For CART, time is of the essence


 by Mark Cipolloni
August 19, 2003

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Of late, my e-mail inbox has been bombarded from CART fans and many in the CART paddock concerned about the series very existence.  Many wonder what the $0.50 per share offer made (and subsequently rejected by CART) by Open Wheel Racing Series LLC, comprised of Messrs. Kevin Kalkhoven, Paul Gentilozzi, Gerald Forsythe, Carl Russo, and Motorock (run by Jamie Rose) really means.  This is a very delicate subject and a lot of people's jobs depend on the future of the Champ Car Series.  If it were to fold, it would likely have a cascading effect on all the road racing support series under the CART umbrella, as well as the other series that race with CART on any given weekend.

In the beginning, I, like many others, wholeheartedly supported Chris Pook.  He appeared to be the hero and savior of the series.  He was quoted on many occasions that "we have a solid business plan and we are executing it."  Quite frankly, at the moment many paddock pundits have begun to question whether there ever was a business plan, and what was really accomplished other than to spend the investors' money. 

Many will argue anyone could have paid teams ESP money to participate, prop up money losing races, pay for lighting at Milwaukee and Cleveland, and flown all over the world looking for new venues and talking to engine manufacturers, only to land none of them.  Many will disagree with my position, saying many forces were working against CART, and it was only by the wherewithal of Chris Pook that there even was a 2003 season.  Many big teams, sponsors, manufacturers, and drivers left CART for the IRL; surely CART could not survive, they said.

In fact, from every measurable sense, his regime has run CART into the ground, leaving it worth almost nothing.  $0.50 per share is practically nothing in my books. 

Originally Chris Pook went to the Board and requested $30 million to support the underfunded teams and produce a reasonable grid.  Based on a recent statement by Normand Legault to the Journal de Montreal, $90 million was spent in one year to keep the series going. A good businessman would have spent half that amount and CART would be in as bad shape as it is today, i.e. near death.

Whether intentional or out of complete incompetence, the fact of the matter is that spending all the investors' money that CART had in the bank has resulted in its stock trading in penny stock territory.  That combined with future liabilities led the bidders to the conclusion that the real value of CART is only $0.50 per share. 

Because the group already owns 22.9% of the 14.7 million shares outstanding, they only have to pony up just over $5.5 million to buy the entire company.  This amounts to about 1/4 of CART's current market cap, and less than 25% of CART's current estimated CASH assets alone. Certainly not a vote of confidence from men who are team owners and know CART well.  That lack of confidence is likely going to be noticed by others, resulting in them bolting to the IRL.

You can't run a 2-car Champ Car team for a year for that $5.5 million.  This from men who have a combined net worth of well over $1 billion.  $5.5 million is chump change for these businessmen, but as mother always said, never pay more for something than you have to.

There are three owners of Open Wheel Racing Series LLC 1) 1/3 owned by Gerald Forsythe who is putting up the  22.9% of shares he already owns, but little or no cash; 2) 1/3 by Kevin Kalkhoven who owns no shares but is putting up cash; 3) 1/3 by the combined group of Paul Gentilozzi, Carl Russo and Motorock who own no stock but are putting up cash.  Paul Newman saying he would buy in, and rumors of Bernie Ecclestone buying in, have evaporated.

In talking to people I know, it is my understanding that Messrs. Kalkhoven, Gentilozzi, Russo, Rose and Forsythe have good intentions and are trying to save the series because no one else has stepped forward to bid to take it over and rescue it.  Supposedly, this group would gladly step aside and withdraw their bid (i.e. be just team owners, which is what they do best) if another higher bid were to come along, or if bidders with deeper pockets who could help ensure CART's long-term success stepped up. And they would support the new bidders.

In a prepared statement issued Monday by Open Wheel Racing Series LLC, members of Open Wheel Racing have committed initial additional funding of $15,000,000 to Open Wheel Racing after the proposed acquisition, which would enable Open Wheel Racing to provide additional funding to CART. If a third party, which intends to continue to operate the business of CART makes a superior offer, Open Wheel Racing and its members at present intend to support such superior offer.

