Last week Liberty Media, a US media and sports group, announced that it would be taking control of Formula One (F1) in a deal valuing the sport at $8bn. Initially, Liberty will buy 18.7% of F1's parent company, Delta Topco, for $746m in cash from a consortium of existing shareholders led by CVC Capital Partners.
Then, assuming the deal wins the approval of regulators in addition to the FIA (the governing body of world motor sports) and Liberty shareholders Liberty will take full control in early 2017 in a deal comprising $4.3bn cash and newly issued shares, and $3.6n in debt, giving the new stock (to be named Formula One Group) an enterprise value of $8bn.
It's a fairly complex deal in which existing shareholders will own 65% of the equity in the new company (with 24.7% retained by the previous controlling owner, CVC) but Liberty will hold the controlling stake and CVC has made clear it very much sees the deal as a passing of the baton.
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What is Liberty Media?
Liberty is a cable TV and media giant, listed on Nasdaq and majority-owned by John Malone, nicknamed Darth Vader for his ruthless deal-making style. Liberty is not well-known in Europe, but it's a big player in the US entertainment industry, making $248m net profit in 2015 on revenues of $4.8bn. It has a 34% stake in the event promoter Live Nation (owner of Ticketmaster).
Sister company Liberty Global (also majority-owned by Malone) owns Virgin Media, as well as the production company behind such UK television properties as Midsomer Murders and The Only Way is Essex, and 10% of ITV. Liberty also owns the Atlanta Braves baseball team, and 29% of the voting rights in Discovery, which is the parent group of Eurosport.
What now for Bernie?
Bernie Ecclestone, the 85-year-old F1 chief executive, who has run the sport with spectacular success for almost 40 years, is expected to continue in his role for about two or three years. But the deal is nevertheless a definite changing of the guard. Ecclestone, as part of the deal, has agreed to sell down his personal stake and that of his family trust stakes that together make up 15% of the business.
Malone's man in charge as the new chairman and new face of the sport is to be Chase Carey, the widely respected former vice-chairman of 21st Century Fox, and a long-time trusted lieutenant of Rupert Murdoch. While making appropriate noises about the great respect he has for Ecclestone, it's clear that Carey is planning changes.
What does he want to change?
A greater focus on marketing, digital rights and social media. Ecclestone is famously uninterested in social media this tweeting and Facebook "nonsense", as he once described it to an interviewer and sees well-off older people as his core market, at the expense, some critics fear, of fostering F1's next generation of fans.
This has caused friction in the F1 paddocks because of the strict restrictions in place by Formula One Management, which forbids any video or audio to be dispersed by anyone at the venue track unless they have a broadcast agreement. That means teams, drivers, sponsors and media cannot post video to social media or distribute it stymieing their ability to build relationships with fans and customers in the age of Facebook and Instagram.
What else will happen?
The change in ownership is likely to mean renewed investment in the growth of F1, according to Zak Brown, CEO of CSM Sport & Entertainment, a large sports marketing group. Whereas CVC, the controlling owners since 2006, focused on maximising revenues and return for shareholders, Liberty is a more strategic buyer that will have a longer view and focus on the desires of sponsors and teams the top priority being growth in the US.
"There's not a single sponsor who doesn't want Formula One to be bigger in North America," Brown told The New York Times. "It's the most untapped, mature market for Formula One to improve its growth."
Is Formula One still profitable?
It certainly has been for CVC. By 2014 the company had made $8.2bn since its initial investment of $2bn in 2006. The sale to Liberty is likely to make its investment in F1 the most profitable deal in the investment house's history. And despite plateauing in terms of TV audience reach (around 400 million viewers worldwide), Formula One's revenues have continued to grow strongly through the tough economic times of the past decade, up 58% from 2006 to 2015 to $1.2bn. That's in large part been driven by Ecclestone's success in promoting F1 to emerging markets.
Race hosting fees ($630m in 2015) and broadcasting rights ($560m) make up the biggest chunks of F1 revenues. Advertising and sponsorship brings in $250m. Other revenue streams, including hospitality, freight, licensing and the Junior Series, brought in $339m. When people are paying you $630m to let them host your event, you've got a business model that still has a lot of mileage in it (see below).
The rising cost of hosting a race
Over the past decade, race-hosting fees have caught upwith, overtaken, and zoomed head of broadcasting rightsas the biggest revenue stream for Formula One. Total feeshave more than doubled from $304m in 2006 to $630m in2015 (whereas broadcasting rights have grown from $395mto $560m).
Ecclestone has achieved this uplift by bringingF1 to markets such as Singapore, Bahrain, Abu Dhabi andAzerbaijan countries that view the races as a way to boosttheir global status or drive tourism through the sport's400 million TV viewers. The limited number of slots on theF1 calendar just 21 in 2016 has led to a rapid inflation inthe amount that potential hosts will bid, with the highesthosting fees rising to nearly $80m annually.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
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