Williams floats out of the slow lane
The Formula One team hopes its Frankfurt listing will succeed, but insists it doesn't need the cash. Christian Sylt reports
Sunday 13 February 2011
The business landscape of Formula One has had almost as many twists and turns as its races.
Ten years ago, car manufacturers such as Renault and Toyota began investing in the sport by buying out independent teams. But as annual budgets escalated to $480m (£300m), the manufacturers couldn't justify their involvement and many fled the sport during the recent recession. This put pressure on independent owners yet again as they stepped in to save teams but then had to find enough money to cover their costs. Throughout this period, Oxfordshire-based Williams was one of the few teams to remain independent and it has come up with an old-fashioned solution to stay this way.
Up to 27.4 per cent of the shares in the team will be floated on the Frankfurt stock exchange on 2 March at an initial price in the range of ¤24 to ¤29 (£20 to £25) per share. The midpoint values the company at ¤265m and the listing is expected to raise ¤46.9m for its co-founder, Patrick Head, 64, who will be providing the bulk of the shares.
As the team's engineering director, Head has steered it to seven F1 drivers' titles with British superstars Nigel Mansell and Damon Hill at the wheel. However, Head intends to retire later this year and the float allows him to cash out. It could eventually do the same for the team's boss, Sir Frank Williams, 69, who founded it with Head in 1977 but who, as yet, has no intention of retiring.
Williams has stressed that since Head is providing the bulk of the shares to be sold, the proceeds will not be used by the team. Convincing investors that the team does not need the funds could be the biggest obstacle to a successful flotation.
Williams has a glittering track record but its winning ways have faded – this year the team is best known for its new Venezuelan driver, Pastor Maldonado. The last time the team won a race was in 2004 and since then it has had a rocky road off track. Its fortunes peaked in 2005 when the team posted a £29.5m after-tax profit on £83.7m of revenue, which was fuelled by severance payments from its former engine provider, BMW, and driver Jenson Button.
Things began to look bleak in 2006 when the team recorded a £27.7m after-tax loss as revenue fell 30.3 per cent. The loss of a major sponsorship from computer manufacturer HP was partly to blame for this, but the team's position was worsened by the lack of engines from BMW. It spent an estimated £10m buying in replacements from Cosworth leading to its cash in the bank falling from £20.8m to just £30,000. Williams took desperate measures to continue.
Williams and Head took pay cuts of £800,000 in 2006 when the company was at its financial nadir, and again the following year when net losses hit £21.4m. Adam Parr, the chief executive, plugged the gap with a loan from Barclays which trebled the team's net debt to £24.7m. It repaid £14.7m of this in 2008 as a boost in sponsorship from Icelandic conglomerate Baugur gave Williams a £9.2m after-tax profit. However, Baugur went bankrupt, sending the team's after-tax profit tumbling 50 per cent to £4.5m, which also meant Williams had made a net loss of £5.9m over the previous five years.
This kind of background is unlikely to encourage investors to buy shares in the team. However, it isn't unique to Williams. One reason there have been so few flotations of motorsport teams is that winning races is usually their primary aim, with profit a bonus at best. The quest for victory involves heavy investment and can often lead to losses which in turn reduce the company's value.
Investors want to hear that all efforts are focused on turning a profit. But if this means that Williams's on-track performance falters, the team will be less attractive to sponsors. Some diehard fans may still be attracted by the allure of owning part of such a team, but the signs are not good.
Following the news of the flotation earlier this month, a user on one F1-related website posted a question asking how shares could be acquired. The reaction was far from positive. "Don't waste your money," said one, with another adding "F1 is a very risky business. Williams as a company have been on the slide. How is that attractive for any investor? Its looking more like 'We really really need the money'."
These views could easily influence share-buying activity. One of the few motorsport flotations was that of the American series Cart. Although Cart is now part of the privately owned IndyCar series, it floated on the New York stock exchange in 1998. Its then chief executive, Andrew Craig, says: "We wanted to get these shares in the hands of our fans who would be holders rather than sellers but absolutely the opposite was the case. We found that when the stock went up, quite a lot the private investors flipped it while the institutional investors were the ones who held on." The attraction of owning a part of a motorsport team soon fades as the public "quickly realise that they are not really a team owner at all – they are still watching the race on TV," he says.
Shareholders who hold over 1 per cent of Williams's shares will get into a members' club which gives them access to hospitality in the F1 paddock and garages at races and tests. But 1 per cent will cost ¤2.7m, around the same as Williams's sponsor Reuters is paying annually. For their money, sponsors get one-on-one time with the drivers, paddock passes and space on the car so it may be a more attractive option for some wealthy fans although it would require multi-year commitment.
And if investors do believe the explanation for the flotation, they might still be put off buying the shares: the money won't go into development, but into one man's retirement pot. The use of the funds could be an issue, Craig says. "In any public offering, the first question that a portfolio manager will ask you is 'what are you going to do with the money?' You need to be able to demonstrate that you are going to take that capital and increase its value."
Williams may not be able to give a good answer.
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