Road rage is over in Formula One

How a private equity firm is bringing peace, and perhaps a float, to the faction-riven sport
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The Independent Online

The keenest spectator at today's British Grand Prix won't be a Union Jack-waving Jenson Button fan but rather a sandy-haired Scotsman from CVC Capital Partners.

Donald Mackenzie, managing partner of the private equity firm, is in the process of implementing a new business plan after CVC took control of the sport's commercial rights-holding company last November. It was a $1bn (£542m) manoeuvre that would have impressed Michael Schumacher.

Just seven months on, CVC has transformed the commercial landscape of Formula One, acquiring the companies running F1's lucrative trackside advertising and corporate hospitality, and bringing all the sport's revenues under one roof for the first time. Perhaps more importantly, CVC has signed a four-year contract extension with the rebellious F1 car giants that had been threatening to start a rival series when their existing deal ended in 2008.

F1 has never been so stable, but will CVC's involvement come at a price to the sport?

The business history of F1 has had more twists and turns than a Grand Prix. At the centre is the 75-year-old billionaire Bernie Ecclestone. The son of a Suffolk trawlerman, his Formula One Holdings (FOH) empire had long held the commercial rights to F1, and it had been cashing in.

When media rights started soaring in value in the late 1990s Mr Ecclestone attempted to float FOH, but he was blocked by the European Commission over competition issues.

Undeterred, he launched a $1.4bn bond secured on the sport's future revenues, and over the following years a 75 per cent stake in FOH's parent, the Jersey-based SLEC, was sold. This raised $2bn for his family's trust but the majority stake ended up in the hands of three creditor banks after the bankruptcy of the previous owner, the German media giant Kirch. The banks wanted out but found they didn't have board control. They gained this after years of legal wrangling and a lawsuit against Mr Ecclestone, but by then F1's value had dropped - from a peak of $4bn in early 2001 to $1.4bn in November last year.

CVC established a new company, Alpha Prema, which acquired SLEC, so giving the Ecclestone trust another payday and getting the banks out. Mr Ecclestone - FOH's chief executive - and F1's management team received stakes in Alpha Prema, which is majority-owned and controlled by CVC. But the firm now faced an uphill battle.

Mercedes, BMW, Renault, Honda and Toyota - five of F1's 11 teams - had demanded increased transparency in the corporate structure and a greater share of F1's $1bn spoils. The teams received 47 per cent of media rights revenues, equating to just 23 per cent of all the money made by the sport. They never saw a penny of the estimated $170m from trackside advertising and $140m from corporate hospitality, which ended up in British Virgin Islands- and Swiss-based companies.

CVC's first move was to bring all the companies under one roof and offer the car makers a slice of the action, hoping to appease their twin concerns of transparency and pay. Last month they finally accepted 50 per cent of F1's underlying profits and agreed to race until 2012.

A spokesman for the car makers confirmed that the commercial negotiations had progressed significantly since CVC had entered the sport: "So far they have shown respect for the teams' position and they've indicated to us how important manufacturer presence is for them."

CVC isn't out for a Sunday drive; the top names' involvement is the fuel it needs to maximise its return on investment.

The private equity company usually looks to hold an investment for three to five years and then to exit via a flotation, private sale or recapitalisation. It is Europe's biggest buyout firm and has acquired such big-name companies as Halfords, Debenhams and the AA. Last year its "Fund IV"' closed at $7.2bn, the largest European buyout fund ever. It bought SLEC, one of CVC's biggest acquisitions.

Sources close to the firm reveal that CVC is so committed to F1 that it has its own stake in Fund IV of at least €50m (£34m). It has good reason to want a slice of its own action: the sources add that while the net internal rate of return on its funds was 25 per cent in 1996, its 2001 funds reached close to 45 per cent.

CVC surrounds itself with external advisers and has massive manpower to scout for the best deals. Sources say that once it makes an acquisition, it usually seeks to implement its business plans within six to nine months.

But it was Mr Mackenzie, 49, who made the F1 deal happen. Before joining CVC in 1988 from rival 3i, he qualified as a chartered accountant and got a law degree from the University of Dundee. His 10 per cent stake in CVC has been valued at £45m and he has a huge Hampshire home where he lives with his wife and children.

Intensely private and with a passion for motor racing, Mackenzie's boyhood hero was fellow Scot Jim Clark, an F1 champion in the 1960s. But there's no indication that SLEC is just a giant Scalextric for him. Those in F1 who have dealt with CVC describe it as being professional, efficient and committed.

"The push now is more towards what is in the long-term interests of F1," says Ron Dennis, the boss of the McLaren Mercedes team. "That is where probably the acquisition has been most positively felt because they want stability, they want growth and now we participate in that growth, so everybody has a very common interest."

Although the financial terms have improved, the structure of SLEC is even more opaque, with new offshore companies still being established and the shareholding division in the new holding company unclear.

But with the car makers in agreement, CVC has an open road to implement its business plan. As with all private equity firms, it is renowned for cutting costs and it may have in its sights the 213 staff of FOH's subsidiaries. These, according to the latest accounts, are paid a total of $19.8m.

But CVC may not need to cut costs in F1 to make its money. FOH's cash-generating subsidiary, Formula One Administration (FOA), has not paid a dividend since it was incorporated in 1999. It has been restricted from doing so under the terms of the bond deal, on which FOA is making the repayments, so profits have been accumulating in the company's reserves.

The $924m now in the coffers must have been a big attraction to CVC, and it has even been suggested that the firm may replicate Mr Ecclestone's masterstroke and take out another bond backed on future revenues to get an early payday.

CVC may not be able to match the $1.4bn F1 raised in 1999 when 10-year contracts were in place, but it could score twice with a flotation.

Industry insiders are cautious about forecasting when a listing might take place given that F1's last attempt was run off the road by the EC. Nonetheless, CVC's credibility could help get a market debut off the grid, with estimates of a possible value ranging from $1.5bn to $3bn - not a bad return on its investment.

It has taken a decade for the City to embrace F1. And with the commercial squabbles behind it, CVC has the chance to put the sport back on track.

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