two companies bought a further 25% of Bernie's F1 company for 600 m pounds in late-March 2001, raising Speed Investments' share of F1 ownership to 75%. If you are counting, the German Muppets have now spent 1.6 bn Euro for 75%, thus valuing Formula 1 at about 2.4 bn Euro. That's quite a bit of dosh for 17 2-hour races. This means that before a car has turned a single wheel, Speed Investments need to find roughly 160m Euro a year just to pay the interest. And remember, they have to pay off 1.6 bn Euro in capital as well in the ten remaining years to 2012 - that's a further 160 m Euro a year. So, 320 m Euro/yr goes out the door every year before anyone actually putting on the show (like the teams) has been paid a cent.

Well, it was not long before the inevitable happened: Kirch's creditors put the company into receivership in 2002 (Formula 1 bust #2).

It was about this time we began to hear a familiar theme: the major motor manufacturers who participated in Formula One at the time; BMW, DaimlerChrysler, Fiat, Ford, and Renault formed GPWC Holding BV to secure better representation of the manufacturers in F1, improved financial conditions for the teams, stability for the championship, and maintenance of free-to-air television coverage. (Where have you heard the bit in italics before?)

Ironically, Formula 1 was now owned by the banks who had leant the money in the first place: Bayerische Landesbank, JPMorgan Chase and Lehman Brothers (who went bust on 14 September, 2008)

On 25 November 2005 CVC Capital Partners (a private equity firm that also own bookmaker William Hill and Debenhams department store chain) announced it was to purchase both the bulk of the assets reposed by the three banks as well as Bernie's shares in the Formula One Group, giving them about a 70% ownership share of Formula 1, although the deal was not sanctioned by the courts until March 2006. Bernie was retained by CVC as chief executive of the company that now administers the sport's commercial rights on CVC's behalf.

To finance its F1 acquisition, CVC borrowed money, initially $1.1bn from The Royal Bank of Scotland (RBS), but a refinancing deal a year later increased the debt to $2.8bn, repayable by 2014.

Now with massive debt to pay, CVC needed Bernie to go out there and make some serious money. New venues with state funding willing to pay top rate for a Grand Prix were given the nod by Bernie as the series began its drift away from its traditional heartlands of Europe and North America, to new venues in the Far East, even though grandstands are either more than half-empty, covered under canvas or supplemented by off-duty soldiers in civilian clothing.

The ultimate UK holding company of CVC's F1's interests is an entity called Delta 3, which in 2007 collected a total income of $938m from Formula 1, partly from hosting fees the circuits pay to run a F1 race, which range from $3.75m for Italy to $37.75m for Malaysia (but also believed to automatically increase by 10% every year), which bring in a total of $329m, with a further $380m from media rights. Add in corporate hospitality, which makes $140m annually, and trackside advertising, and you get your $938m.

On the expenses side of the balance sheet in 2007, the F1 group's biggest single overhead is payment to the teams a 50% share of profits after the expenses of running F1 have been deducted, making them "equal participants in the success and failure of the series", said Nick Clarry, CVC's UK managing director in November 2008. Crucially, he added: "In a worst case the impact on the bottom line is lessened by a reduction of our largest cost item." Therein lies the clue that drives the current debacle.

However, and this is the crux of the problem for CVC, is that Delta 3, having doled out $469m to the teams, was left with a similar amount to pay its operating costs and manage the huge loan. In fact, it paid off just $95m of the loan principal and made $260m in interest payments.

(It appears however that it is unclear whether anything like this sum of $469m has in fact been paid to the teams. On 18 March, 2009, FOTA representatives met with Bernie to sort out their claim to have been left out of pocket to the tune of tens of millions of dollars each in unpaid fees relating "to agreed sums owing from the 2006, 2007 and 2008 championship years". Bernie insisted that none of his companies "owes any amount of money to any team. Each of these teams has been paid its full prize fund entitlement to date.")

But the frightening thing is that whilst interest rates are relatively low now, the Obama/Brown solution of printing money to spend our way out of the recssion can only mean we're going to pay for it later with higher inflation and the inevitable consequences of that: higher interest rates. Despite base rates currently being at an all time low, CVC is already paying interest at a rate of over 10% because it is using 'payments in kind' loans that allow interest and capital repayment to be delayed, as it already can't afford to make a 'normal' repayment schedule!. Imagine what rate CVC will have to pay when the effects of the Obama/Brown monetary policy come home to roost!

