The long term value of Formula One is at risk from several key factors. A successor to Bernie Ecclestone, F1’s 81-year old CEO, is as yet unclear, and the long-term viability of F1 as a business needs protecting, both from the breakaway of internal factions and the threat of an external takeover.

Private equity group CVC Capital Partners, has held the majority stake (63.4%) in Formula One since November 2005, when they acquired the shareholdings of Bambino, Bayerische Landesbank and JP Morgan Chase, and was approached last May from a consortium formed by Rupert Murdoch’s News Corp and Exor, the Agnelli family investment company that controls Fiat (and Ferrari).

Update following a statement published on Formula One’s official website (24/3/2012) – Teams commit to compete after 2012: Formula One Group Chief Executive Bernie Ecclestone announced today:

“I am very pleased to announce that we have reached commercial agreements with the majority of the current Formula One teams, including Ferrari, McLaren and Red Bull Racing, about the terms on which they will continue competing in Formula One after the current Concorde Agreement expires at the end of this year.”

Ed: Whilst this news implies that the relationship between teams and the commercial rights holder remain constructive, there is still a long way to go before shares in Formula One’s holding company, Delta Topico, can consider being floated on the Singapore Stock Exchange.

At the time, CVC politely declined further discussions, saying that their stake in Formula One was not for sale and whilst James Murdoch informed CVC that the approach was friendly, that’s usually how most hostile takeovers begin..

Meanwhile, two of Formula One’s most high-profile teams – Ferrari and Red Bull quit the Formula One Teams Association (Fota) last December (followed by Sauber), instigating a ‘divide and rule’ tactic intended to secure greater influence and share of income for those teams who contribute most to the sport’s value.

All the pieces have been lining up for a fundamental change in the ownership and governance of Formula One, which has just received a major push by news this evening, provided by Mark Kleinman of Sky News*, that CVC Capital Partners has retained Goldman Sachs to begin preparations to sell part (or all) of its stake in F1 during the next few months.

If CVC do elect to sell only ‘part’ of their 63.4% share, it is likely they will retain a controlling interest. It is also likely that CVC’s stock would be combined in a listing with the 15.3% held by LBI Group (the holding company used to contain the assets from the bankrupt US bank Lehman Brothers).

Lehman’s estate, which emerged from bankruptcy protection earlier this month, is expected to yield $1.5bn from its 15.3% stake in Formula One’s Jersey-based holding company, Delta Topco, hence the mention a few weeks ago of an estimated $10bn valuation of the business as a whole.

When Lehman Brothers originally went bankrupt in September 2008, CVC attempted to seize its Formula One shares, since Delta Topco’s articles of association give it the power to force any shareholder which becomes insolvent to sell to the remaining shareholders at a fair price. But with a $639bn debt to service, Lehman put its business into bankruptcy protection believing it would be worth more if sold as part of a controlling interest in the sport. Lehman Brothers is the 2nd largest shareholder in Formula One, after CVC Capital Partners.

CVC have power of veto over the sale of any shareholding in the Delta Topco, however when it requested the transfer of the Formula One shares from LBI, Lehman argued that US bankruptcy law would overrule its obligation to CVC. This was never tested in court, so ultimately CVC retain the right to seize the LBI shares.

The restructuring deal would likely bring in a number of prospective new investors and earn some significant payments to Ferrari (and possibly other teams). In addition to News Corporation/Exor, this could include Abu Dhabi sovereign wealth fund Mubadala and the world’s richest man, Carlos Slim, whose telecommunications company, Telmex, already provides financial support to Sauber driver Sergio Perez..

According to the report on Sky News, such a deal would depend on creating a formal process for appointing and removing a chief executive – which would be an essential precursor to any form of stock market listing or IPO (Initial Public Offering). The deal also includes a provision to formalise Ferrari’s role in Formula One – as the sport’s longest standing team – with a shareholding in the sport’s holding company and enable both Ferrari and Red Bull to nominate a director to sit on the company’s audit and nominations committees.

It is believed that Luca di Montezemolo would represent Ferrari, whilst either Red Bull founder, Dieter Mateschitz, or team principal, Christian Horner, would represent Red Bull Racing,

This is a significant step, not only because it paves the way to recognise key stakeholders in the sport in a more conventional and secure manner than currently provided by the Concorde Agreement, but it could also put in place a defensive layer to prevent an unwelcome takeover in the future.

The process, sometimes called a ‘scorched earth’ strategy (in its most extreme forms), is designed to make the business less attractive to a takeover by either placing key assets outside the company’s holding, or adding onerous conditions to the holding company’s articles of association. Either way, Formula One becomes a stronger business (and investment) proposition if the key teams are disincentivised to leave. Something that would be good for the sport, as well as for those financing its growth.

The proposals being explored include the introduction of single car customer teams, enabling new teams to use cars deployed by other constructors during the previous season. New teams would then be able to use these ‘customer cars’ for up to 3 seasons, before having to introduce their own designs, which would go some way to avoiding the situation illustrated by HRT this weekend, who have been excluded from tomorrow’s Australian GP after falling outside the 107% rule.

Apparently team managers are due to meet during the next few hours (in Melbourne) to discuss these proposals, plus other issues relating to the 2013 Concorde Agreement, but it remains to be seen if other big teams such as McLaren and Mercedes, will join Ferrari and Red Bull in gaining a share of the sport they’ve helped create.

* The original article by Mark Kleinman on Sky News was taken down shortly after being published, however any F1 scribes who would like to take a look at its contents should get in touch with me using the feedback form on this page or by sending an email to press[at]fitchmedia[dot]com.

Written By

Steve Davies

Steve is an investor, private equity advisor and former Partner at KPMG, PwC and Bain.   Most importantly he's a life-long car enthusiast, mountain biker and active sports enthusiast. He designs and builds technology platforms and is the architect behind Transmission.

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