Making sense out of the Bernie Ecclestone/CART rumors

 by Mark Cipolloni
October 26, 2002

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Ecclestone is in deep thought these days.  He has problems with F1, and the rumors about a potential buyout of CART is the hot topic of discussion in racing circles.

The media is in a feeding frenzy over the rumors that Bernie Ecclestone might buy into CART.  Yesterday in Australia, CART President Chris Pook flatly denied the rumors.  While what Pook stated may be true, I have a feeling there's more to this story than meets the eye.  Let's take a closer look.

In this AP article, Chris Pook speaking from pit lane at the Gold Coast event, told The Associated Press,  "I'm not going to deny to anybody that I've talked with Bernie Ecclestone," Pook, . "He's a friend. He's also the most intelligent man in motor racing in the world. And there is no doubt that I am rebuilding this series. So it's logical that I would go to someone like that and say `Hey, am I going in the right direction?' That's what's going on." Pook said that he sees CART as a proven training ground for drivers who want to get to Formula One. Jacques Villeneuve and Juan Montoya, previous CART champions, moved on to Formula One, and Cristiano da Matta, who clinched the 2002 series three weeks ago, is rumored to be going to Formula One next year.

"It no secret that I have said on the record that I would like to take young drivers out of this series and present them to Formula One to see if they can make their way up the ladder," said Pook. "That's got to be the epitome of their career." But there was too much speculation and not enough truth in the merger rumors, he said. "All these things are out there, and somehow or another, someone has tried to connect all the dots, and said `Ecclestone is going to take over CART'. "Maybe he is, I don't know" added Pook, laughing. "But he hasn't told me that. And he hasn't told anybody else that." Pook said the merger talks have "quite frankly, been very flattering from our point of view, but also very embarrassing."

"Our position is quite clear. We're in the open-wheel racing business. He (Ecclestone) is in the open-wheel racing business. He's got some challenges, we've got some challenges. Our solution is to talk." Pook said he and Ecclestone were talking about a lot of things, "but there are no formal discussions going on about our relationship with Formula One. Absolutely not. "This is two businessmen who have known each other for a long time.

When you read those quotes you come away convinced that all the rumors were just smoke and mirrors to hide the real situation, that CART is a series in deep trouble on several fronts.  However, I don't think it's smoke and mirrors.  I think Pook knows CART has some major hurdles and he has indeed engaged Bernie to advise him. 

But if it's just advice, then why did RPM2Night report that CART sent all its financial records and contracts to Ecclestone for review?  The Ford Racing website has reported this as well, saying the info came from, quote, "a most reliable source."  The Toronto Sun also was told something based on their reports this past week that Bernie might buy CART.   If Bernie is giving Pook advice, then it's very serious advice because if CART is making those sort of records available to him, then Bernie is advising Pook on every facet of the business.

Bernie may not have told Pook that he was going to buy CART....yet.  Therefore, Pook is being truthful when he says "if Bernie is buying CART, he hasn't told me yet."  However, a company doesn't usually just turn over those records to anyone unless they are interested in potentially buying the company. 

In legal circles it appears they are in a period called due diligence, at least from my perspective.  Under due diligence, the interested buyer signs a Confidentiality Agreement which bounds them to complete secrecy as to what they see in a companies financial records and existing contracts.  If you owned a company, you would not want your records being made public, and if the info did leak out you have the right to sue the party who signed the confidentiality agreement for damages.

In turn, during the due diligence period, the buyer does not want their competitors to know that they are interested in buying XYZ company because then other companies may jump in and it becomes a feeding frenzy, driving up the price to buy.  Due diligence is normally a quiet period whereby everyone does their investigations/research.

Due diligence is nothing more than an investor being "diligent" when checking out the substance of the claims made by a company with respect to the market, the product or service concept, the competition, the management team and so on. The term "due" means that it's expected and someone has to perform this task. So the concept is really all about the diligence that is due the investigation into a company's plan for doing business.

I have heard, though have been unable to confirm, that Bernie himself may not buy CART, but he may orchestrate a deal whereby other wealthy investors buy into CART and he remains in the background.   Is this information true, or just more unsubstantiated rumors?  If true, then when Pook denies Bernie is buying into CART, he's again being honest; Bernie himself may not be.

Due diligence can also go several steps further. Investors will often pick up the phone and contact people or companies named in your business plan, contracts, or other correspondence.  I have recently been told, that out of the blue, Ecclestone has been calling a number of people in the United States associated with CART in one way or another.  What I am told is that his calls have been mostly along the lines of, how are you, and how have you been?  Perhaps it's an attempt for Bernie to renew old acquaintances and to see if he's greeted warmly.  These casual conversations may also yield information about CART that may be valuable to Bernie, information the person may reveal if he/she thinks the call is of a casual nature, i.e. when their guard is down.

Due diligence also applies to statements about patents, trademarks, exclusive contracts and deals currently in process. Investors would like to mitigate as many risks as possible related to the purchase. Due diligence simply allows them to check and double-check the pertinent pieces of the deal before deciding whether to provide capital, hence why the reports say Bernie also requested CART's existing contracts.

In the end Bernie may walk away and say, thanks, but no thanks. In that case, Pook isn't required to say anymore.  Perhaps that is what has happened already.  Perhaps Bernie said, thanks, but no thanks, and would explain why Pook flatly denies there is any truth to Bernie buying the company.

Another possible scenario is this - with Bernie dropping races in Europe, he is going to have to try to appease track owners and sponsors of the soon to be dropped events. He could fill the canceled Formula One dates with CART, given the leverage he has in those markets with the race tracks and sponsors. The reason Bernie maybe looking at the CART books, is to validate that CART is solvent, has the ability to be in business for the next X amount of years, which makes CART highly marketable to track owners and sponsors in Europe; or, where ever else Bernie has influence and can get a slice of the money without any large amount of capital laid out on his part.

However, if he decides he likes what he sees, then perhaps he, or his investment group, may make an offer to CART to buy.  At that time, Pook could reveal that there is an offer on the table to buy all, or buy a portion of, the company, and who the buyer is, in this case Ecclestone or some other group.  However, by law he or the board still do not have to say anything.  If they choose to inform stockholders, then some sort of announcement would be put out in the form of a press release, or a press conference.

However, that still does not mean he would be buying CART, or even a controlling interest of 51% of it.  At that point, an offer would be on the table from Bernie to buy shares of CART stock at some price, say $8 per share or $10 per share (versus a current price of $4.90 per share).  There would be a vote by the board of directors to accept the offer or decline.  If they vote in favor of the offer, then the deal can move forward.  If rejected, the buyer can the choose to walk away, or make a higher per share counteroffer.

In conclusion, while Chris Pook may have attempted to put an end to the rumors about Bernie buying CART in what I think may be a quiet period of due diligence, I am not ready to close the book just yet.  Whether a deal materializes or not, you're guess is as good as mine. 

However, where there's smoke, there's fire, and with all the negative news surrounding CART (lost teams, lost drivers, lost sponsors and lost manufacturers), Pook and his staff don't appear worried at all.  Outwardly at least, they appear confident, and that may be the most telling sign of all.

The author can be contacted at markc@autoracing1.com

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