Formula 1 - Uphill task for F1 float following New Jersey race delay

It wasn’t easy for Formula One boss Bernie Ecclestone to make the decision to delay the Grand Prix of America in New Jersey to 2014.

For nearly 40 years Ecclestone has been trying to stage an F1 race near the Big Apple and he has investigated a wide range of locations from a street circuit passing through Times Square to building a track to the west of Manhattan on a site which was due to be home to the 2012 Olympic stadium if New York had won the bid for the Games. Ecclestone finally realised his dream in October last year when it was announced that a race would take place in New Jersey on a 3.2 mile street circuit snaking alongside the Hudson River with the famed Manhattan skyline in the background. It didn’t take long for cracks to start to appear. The project was announced with great fanfare and although the media was told about the £62.4m ($100m) economic benefit that the race was expected to bring, no details were disclosed about the source of its financial support. All the organisers would say is that the race would not be funded with public money. The amount they needed to get the project off the ground was far from inconsequential as upgrading the public roads and facilities costs around £30m with another £15m due annually as a fee for hosting the race. Since it is due to be on the F1 calendar for 10 years the total sum required comes to an eye-watering £180m. The organisers seemed to be ideally-placed to secure the funds. The executive director of the race is Leo Hindery Jr, a sometime racer who set up private equity firm Intermedia. He is joined by former Nascar race promoter Humpy Wheeler and his son Trip with veteran motorsport marketing executive Tom Cotter coming on board in January as the Grand Prix of America’s president. However, it was understood from the start that the management would not be providing the majority of the funding for the race and despite their impressive credentials, it soon became clear that they were struggling to raise finance. In May Ecclestone revealed that the organisers were late paying him. Three months later Tom Cotter unexpectedly resigned and last month Ecclestone said that the organisers’ contract had been torn up after they failed to comply with its terms. F1 hosting fees are paid in advance of the race and although Ecclestone had not been paid he stuck by the organisers even including the Grand Prix of America on the provisional 2013 calendar which was produced at the end of September. Nevertheless, the lack of financial backing soon became hard for Ecclestone to avoid. Construction work on the track began earlier this year but a lot of it has focussed on the pit building located inside garages which had been planned to be built regardless of whether the race takes place. It wasn’t clear how much other work had been done but last Thursday worst suspicions were confirmed when local mayor Richard Turner revealed that the organisers are behind on road repairs and obtaining permits. With the race even losing local support Ecclestone finally caved in and on Friday he revealed to Eurosport that the Grand Prix of America “is not going to happen next year.” It raised the question of whether it will ever get off the grid. New Jersey has the dubious honour of being the only one of nine new races in the past 20 years which has been dropped from the F1 calendar. Indeed, there is no precedent in the modern history of F1 for a new race which has been dropped to later return to the calendar. Ironically, although the delay gives the organisers more time to find the required funding, it could now be harder for them to do this because the last thing investors want to do is put money into a project which doesn’t happen. Anyone who had committed money to the 2013 Grand Prix of America would not be seeing the fruits of their investment next year so the question that financiers will be asking is whether the same thing will happen in 2014. It explains why Ecclestone left it until the eleventh hour to confirm that the race would be delayed and there is much more at stake than just his dream of holding a Grand Prix with Manhattan as a backdrop. Dropping the race in 2013 immediately lowers F1’s revenue stream for the year by £15m as a result of it losing the hosting fee which was due to be coming from New Jersey. It is hard to compensate for this as it is likely to be too short notice for a replacement race to step in. Likewise, the moment that the Grand Prix of America’s contract was torn up, F1 could no longer bank on receiving any of the £150m which was expected to be paid in hosting fees over the next 10 years. This couldn’t come at much of a worse time for F1 for two reasons. Firstly, the New Jersey organisers’ difficulty to raise finance sends out a signal that F1 races may lack commercial interest. This is the last thing that the organisers of other Grands Prix want to hear since many of them may also need to raise finance to keep their races afloat. There is talk in Australia of reducing the state-aid given to its race whilst the organisers of the South Korean and Singapore Grands Prix recently renegotiated new contracts on improved terms. The historic Nürburgring recently lost the right to hold the German Grand Prix after making huge losses and in 2013 the Spanish Grand Prix will begin to rotate annually between Barcelona and Valencia which have both been on the calendar every year since 2008. Looking at the bigger picture, it is particularly bad timing for F1 to announce that it has lost £150m from the New Jersey race contract. The single biggest shareholder in F1’s parent company Delta Topco is private equity firm CVC Capital. Its investment fund bought the sport