If CART spent $90 million to stay in business in 2003, one has to question whether $15 million is going to be enough to run it in 2004. If they cut back on races, televise fewer races, and teams close their doors because the subsidies are no longer there, teams and sponsors will bail and CART will fold like a deck of cards.  The low-bid and the mere $15 million they are proposing to get the series back on its feet gives the appearance to sponsors, team owners, etc. that this group of bidders is worried about every last dollar and are not willing to spend the kind of money necessary for CART to flourish. 

Without confidence in CART's ownership, teams will leave, along with their sponsors.  The low-bid has already resulted in a no-action by the CART Board and I predict the group will come back with a counteroffer of $1.00 per share, making themselves and the CART Board look good.  Of course Jon Vannini and friends control the majority of voting shares, so nothing is being finalized until they say OK.  Lowballing the bid delays the sale and will result in teams and sponsors looking elsewhere to race in 2004 thinking CART is finished.  Their sponsors finalize budgets now for 2004. It's the 11th hour and the clock is ticking, and Tony George is raising his hammer to drive that final nail.

In Monday's prepared statement, Open Wheel Racing Series LLC stated, "In order to improve the financial outlook for CART, Open Wheel Racing would focus on CART's three constituencies: fans, sponsors and teams. For the fans, Open Wheel Racing would seek to broaden the fan base by maintaining the current series format as well as entering into strategic agreements with other parties (including Motorock) to organize and conduct music festivals, concerts, events and contests in conjunction with CART racing events. Open Wheel Racing plans to provide enhanced value to sponsors by increasing the fan base both at race venues and via other broadcast mediums. Open Wheel Racing and its members believe that the financial interests of the teams are best promoted by creating a stable business environment to allow the successful operation of the teams over the long term." 

That all sounds good, but they missed the most important constituency of all - the drivers.  Until a focus is placed on promoting the drivers, the series is doomed for failure.

Adding in concerts, events and contests is nice, but in the end, sports fans worship the great athletes, in this case great drivers.  What are they going to do to put the drivers front and center?  Is CART a sport or is it becoming a circus?  In its heydays, CART's strengths were its great drivers, and the great events were just icing on the cake.  When the icing becomes the cake, the foundation crumbles. Sure, going to great events like the Toyota Grand Prix of Long Beach is a wonderful experience, but NASCAR built its foundation on its drivers and then its events.  NASCAR fans drive around with car numbers in their back windows because that represents "their driver," "their hero."

Mid-Ohio promoter Michelle Trueman Gajoch had this to say (reference this SPEED TV article) - while freely admitting the obvious—that she has a vested interest in Champ Cars continuing to run on road courses—believes an all-street circuit schedule is seriously, perhaps fatally, flawed. “I told (David Clare) what my perspective was, ‘You either need to be a sport or you need to be an entertainment vehicle. I’m in the motor-sports business. If in fact you define yourself as an entertainment vehicle going forward, I can surely understand that we probably aren’t going to fit that equation.’  And he quickly said, ‘Don’t you think there needs to be a balance?’ “And I do believe there needs to be a balance because, I think what’s been lost in all this speculation is the fact that the fans come for the sport. And the fans are enthusiasts of the sport. And it’s been proven time and time again at permanent facilities, road courses and ovals, that you can bring in all these bells and whistles and put on carnivals and put on concerts, and at the end of the day, the racing fans are not here to see it."

"They’re here to watch cars go around the racetrack and be involved in that. In my opinion, (at) festival/entertainment based events…the racing becomes totally secondary. I would argue that the race fans and the sport of it have to be the foundation that drives the other. And I think that the entertainment side of it certainly brings new people to it, but they’re not the loyal people who are going to travel from racetrack to racetrack and who the sponsors, more importantly, want to be influenced by their products.” Nor, she notes, do they go home from a festival event and watch the next race on television. “They’re casual consumers, that’s the way I look at it,” she says.

There is also the problem of these team owners being conflicted, i.e. wearing two hats, that of team owner and series owner.  Although their intentions may be good, there will always be someone who will question why something was done in a way that appears to benefit them as team owners, or whether team owners who don't buy-in will get a fair shake.

An example of conflicted - Gerald Forsythe has called for CART to join F1 and drop their Montreal race to protest Canada's tobacco laws.  As a team owner who is losing his Canadian tobacco sponsor, one would expect Forsythe to say such a thing, but if he also owns the series and decides to cancel the race, all the other teams are negatively affected because Montreal is one of the most popular races on the circuit.  What's good for one team is not always what's good for the rest.