When, 12-18 months ago, the teams started demanding an 80% share of all underlying profits, this set alarm bells ringing at CVC: This would mean an additional $300m annually from CVC. Were this to happen, CVC would have just $200m to cover operating expenses, service the debt and pay off the huge loan. Clearly if the teams were to get their way, CVC would not be able to even make its current loan interest payments.

And with many tracks walking away from Bernie's +10% annual fee escalator (e.g., Indianapolis, Montreal, Hockenheim, Imola), revenue for 2009 may decline over 2008 after surging 42% between 2003 and 2006. Although Abu Dhabi will pay about $45m to host the season-ending race in November, the injection of government money won't continue. CVC are clearly heading for serious trouble.

Add into this mix the collapse of F1 corporate hospitality this year as requests for hotel bookings fell 80% compared with last year for a race in Barcelona and by 50% for the Monaco Grand Prix. Executives don't want to be seen living it up in Monaco while they fire staff back home.

A default on debt covenants would put F1's commercial rights in the hands of the institution that leant the money in the first place, RBS. This a bank that went bust in the 2008/09 financial meltdown, forcing the British government to take a 70% shareholding in it on 19 January, 2009, effectively nationalising it. This would be extremely ironic, given that the British government refuses to invest in even the British Grand Prix.

The fear of this happening is what started Bernie, as F1 point man for CVC, down the road of cost-cutting. It wasn't Max's idea at all. If the teams were to lower their operating costs, Bernie reasoned they wouldn't have any grounds to argue for 80% of a $938m pie; their current 50% split of the underlying profits between ten teams would give each team, on average, $47m or 34m Euro, a team budget figure suspiciously close to Max's budget cap...

All it required was for Bernie to sow the seed of a budget cap idea with his mate Max, and CVC's debt repayment problems would be solved. Cleverly, in a typical diversionary tactic, Max shifted the goal posts and repeatedly keeps banging on and on about how the current recession means that the manufacturers must be told how much they will be able to spend, lest they go belly up. He makes no reference to the truth that it is in fact the sport (i.e., CVC) that will go bust without his budget cap, not the teams. Such arrogance and deception is typical of Max.

However, now that FOTA has said it'll set up an alternative championship (and one that does not come with $2.8bn of debt), CVC's ability to make its annual debt payments would be nonexistent if 80% of F1's established participants deserted it, as one would expect to see a commensurate fall in track fees, media rights, hospitality and advertising.

Williams' CEO Adam Parr has admitted it is "going to be very difficult to raise sponsorship revenues" in a 2010 FIA F1GP without the pull of the FOTA teams. He insisted that Williams did not regret sticking with the FIA series, because of the money it gets from Bernie and CVC. Obviously he has not yet worked out that this money source is the first to dry up when revenues get tight for CVC, as they will do.

Of course, ultimately, the FIA's big mistake was allowing the sale of the commercial rights to a heavily leveraged third party in the first place. They had a right of veto over the onward sale of the rights to CVC Capital Partners and they could have used it, arguing that sale to a company which had to become so heavily indebted to buy the rights was bad for the sport. As indeed it has proven to be...

If this was the Premier League football (soccer), the 20 club chairmen would have strung Bernie up by his size five bootstraps by now. Every year the Premier League generates around 900m pounds in television money, not much different to the total income for Formula 1, and it all goes to the footy teams - aside from a massive amount that goes into charity and grass roots development.

In contrast, the Formula 1 teams - the people who design the cars, invest the cash and put the drivers on the circuit - get half the cash, while CVC, a privately-owned company of professional money-makers, get the rest. Meanwhile, there is no investment in the grass roots or in the infrastructure of motor racing or the circuits. Bernie and CVC simply sit there and take the loot.

And now the teams are fed up because they have finally woken up to the fact that, as well as not getting the money, they also have no say in the running of the sport. No wonder they want to go their own way.

Even if FOTA backs off and accepts the demads of Max and Bernie, the Max & Bernie business model is not only unsustainable, it is also fundamentally bad for the sport.

As things stand now, if FOTA's alternative series goes ahead, CVC is dead in the water, with the British taxpayer looking to pick up the pieces, all $2.8bn of it (Formula 1 bust #3).

Now I understand!!!!

 

theres more!

If you have not heard the news this morning, the stoush between the Formula 1 teams, FOTA, and the FIA President, Max Mosley, is over. The FIA has issued the entry list for next season's F1 world championship and it features all of the ten existing teams and the three new ones who entered last week.