in 2006 using £602.6m ($965m) provided by private investors. CVC puts their money into businesses and they get a return when the companies make a profit or are sold for a profit. Earlier this year CVC started to return money from F1 to its shareholders when it sold a 28.3% stake in the sport to two US investment funds – Waddell & Reed and BlackRock – and Norges, the investment division of Norway’s central bank. The shares were sold for £1.3bn ($2.1bn) and left CVC with a 35.5% stake in F1. It planned an even more daring strategy to further reduce its stake in the sport. CVC was hoping to float F1 on the Singapore stock exchange in a deal which would value the business at over £6.2bn ($10bn). The flotation was planned to take place in June and although all the preparation work was done, weak stock market conditions put the brakes on it going ahead. It is not expected to take place for at least a year as markets are still recovering. Whilst the delay is sensible, it is not ideal because if F1 were to be publicly valued at over £10bn it would considerably increase the value of its owners’ shares. A minimum benchmark for F1’s value was set by the sale to the three funds and they invested in several stages with the most recent being Waddell & Reed’s £312.3m ($500m) purchase in June of a 7% stake. This put a £4.5bn ($7.1bn) equity valuation on F1 which is expected to increase to £6.2bn on flotation driven by high interest from financial institutions. They buy huge blocks of shares and are required to get any major flotation off the ground. Crucially, many of the top financial institutions are American and F1 has a famously low profile in the country. Losing £150m in revenue from New Jersey could make it harder for F1 to hit its anticipated valuation but, perhaps more importantly, if the race never takes place then F1 will miss a golden opportunity to raise its profile in the US. The Grand Prix of America would literally drive F1 to the front door of New York with Wall Street’s skyscrapers looming large in the background. This wouldn’t just boost the teams’ efforts of attracting US sponsors but it could also affect the future ownership of the sport. The higher F1’s profile is in the US, the more likely it is that financial institutions there will want to invest in the flotation. Next month’s inaugural United States Grand Prix in Austin will go some way to address F1’s profile in America but it isn’t likely to act as the same kind of flagship to the financial community as a race in front of Manhattan. Interestingly, last week rumours began to surface that the estate of Lehman Brothers, the bankrupt bank which owns 15.3% of F1, had reached a preliminary agreement to sell a 3% stake to the Teachers’ Retirement System of Texas (TRS) – a prominent US pension fund. It is unclear whether the rumour has any foundation and, adding to the uncertainty, it was claimed that “there are no plans for any of the participants to announce the Texan investment because it is a private deal.” Lehman Brothers bought its F1 stake in 2006, two years before the bank went bust. Since then, its investments have gradually been sold off to pay the £281.1bn ($450bn) of creditors who it owed money to. Earlier this year it was revealed that Lehman Brothers had until June 2014 to sell its F1 stake so it would not be a surprise if it has indeed done a deal with TRS. If this proves to be the case, perhaps the most interesting point is that the rumour claimed the 3% was sold for £125m ($200m) which values F1 at £4.2bn – a marked fall from the £4.5bn valuation earlier in the year. It is unclear precisely what could have driven this drop but an obvious possibility is an ongoing bribery investigation in Germany. The case involves former banker, Gerhard Gribkowsky, who was sentenced to eight and a half years in prison in June for corruption. A court in Munich convicted Gribkowsky of receiving £27.5m ($44m) in return for agreeing to sell a 47.2% stake in F1 to CVC in 2006. Gribkowsky was chief risk officer of German bank BayernLB which owned the shares and was unaware that he had been paid. Ecclestone has admitted to making the payment but says he did so because Gribkowsky had threatened to make false allegations about his tax affairs if he did not get the money. Since Gribkowsky was sentenced, the media has been awash with reports that Ecclestone would be charged with paying a bribe to him and people close to CVC now say “it’s hard to know [if they are going to press charges against Bernie]. Bernie is pretty blasé about it. It’s hard to know to be honest.” The most recent F1 share sale in June came 12 days before Gribkowsky’s sentencing so it would not be surprising if the sport’s value has fallen since then. Improving F1’s image in the US could well help to boost this figure as it could attract more viewers and sponsors which in turn would ultimately increase its revenue. That’s not the only benefit it could bring. US investors are famously risk averse so if Ecclestone gets charged it would probably not endear the financial community in the country. Holding a race in New Jersey would not neuter this but it would at least showcase the excitement and benefits of the sport to Wall Street. In the long run it could become even more important as it is nearly two years since Gribkowsky was first arrested and with the investigation into Ecclestone ongoing, the case shows no signs of slowing down. “I don’t see how it can come to an end really,” says Ecclestone. Perhaps ominously, nearly two years ago to the day Ecclestone told the Financial Times that “there’s no way I would sit in front of a load of shareholders. [F1] wouldn’t float under me.” Only time will tell whether he is right.

Christian Sylt is author of Formula Money