F1 borrows big for shareholder payday

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I find the entire financial side of Formula 1 to be an very interesting study in investment, promotion and distribution. If you consider the teams are effectively in F1 to break even with some teams owning different for-profit divisions, the racing arm of most teams is there to establish budgets (including salaries) and effectively break even at the end of the year.

Earning prize money, of which the teams split 63% of the total take in F1, the teams have become ecosystems unto themselves to participate and live off the earnings of the sport. The sport itself is a for-profit entity in the form of distributions to shareholders and while in the US they would typically distribute retained earnings at the end of the year, F1 has a different approach as revealed by our friend Christian Sylt.

According to a Telegraph article, the sport likes to refinance itself with new loans to recapitalize the sport and raise funds for big distributions to shareholders:

“Last year, F1’s bank borrowings accelerated by $2bn (£1.3bn), half of which went to investors. CVC, the private equity firm, received $350m in line with its 35pc stake.

The payout followed a strong year for the sport, with pre-tax profits up more than a third from $284.6m to $394.1m, and revenue clocking up a 3.2pc rise to a record $1.8bn, according to its latest accounts.”

It does reveal how well the owners are paid but it also seems the retained earnings are used to pay teams and the shareholders are paid via refinancing and leveraging the value of the entity over time. Perhaps I am reading or interpreting this strategy incorrectly and apologies if that’s the case.

This process doesn’t imply anything nefarious or untoward, it’s just the way the shareholders distribute profit from the series for dividends.

I do think it is important to understand who is taking distributions and how they take them. The talk for some time now has been about the lack of equity in how the prize money is distributed and the rising costs of F1. It’s a lot more complicated than that and finding a harmony for teams to run break-even from the earnings of a for-profit series who also has shareholders to compensate is an act of keeping more than one plate spinning at a time.

Hat Tip: Telegraph

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runnah

So the rich get richer and the folks who actually need the money get screwed.

The Captain

Someone needs to step in and explain this like we are all 5yo, because if I read this correctly this seems like an astonishingly bad practice. They’re borrowing from private banks now (so with interest?) to pay off investors while amassing future debt to do so that will have to be paid off sometime in the future when these same debt amassing investors are probably not around? How does this make sense in the least bit? (other than a get the money and run scheme)

Jason Smith

You summed it up by quoting Steve Miller, “Take the Money and Run.”
It’s basically a way of guaranteeing a profit margin by selling the long-term profit in the form of a loan secured against that projected profit. Apparently FOM took a few pages from the U.S. sub-prime mortgage racket, it’ll be interesting to watch then they find-out how this story ends…

Paul KieferJr

Why does this sound like a pyramid scheme?

Joe Mama

I’m astounded. The Captain is exactly correct; they’re taking their profits now regardless of actual performance by simply borrowing against F1…and they are free to walk away with the cash, completely absolved of all risk. That’s not investment, that’s fleecing. Not that this should be a surprise; the world of high finance runs on a separate set of rules. In that world, We The People, as in the rest of us, are just widgets in a system that allows them to harvest the fruits of our labor from behind the gilded doors of power without getting their hands dirty. The… Read more »

jakobusvdl

Here we have ‘ the REAL problem with F1’. This highlights why I get irritated by the posts and podcasts that talk about ‘what’s wrong with F1’ – the races are too predictable, technology is ruining the sport, high degradation tyres are ruining the sport, driver coaching is ruining the racing, aero is……you guys know the script. In my mind those are all sideshows, CVC’s continued pillaging of money from the sport is the fundamental problem. The whole F1 franchise remains hugely financially successful, revenues continue to rise despite the frequently reported drop in spectator and viewer numbers. There is… Read more »

228929292AABBB

I work in finance and this is often done, particularly by real estate funds. If there’s equity, borrow against it and take the cash, it’s not even taxable because it’s not income. Makes perfect sense unless you care about the future or anyone in the organization other than yourself. F1 seems to care about neither but as we criticize them (probably with justification) we could also look at our own fiscal or environmental stewardship of the present vs. the future, or our personal decisions to drink or eat to excess while at the F1 race despite the consequences to be… Read more »

Negative Camber

Yeah, as I said last night on the podcast, it’s not uncommon but I do find the entire model interesting in that they borrow against equity to cash out and teams are running break even. then we get the groundswell screams of equity amongst teams and the like. Interesting indeed.

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