F1’s high-octane profits

F1 actually refers to technical regulations issued by motor racing’s governing body the Fédération Internationale de l’Automobile (FIA). Cars complying with the regulations are eligible to compete in the F1 world championship and the commercial rights to the series are owned by one company, Jersey-based Delta Topco. It is also known as the F1 Group and it runs the sport which is seen on television by hundreds of millions of viewers every year.

Topco’s contract expires at the end of 2110 and it allows the company to commercially exploit any aspect of F1 from selling the rights to host and broadcast races, to signing up track-side advertisers.

The company’s biggest shareholder is the private equity firm CVC which has a 34.6 per cent stake in it. The second-largest shareholder is American asset management firm Waddell & Reed, which has 20.7 per cent, followed by the estate of bankrupt investment bank Lehman Brothers with 12.2 per cent. Bambino Holdings, the family trust of F1’s chief executive Bernie Ecclestone, owns 8.4 per cent with 5.2 per cent in his hands and the remainder held by other banks, funds and management. There is a mighty financial engine beating at the heart of the business.

Topco’s revenue comes from six sources. Starting at the bottom, sales of vending and concession stands at tracks brought in $33.9 million in 2013, the latest year for which accounts are available. Junior series GP2 made a total of $34.1 million from selling cars and parts to its teams, while F1’s corporate hospitality outfit had revenue of $87.8 million.

The two biggest sources of F1’s revenue are fees from hosting and broadcasting races, which in 2013 brought in a combined $1.3 billion

Next up is $259 million from selling trackside advertising at each race and sponsorship of the series. This comes from companies, such as parcel delivery service DHL and luxury watch maker Rolex, which are both official F1 partners. The two remaining sources of F1’s revenue are the biggest – fees from hosting and broadcasting races. They each bring in roughly the same amount and in 2013 it came to a combined $1.3 billion.

This gives Topco total revenue of $1.7 billion and in 2013 it had underlying profits of $530.7 million. F1 doesn’t own any tracks or teams so its costs are kept under tight control. The company only has around 340 staff and its biggest single cost is a payment of 63 per cent of its gross profits to the teams as prize money. Over the five years to 2013 the prize money payment accelerated by 46.6 per cent to $797.5 million due to the boom in interest in F1. It is a staggering sum, but as it is a profit share, it mitigates risk for Topco. It isn’t the only trick under its bonnet.

Only 10 to 20 per cent of its contracts need to be renewed annually as they have an average length of around five years. To insulate against inflation, the key contracts also contain an escalator clause which increases the amount paid by 10 per cent annually. This makes F1 very different to other sports companies and teams as its performance is not related to the events on track. It gives it a stable outlook and has driven Topco’s valuation up to $12 billion, according to sources close the company. CVC is the biggest winner.

It acquired F1 in 2006 in a leveraged buyout funded with two loans – $965.6 million from its investment Fund IV and $1.1 billion from the Royal Bank of Scotland. Soon afterwards it got back its loan from a $2.9-billion debt refinancing, but the biggest gains have come over the past three years.

CVC got 2012 off to a bang when Waddell & Reed paid $1.1 billion in January for a 13.9 per cent stake in Topco. There was more good news in May when Topco paid out an $850-million dividend with $420.8 million going to CVC in line with its shareholding which was 49.5 per cent at the time. More acquisitions came later in the month when US money manager BlackRock paid $196 million for a 2.9 per cent stake, followed by the sale of 4.5 per cent for $300 million to Norges, the investment division of Norway’s central bank.

In June 2012, CVC announced that Waddell & Reed had invested a further $500 million which took its stake to 20.9 per cent. Capping off a bumper year, in December 2012, Topco paid out another dividend which this time came to $1.2 billion and was fuelled with income from another debt refinancing. CVC took home $421.1 million in line with its shareholding which had fallen to 35.1 per cent following the stake sales.

Since then CVC has struck gold again as a $332-million dividend was paid out in 2013 with CVC taking $116.2 million as by then it had a 35 per cent stake in Topco. Last year the company’s debt was boosted by $1 billion to $3.5 billion with the proceeds fuelling a pay-out to shareholders. It gave CVC $350 million, bringing its total cash haul from F1 to $4.4 billion.

CVC’s current stake is worth around $4.2 billion, giving it a total of $8.6 billion of cash out and remaining value. For a business which makes its money from cars racing round tracks for two hours 20 times a year, it is an impressive result.