I'm really pushed for time to go into too much detail, but these seem to be the key points:

The deal was brokered by Luca di Montezemolo, Max Mosley and Bernie Ecclestone in a three-hour meeting first thing Wednesday in Max's Paris FIA office before they presented their compromise to the assembled World Motor Sport Council for ratification.
Max has been removed from power and will not seek re-election in October when his current term expires. In the meantime he has relinquished his position as the main contact man at the FIA for F1, and will now become an honorary president of the FIA and a member of the Senate. Effectively his days of power are over.
Michel Boeri, the president of the Senate and also the president of the Automobile Club de Monaco, will take over the day-to-day running of office until Max's departure in October. Max said he believed there were "three serious candidates" to replace him permanently, with one of them understood to be former Ferrari team principal Jean Todt.
FOTA has achieved a seismic shift in the balance of Formula One power. The teams and manufacturers have agreed to commit to 2012, but the deals with the FIA and FOM are different. This was a key point for FOTA. The FIA deal is open ended, recognising the FIA's right to be the regulator of the sport, but now with the F1 commission in place to decide on future rules, which was not the case recently. With regard to Formula One Management (FOM – i.e., Bernie and CVC), the teams are signed up only until 2012, but they have separated their dealings with FOM from their dealings with the FIA.
Lawyers for F1's commercial equity owners CVC, who were looking at their $2.8 bn investment vanishing at the end of this season, had apparently pushed the warring sides very hard to broker a solution. Bernie, their point man, stood to lose his entire empire and, seeing the strength of FOTA, their refusal to deal with Max and the threat to the repayment vehicle, he persuaded his old ally to step down. However, huge financial questions remain, as it is believed the teams' share of the revenues will now be increased to more than the current 50% of the sport's $1 billion turnover, yet even on this revised deal they have only committed to Bernie for the next three years. It looks like CVC's investment remains as fragile as ever.
The published 2010 regulations are to be completely torn up and the rules for next year will be the same as 2009; FOTA teams will work to bring costs further down, but there will be no budget cap and the teams and manufacturers have committed to the sport until at least 2012.
Currently unknown are details like the proposed ban on refuelling, for example. FOTA meets the FIA tomorrow to move forward on finalising things.
The FOTA teams will act together to drastically reduce costs, down to around £40m in 2011. They will provide some 'technical assistance' to the three new teams (USF1, Campos Racing and Manor Grand Prix), although as all three of them are signed up to Cosworth, cut price engines will not be part of that. It will be interesting to see whether all three of the new teams are still using Cosworths when next season starts. And will the Cosworth engines still be free to rev past 18,000 rpm?
A few of the teams (including Brawn GP) have a 'TBA' where the engine maker would be, so obviously some engine deals still to be done.
We assume the energy recovery system, KERS, will be ditched by everyone.
It appears that Williams and Force India will be readmitted to FOTA, having sat on the sidelines throughout this most recent process.
FOTA is due to hold a press conference in Bologna on Thursday afternoon where Luca will announce further details regarding the compromise. He has already said "The satisfaction is that all of our requests have been accepted. To us three things were most important: that F1 stay F1 and not become F3; that there is no dictator, but that there was a choice of rules, agreed and not imposed; and that whoever had a team was consulted and had a voice."
He added, "Now finally we have stability of the regulations until 2013. I want to thank all our fans, because the public had had enough of these changes. Let's hope that next year, with the rules finally stabilised, we will see also a winning Ferrari. Could Mosley change his mind? He can, yes, but we won't. What has been fundamental is the unity of the teams, of the manufacturers. Ecclestone said that he fed FOTA's faxes to his dogs, Mosley said that he didn't know what FOTA was, today it seems to me that both of them have something different to say."
My take on it all is that it is somewhat anticlimactic outcome. A part of me was getting excited by the prospect of a break-away series, with all the exciting possibilities for fresh regulations and new tracks and the end to those boring Hermann Tilke designs, such as Bahrain, Abu Dhabi, Sepang, Shanghai, Istanbul, Valencia and Singapore, and see a return to some of the classic tracks of old (Laguna Seca anyone?) and new ones, such as a Helsinki street circuit.

I also hoped we'd get rid of all the old baggage about commercial rights/CVC and had the opportunity of a clean-sheet commercially, one that did not see $500 m disappear out of the sport every year. But I guess this whole argument will begin again in 2012…

I was also hoping to see the ticket prices reduced to a more realistic level, but we have to assume Bernie will continue to screw the tracks for mega-millions, thus forcing them to charge fans like wounded bulls to recoup the cost.

And lastly, I do hope they make some technical changes to the cars to improve overtaking for 2010: Silverstone was boring with far too little on-track action and the result decided (again) by the race strategy and pit crews. That's not Formula 1.

I'm not sure how realistic any of this wish list ever was; I guess we'll never find out. But I'm a little disappointed.