The Strategist

John Malone to buy Formula One

09/08/2016 - 15:01

Liberty Media owned by American billionaire John Malone announced its intention to purchase Formula One auto races from a consortium of vendors led by private equity firm CVC, reports The Wall Street Journal.

CVC Capital Partners, based in London, bought a controlling stake in Formula One in 2006. 100% stake in the franchise is estimated at $ 4.4 billion. Total worth of the race is $ 8 billion, including debt of $ 4,1 billion. The deal, to be closed in early 2017, stipulates that Formula One’s current president Bernie Ecclestone retains his post.

Formula One is a series of auto races held in various cities from Monte Carlo to Kuala Lumpur. The main profit comes from sale of television rights and sponsorship agreements.

Malone himself, a pioneer of cable television, has only recently returned to the media space. He noted growing popularity of sports broadcasts in the American market of cable television, as well as significant revenues coming from cable TV operators.

Liberty Media’s plan to become owner of Formula One consists of two stages. To start, Malone’s company acquired 18.7% stake. The remaining shares will be redeemed in the I quarter 2017. The transaction is also subject to approval by antitrust authorities and Formula One’s regulators.

The transaction will be paid in cash, newly issued shares and convertible debentures. Liberty Media shareholders will receive 35% ownership interest, and current owners, including CVC, will have the remaining 65% stake.

The global championship with a turnover in excess of $ 2 billion, attracts 450 million to 600 million spectators each year. It is believed that audience of Formula One is second only to the Summer Olympic Games and the World Cup. Moreover, the above tournaments are held every four years, but Formula One is annual. 

Sponsorship contracts are the most obvious method of monetization of popularity, which brings to Formula One around $ 400 million a year. This sum includes payments from Emirates airline, insurer Allianz, UBS Bank, watchmaker Rolex and other international corporations.

Share of sponsors barely reaches 20% of total revenues. Such a low percentage indicates a real attractiveness of Formula One as a spectacle. Income from advertising clearly shows that the tournament looks quite appealing for experienced market players.

Another source of income of Formula One is the biggest and most illogical. Organizers of the auto race have to pay for the right to host the Grand Prix. The most popular and lucrative American racing series NASCAR works exactly the opposite. Revenues from the championship go to maintenance of race tracks. 

Generous contributions of organizers bring $ 700 million per season, and the amount is increasing every year. 

The smallest, but an important component of Formula One’s income is sale of licensed souvenirs brings. This brings in $ 100 million a year, and VIP-tickets for the seats earn additional $ 200 million.
Commercial appeal of Formula One is the global TV audience. There was a time when number of viewers amounted to nearly 2 billion people. Current figures are more modest: there were 450 million people in 2014. Nevertheless, the ratings continue to impress, and broadcasters are still mechanically purchasing expensive broadcast rights.

In the late 1990s, revenues from broadcasters fully formed financial well-being of Formula One, covering more than 80% of total income. Now, the share has fallen to 30%, or $ 600 million in absolute figures per year.