Marussia F1 Made “Duress Payments” To Recover Seized Assets
Astonishing details have come to light about the scale of turmoil at the Marussia Formula One team which led to it hitting the wall last year owing $97.5 million.
Marussia is currently fighting for a place on the 2015 F1 grid after going into administration, the British equivalent of Chapter 11 bankruptcy, in October. It missed the last three races of the season and in December its administrators, FRP Advisory, released a detailed report lifting the lid on its financial position. Buried amongst its pages is the revelation that not only had unpaid creditors claimed assets from the team's operating company, Manor Grand Prix Racing (MGPR), but they demanded payments in return for handing them over.
According to the report, "duress payments were made to third party creditors who had taken possession of MGPR's assets due to non-payment of their invoices." The identity of the companies that had taken the assets isn't known and, as Britain's Daily Telegraph newspaper revealed in December, the full list of creditors reads like a roll call of the great and the good in F1.
At the top of the tree is Ferrari, which is owed $25.4 million for supplying its 1.6-liter V6 turbo engines. Next up is $10.9 million due to rival McLaren for providing wind-tunnel and simulator services. The team even owes money to F1's governing body the Fédération Internationale de l'Automobile (FIA) and its unpaid bill to Britain's tax authority alone comes to a cool $1.6 million.
In fact, MGPR owes money to more than 200 companies and they are all listed in FRP's report. It reveals that in the eight months to the end of August last year MGPR made a $48.4 million (£29.2 million) net loss on revenue of $41 million with total net liabilities coming to $68.9 million.
Geoff Rowley, managing partner at FRP, says that "by reason of its outstanding liabilities and cash position, the company was insolvent on both a balance sheet and cash flow basis."
Mr. Rowley's assessment is significant as, according to F1 company documents, teams which are insolvent lose their right to prize money.
In order to race in F1, the companies which operate the teams have to sign two key agreements. The first is the entry form which is lodged with the FIA and gives the team a place on the entry list.
Secondly, a contract, known as a Team Agreement, has to be signed with the commercial rights-holder of the series, the F1 Group. According to the prospectus for the stalled stock market flotation of F1, under the Team Agreements, the teams "have agreed to participate in the World Championship from 1 January 2013 to 31 December 2020." In return, one of the most valuable rights granted to the teams in the Team Agreements is a share of F1's prize money. The Team Agreements set out the terms of the prize fund and, as Forbes has revealed, it came to a total of $797.5 million in 2013.
The prize fund comprises 47.5% of the F1 Group's underlying profits and is paid to the top ten teams on a sliding scale. In addition, the best-performers receive bonuses which bring the total payment to around 63% of profits. It is a rich reward and one of the key conditions of receiving it is that the team must remain solvent. This is disclosed on page 179 of the prospectus which can be seen below and states that "a team's rights and obligations under its Team Agreement terminate if it…is insolvent."
A page from the F1 flotation prospectus confirms that if a team is insolvent its rights and obligations under its commercial agreement with the sport terminate
Last year Marussia scored its first points when its driver Jules Bianchi finished in ninth place at the Monaco Grand Prix just four months before being severely injured in an on track accident in Japan. His result in Monaco drove the team to ninth place in the championship which is worth an estimated $52 million in prize money.
Marussia is the most successful of three new teams which joined F1 in 2010. The other two – Caterham and HRT – collapsed after scoring no points which makes Marussia's performance all the more impressive. It has brought it to the attention of investors but they have an uphill struggle ahead of them.
In December FRP held a public auction of MGPR's assets and even sold its factory which was bought by Gene Haas, the American entrepreneur who is launching a new F1 team next year. Hopes were raised last month when FRP cancelled the second auction of the team's remaining equipment. A bigger boost came on Wednesday when FRP announced that the team expected to get new investment so that it can race this year.
It started life as Manor Grand Prix, hence the name of its operating company. Manor was a successful team in junior racing series and its management expanded into F1 with funding from Richard Branson's Virgin Group. It was a founding partner and shareholder of the team which was initially known as Virgin Racing. The private equity division of British bank Lloyds later became the team's majority shareholder but eventually both it and Virgin exited the business.
Control was sold to Marussia, the Russian sports car manufacturer which the team was named after. The team's working capital came directly from Marussia's controlling shareholder, Russian businessman Andrei Cheglakov. However, he pulled the plug on its funding after MGPR had burned up total losses of $274.4 million.
According to Mark Kleinman, city editor of Sky News, the new investors circling the team are led by Justin King, former chief executive of British supermarket Sainsbury's. Mr. Kleinman occasionally covers F1 and is renowned for revealing that Rupert Murdoch's News Corporation was bidding for control of F1.
He later reported that that Google's executive chairman Eric Schmidt and Sean Parker, former president of Facebook, were poised to become backers of the alleged bid; that Stuart Rose, the former boss of another supermarket chain Marks & Spencer, had been approached about becoming F1's chairman; that Singaporean wealth fund Temasek Holdings was being courted to buy a stake in F1 and that Lloyds was in talks about investing in Britain's Silverstone track. In just over the past year alone he also reported that F1's controlling shareholder, the private equity firm CVC, was bidding for the sports rights agencies Infront and IMG.
They are all great stories, and no doubt were based on fact at the time they were written, but none actually came to pass. News Corp didn't buy F1 and hence it didn't use money from Mr. Schmidt and Mr. Parker. Mr. Rose didn't become F1's chairman, Temasek didn't buy a stake in it, Lloyds didn't invest in Silverstone, CVC didn't buy either Infront or IMG and there are many more examples.
King's previous connection to F1 was as a mooted successor to Bernie Ecclestone, the chief executive of the series, and this is another rumor that hit the wall. It was first reported in the Financial Times in November 2012 but last year Mr. Ecclestone put the brakes on it in an interview with Britain's Guardian newspaper. He said that there is "no truth at all" to the rumor that Mr. King was taking over F1's driving seat and lo-and-behold Mr. Ecclestone was right.
Asked what the former Sainsbury's boss knows about running a motorsport series, Mr. Ecclestone said "all he knows about is looking for support for his kids." It was a reference to his son Jordan, a racing driver who will this year compete in F1 feeder series GP2.
Mr. Kleinman that wrote "one motorsport insider pointed out that if the elder Mr. King played a role in the return of Manor Grand Prix, it would enable him to watch his son race, since the 11 GP2 weekends all take place as the undercard of F1 races." It sounds like using a sledgehammer to crack a nut as not only do GP2 drivers get passes for their entourage but it would obviously be far cheaper to buy corporate hospitality tickets to an F1 race than buying a team to get access. They are options which Mr. King may now have to consider as, perhaps unsurprisingly, it looks unlikely that his latest F1 foray will come to pass.
The statement from FRP on Wednesday said "it is envisaged that, prior to the commencement of the first race of the 2015 season, investment into the business will be made upon the company exiting from administration via a Company Voluntary Arrangement (CVA), which is planned for 19 February 2015. A CVA is a restructuring process agreed with the company's creditors which allows for a turnaround of the business and the creation of a longer term viable solution for the team." Read more at Forbes.com