F1 could be CVC's undoing
CVC Capital Partners Ltd.’s $2.5 billion bet on Formula One is looking like a loser as the new season gets under way.
The world’s most-watched motor sport faces an 80 percent decline in corporate hospitality guests at some races because of the economic slump, said travel company LSA Ltd., which books hotels for 20 team sponsors and guests. Honda Motor Co. withdrew its team in December, and Renault SA may follow unless it gets more of the sport’s $938 million in annual revenue.
London-based CVC, a private equity firm that bought the series in 2006, may have to wait longer to get a return on the investment than it anticipated, said Tom Cannon, a sports business professor at the U.K.’s Liverpool University. Formula One CEO Bernie Ecclestone says revenue will be little changed this year after surging 42 percent between 2003 and 2006. The 17-race season starts in Melbourne on March 29.
“CVC isn’t going to be able to sell its Formula One stake in the current climate,” Cannon said. “It’s a conspicuous consumption sport with the kind of spending that isn’t viable in these times.”
CVC’s Formula One bonds fell to about 50 percent of face value last week, 38 percent less than a year earlier, according to Markit Group Ltd., which charts credit pricing. That’s a bigger decline than the mean price on Markit’s iTraxx LevX Index, a gauge of high-risk, high-yield loans in Europe, which fell to a record 68 percent of face value on March 10 over concern that defaults will increase.
CVC had paid off $84 million of its Formula One loans in 2007, when it had $229.6 million in interest payments, the latest accounts of its Delta 3 (U.K.) unit show.
Ecclestone arranged a management buyout of the Honda entry led by Ross Brawn. Ecclestone says he’ll aid Germany’s Hockenheim circuit, which is struggling to stay on the schedule after losing 5.3 million euros ($7.2 million) on falling ticket sales last year. Tracks in France and Canada already lost races because of financial difficulties.
The status quo hinges on what CVC provides “in terms of services, what the overall revenue is and the share as well,” Toyota team manager John Howett said. Renault Chief Operating Officer Patrick Pelata said March 4 he couldn’t rule out the carmaker quitting.
Corporate hospitality, which earned CVC net income of $5.6 million on revenue of $139.4 million in 2007, will be hardest hit, said Zak Brown, chief executive officer of Zionsville, Indiana-based Just Marketing, an auto-racing consultant.
CVC charges as much as $3,940 for a race-day VIP ticket that allows companies to entertain guests in an enclosure where they can drink champagne and rub shoulders with race drivers like champion Lewis Hamilton. LSA Managing Director Lynden Swainston said requests for hotel bookings fell 80 percent compared with last year for a race in Barcelona on May 10 and by 50 percent for the Monaco Grand Prix on May 24.
“Executives don’t want to be seen living it up in Monaco while they fire staff back home,” Swainston said.
To be sure, most of Formula One’s income is tied to long- term television contracts and race-hosting rights fees, meaning revenue won’t decline in 2009, according to Ecclestone. The sport has deals with the British Broadcasting Corp. and Spain’s Mediapro through 2013.
“The income will be the same,” Ecclestone said. “Maybe in the future we’ll have to make some adjustments.”
Ecclestone increased the sport’s income since 2004 by adding races in Shanghai, Bahrain and Valencia. Public funding helped build the new racetracks and pay hosting fees. Abu Dhabi will pay about $45 million to host the season-ending race Nov. 1, according to Formula Money, a report on the sport’s finances in September. The injection of government money won’t continue, says Professor Cannon.
“No big city is going to make that kind of investment in hosting a race,” Cannon said. “These are challenging times.” Bloomberg