Morgan Stanley Forecasts $220 Million Of Net Losses For F1 By 2020

https://www.forbes.com/sites/csylt/2018/02/12/morgan-stanley-forecasts-220-million-of-net-losses-for-f1-by-2020/#535dd4355b5c


The investment bank Morgan Stanley has forecast that Formula One auto racing, which is listed on the Nasdaq with the ticker FWONK, will burn up $216.1 million of net losses over the next three years.

The grim outlook was disclosed in a recent report from the bank. It follows the news in Britain’s Independent newspaper that F1’s revenue in 2017 crashed by $18 million to $1.8 billion fuelled by the loss of the German Grand Prix and several sponsors including insurance firm Allianz and banking giant UBS.

It was the first year F1’s new owner, Liberty Media, was in the driving seat and the fall was the biggest of the past decade. In fact, the only other drop came in 2015 when F1’s revenue reversed by just $4.6 million to $1.7 billion.

Despite promising to give a boost to the business Liberty failed to sign any new races or major sponsorship deals to compensate for the ones it lost. Morgan Stanley’s report forecasts that an increase in fees from broadcasters will drive growth in F1’s revenue but as Forbes has reported, one of the bank’s own sources has contradicted this.

It raises questions over 42.1% of the $186.9 million increase in broadcast revenue which is forecast for this year and the less revenue there is at the top, the less there is to fall to the bottom line. According to Morgan Stanley the red ink is already revving up.

The report claims that the surge in broadcasting fees will boost F1’s revenue by 13.7% to $2 billion this year. It forecasts that this will rise to $2.1 billion next year and accelerate by further $200 million in 2020. The bottom line is a different story.

F1’s biggest single cost is the payment of prize money to the ten teams which equates to 68% of its underlying profit. This profit share is expected to come to $1 billion this year followed by $1.1 billion in 2019 and $1.2 billion the year after. Even after paying this and the running costs F1 is still forecast to be left with Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) of $382.4 million in 2018, $420.8 million next year and $467.6 million the year after. Then comes the sting in the tail.

F1 has around $5 billion of debt on its books so it has to make high-octane interest payments. Morgan Stanley forecasts that they will come to $173.4 million this year, $177 million in 2019 and $164.6 million in 2020. This isn’t enough to drive F1 into a loss but it’s far from the end of the story.

There is no doubt that that prize money is F1’s biggest single cost when the payments to all of the teams are combined. However, the largest single expense in itself is actually the what is known as amortization and Morgan Stanley forecasts that it will hit $394.6 million every year between now and 2020.

Amortization is an accounting term which refers to the process of reducing the value of an asset to reflect its reduced worth over time. The benefit to a corporation is that this reduction in value is a cost on paper so it is tax deductible. However, as the amortization and interest payments exceed F1's EBITDA they drive it into a net loss and Morgan Stanley forecasts that it will finish 2018 $115.2 million in the red. Next year is on track to be a similar story with net losses of $78.5 million followed by $22.4 million in 2020. The forecast gives total net losses of $216.1 million over the next three years.

As Forbes has reported, the wheels which led to this were put in motion 16 years before Liberty got the keys to F1. The rights to the series are directly held by Liberty’s subsidiary, the UK-registered company Formula One World Championship (FOWC) limited which is F1’s commercial rights holder. This entitles the company to sell the rights to host, broadcast and sponsor F1 races as well as operate the official corporate hospitality outfit.

FOWC has got an exclusive license to commercialize the championship until the end of 2110 as it signed a contract covering a 100-year period which began in 2011. It bought the rights from F1’s regulator, the Fédération Internationale de l’Automobile (FIA), for $313.7 million in 2001 and when the contract came into force it had a value of $5.5 billion on FOWC’s financial statements. That is when the amortization started to rev up.

In 2011 the amortization on the agreement with the FIA came to $425 million which left $5.1 billion of its value to be cleared. The job is far from done.

Liberty’s latest filings show that the amortization expense on the FIA agreement came to a total of $215 million in the first nine months of last year alone and comprised the bulk of its $295 million total.

Although amortization is nothing more than an accounting mechanism that doesn’t mean to say that it only has an effect on paper.

If amortization is applicable to a private company the management can simply prepare financial statements for shareholders which strip it out and show an adjusted bottom line without its effect. However, it isn’t so easy for management to remove line items in the financial statements of a publicly-traded stock as they have to follow fixed reporting standards.

It has led to the F1 Group reporting turbocharged losses which in turn could affect investor appetite for the stock.

F1’s shares are up nearly 20% since the year end of 2016 but Morgan Stanley says this has “been fuelled almost entirely” by the appreciation of Liberty’s 34% stake in event organizer Live Nation which has been attributed to F1. “FWONK has appreciated nearly 20% since YE16, much of that strength was driven by its ~34% stake in Live Nation,” says the report adding that “while shares are up nearly 20% since YE16, excluding its 34% interest in Live Nation, the F1 stub is actually up less than 5%.” Time will tell whether the forecast losses lead to that reversing.