www.formulamoney.comFormula One's Net Loss Accelerates To $160 Million
Liberty Media Corporation has revealed that its Formula One Group burned up net losses of $160 million in the first nine months of 2017 fuelled by increased costs and high-octane interest payments on loans held by the auto racing series that it is named after.
In January Liberty bought 100% of F1’s parent company Delta Topco for $4.6 billion from a consortium of sellers led by the private equity firm CVC. They were paid in cash, shares and a loan which could be exchanged for shares. These shares are listed on the Nasdaq with the ticker FWONK and reflect the performance of the F1 Group which is a collection of related Liberty assets including Delta Topco, small stakes in media giants Time Warner and Viacom as well as a 34% shareholding in event operator Live Nation. Delta Topco represents around 80% of the group’s assets and the financial results of the group as a whole closely track those of the company.
The shares have surged 76.2% in value since Liberty announced its F1 takeover in September last year. However, over the past month they have declined by 3.9% to close at $37.45 on Friday and Delta Topco’s former owners aren’t waiting around for further gains.
They were initially given shares which represented 64.7% of total but a statement from Liberty on Thursday revealed that almost all of them have sold up. It said that “the original selling shareholders of F1 who acquired shares of FWONK in January 2017 in connection with the Formula 1 acquisition own approximately 3% of the equity of the Formula One Group.”
As the table below shows, the shares have been sold in four stages with the latest coming in September. As this author revealed at the time in the Guardian newspaper, one of the former Delta Topco shareholders which had fully exited its investment was the collapsed bank Lehman Brothers. However, until now it wasn’t known that almost all of the former owners have also joined it.
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www.formulamoney.comReturns made by former F1 shareholders from selling FWONK stock
The biggest beneficiary was CVC as it has pocketed $846.3 million from selling its FWONK shares. It boosted an already high-octane return. As Forbes has reported, before the sale to Liberty CVC had made an estimated $4.4 billion on the $965 million it invested to buy F1 in 2005.
Next in line is Kansas-based asset manager Waddell & Reed which has made $407.1 million from selling its shares bringing its return so far to $1.7 billion. As Forbes revealed by late last year Waddell had still not made a return on the $1.6 billion it paid for its 20.9% shareholding in 2012 but the sale of its FWONK shares drives it $100 million into the black. It could yet boost that return as Waddell is one of the few former shareholders which still has shares in FWONK though its stake comes to less than 1%.
In contrast, the share sales brought the flag down on the ownership reign of F1’s former chief executive Bernie Ecclestone and his family’s Bambino trust. They made $59.9 million and $186 million respectively from selling their FWONK shares.
It is unclear why so many of the former shareholders have sold up but there is no doubt that F1 is facing a number of obstacles.
Despite being in the driving seat for nearly a year Liberty has not yet signed any major sponsors or new races. F1 is down by one race this year as the German Grand Prix is taking a breather which explains why the filings show that Delta Topco’s revenue has reversed. Over the three months to the end of September 2017 it came to $501 million which was $19 million lower than in the same period last year.
The decision to give the German Grand Prix the red light in 2017 was made long before Liberty took the keys of F1 but if it had signed some significant new sponsorship deals it could have offset the decline in revenue that resulted from the race taking a hiatus.
Not only has Liberty failed to sign any major new sponsors or races but two Grand Prix organizers have put the brakes on their contracts early under Liberty’s watch.
In July, the organizers of F1’s flagship race, the British Grand Prix, cancelled their contract seven years early due to soaring hosting fees. Likewise, last month’s Malaysian Grand Prix was the last in the country as the organizers also cut short their contract which was due to end in 2018.
In the medium term, there is also the threat from fraud authorities in Britain and France which have both opened preliminary investigations into F1’s governance contract, the Concorde Agreement, to see whether there is evidence of corruption.
As Britain’s News at Ten programme revealed, the politician Damian Collins asked the country’s Serious Fraud Office to look into this and its director David Green replied to say that a “thorough examination” will be carried out. It was highlighted under the heading ‘Legal Proceedings’ in Liberty’s results for the first six months of this year though all parties have denied that the contract was corrupt.
Further down the line comes the hurdle that all of Liberty’s contracts with F1’s teams expire at the end of 2020 so, as things stand, it only has three years of guaranteed income. Perhaps ominously the teams have steadfastly resisted opportunities to buy FWONK shares which would give them a long-term interest in F1.
As Forbes revealed, Liberty has been investing in F1 by adding staff, hosting a demonstration on the streets of London, moving to lavish new headquarters there and planning to open an office in New York. However, it remains to be seen whether this is worth the gamble.
There is no doubt that the US market is huge and largely untapped as F1 only has one race which is in Austin, Texas. However, it could echo a classic mistake made by contestants on game shows like Shark Tank. Often ones who want to enter into a huge new business area say they will strike it rich if even a tiny percentage of the customers there take notice. The key question is always whether there is evidence of an appetite for the product and in the case of F1 in the US the answer is not certain.
It is especially unclear given that even the dominant US series Nascar is struggling. Attendance revenue at its main track operator International Speedway Corp has reportedly fallen by half to $123.5 million over the past decade.
What is clear is that Liberty’s spending has already put a dent in the bottom line of the F1 Group. The filings show that its ‘selling, general and administrative expense’ increased by 19% to $88 million over the first nine months of this year and reveal that one of the driving forces was “higher personnel costs as a result of additional headcount due to the acquisition by Liberty of Formula 1.” Coupled with a loss of revenue from the German Grand Prix it has fuelled a drop in the teams’ prize money which comes to around 68% of Delta Topco’s underlying profit. Over the first nine months of the year the prize money payments to the teams fell $41 million to $650 million.
At the same time, the F1 Group’s borrowings have accelerated. Liberty used around $1.2 billion of debt to fund its acquisition and Delta Topco has $3.3 billion of bank loans on its books. It increased recently as Liberty’s latest filings state that “on August 3, 2017, Formula 1 increased the amount outstanding under a...loan...from $3.1 billion to $3.3 billion...In addition, on August 3, 2017, the revolving credit facility under the Senior Loan Facility was increased from $75 million to $500 million.”
Before the acquisition of Delta Topco in January the F1 Group, which was then known as Liberty Media Group, had none of this debt so its interest payments have surged. In the first nine months of 2016 they came to $12 million compared to $175 million for the same period this year. The takeover also boosted the depreciation and amortization (essentially, paying off the acquired asset over time) to $295 million in the nine months to the end of September. As this is a cost it helped to drive up the red ink and led to the F1 Group making a net loss of $37 million over the three months to the end of September.
This comes after the F1 Group lost $123 million in the first half of the year as Forbes revealed. It leaves the F1 Group with a total net loss of $160 million in the nine months to the end of September and, crucially, in the same period last year it made a $289 million net profit. It is hardly the grand prize that investors were looking for.