What's Carl Russo and company doing scoping out the scene in the IRL paddock with an eye at possibly fielding a team there, yet he's part of the team that might own CART?  If that isn't the ultimate conflict of interest, I don't know what is.  I can list many other examples; you get the idea.  Team owners owning CART have been a problem from day one because of many conflicts of interest.

So what's the solution?  While I have great respect for all the owners of Open Wheel Racing Series LLC, I am of the opinion that CART and the entire community would be far better served if an independent contingent were to step forward and buy CART.  But who? And is it too late?

This is where I must tread lightly.  In my opinion, the group that would best serve CART would be that of Jon Vannini and friends -- the Eatons, the Thomsons et al, who have a combined net worth of over $14 billion, making even Bernie Ecclestone look like a pauper.  They certainly have the wealth, and a history of racing involvement as outlined in a recent rumor here on AR1, but do they have the stomach or the time to pull together a deal in this the 11th hour?

As investors, they have already lost countless millions.  If they accept $0.50 per share, or even $1.00 they lose.  If the company goes belly-up, they lose even more. If they sue, they might collect something back, but that's speculative because I am not privy to all the facts and don't know whether they would prevail in a court of law.  Certainly they think so or they wouldn't be considering a major lawsuit.   And if they prevail, they might collect a substantial amount of money, especially if they are successful in piercing the corporate veil.

Buying the series is another alternative, and with a measly $0.50 per share offer on the table, certainly that would not be hard.  But could they someday make it profitable such that they recoup their money?  That is going to take further investment and the human resources to make it happen, and it certainly will take time.

The Thomson family are big media moguls, and would be able to promote and publicize the series through its vast array of media outlets.  Having numerous conversations with Jon Vannini over the past two years, and anyone who knows him, will tell you  1) he loves CART and road racing, 2) he is a straight shooter, tell-it-like-it-is kind of guy, which will instill confidence in sponsors, manufacturers, team owners, and drivers, 3) is a keen businessman and investor who understands the financial and legal aspects of business, 4) has his fingers in many businesses, 5) and as a driver in various series, understands the sport.

By waiting until the 11th hour (i.e. when it's almost too late to land sponsors for 2004) to announce the company's financial resources were near depletion and would not have enough to finish the 2004 season, this CART regime has severely limited the time any number of groups might have to put together a reasonable and acceptable offer for the series.  By waiting, and not putting out financial guidance for over one year, before announcing they were in trouble (were they asleep at the wheel, or just incompetent?) a limited number of bidders will step forward in time, which means the stockholders are gored even further because there is little chance/time for a higher bid to come in.

Someone like Tony George or Roger Penske could choose to come in with a bid of $0.10 more per share and delay the process long enough that the entire series will implode, such is the danger this regime has placed CART in by waiting so long to announce their dire situation.

Will the current CART management team be held accountable?  Will Jon Vannini follow through on his threat to sue?  Anyone who took elementary business law in high school knows that the standard of conduct by which corporate officers and directors are judged is called the "reasonable business judgment rule."  What this means is would a reasonably prudent businessman under the same or similar circumstances have made the same or similar decisions that CART management made this year?

There appears to be an enormous amount of confusion as to the reason for this astounding depletion of financial resources over the past year.  Some extreme cynics believe it's massive fraud stock manipulation; other say it's gross incompetence; and still others believe very strongly that Chris Pook was a victim of misplaced confidence in Bernie Ecclestone.

And if history is any guide, road racing has been up and down for 30 years; up when they had automotive factory support, and down when they didn't.   Back in the '70s Trans-Am had all the big factory teams, Can-Am had factory support, as did CART, at least until now.  When each of those series lost factory backing, they soon became a mere shell of their former selves.

In conclusion, if CART collapses it will be the end of America's greatest open wheel series ever.  Tony George will have won the war, but it will be a pyrrhic victory (in a pyrrhic victory, there are no winners because everyone is dead).  Open wheel racing will essentially be dead in North America.  So while Tony George may be celebrating now if CART dies, it's the France family that will reap the ultimate trophy - a complete monopolization of American motorsports by stock car racing.

The clock is ticking......

The author can be contacted at markc@autoracing1.com

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