Force India’s collapse; £28.5m still owed to 450 creditors

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A very interesting read over at the Independent regarding the impact the Force India administration effort has had and the scale of the unfortunate situation. The short version is this:

  • Team was taken into administration over past due debt totaling £28.5m to more than 450 companies including parts manufacturers, hotels, delivery firms, caterers and even the race tracks in Abu Dhabi and Italy
  • The team was purchased by Lawrence Stroll and a group of investors for £90m from Indian businessmen Subrata Roy and Vijay Mallya who is fighting extradition from Britain to India
  • At the time, Mercedes was very involved in the process as was driver Sergio Perez with £13.7m and $4m owed respectively
  • Team sponsor, BWT, had initially given the team two loans of £757,000 and €535,000 to assist with its cash flow and stepped in again with an additional £5m loan
  • The quest to find a buyer garnered in excess of 20 expressions of interest
  • An August 6th deadline was set and of the offers, only five were valid with one offer agreeing to buy shares and this was Stroll and party who provided a £15m loan to the company to enable the ongoing payment of costs including the time critical development of the 2019 racing car…This enabled BWT to be repaid their loan of £5m
  • Mallya has a freeze order on his assets and this meant the banks would have to approve the sale of his shares but the approval was not going to come in time for an August 20 deadline, so the administrators sold the assets instead of the shares to Stroll as the assets were not covered by the freeze order (which I find very odd because the assets are the true physical collateral a team has)
  • The administrators, FRP, are now being sued by Russian fertilizer producer Uralkali whose chairman and shareholder Dmitry Mazepin is the father of Force India development driver Nikita Mazepin because they say they made a higher offer but it was ignored
  • There are also several lawsuits pending against Force India regarding commissions from introducing sponsors to the team and introducing a potential buyer to the team which FRP saying these lawsuits are without merit
  • Mallya and Roy say they are owed £159m as that is what they put into the team but FRP says they actually owe the team £4.2m
  • The article seems to suggest that all creditors will be made whole on amounts owed and that is also interesting to me as an asset sale normally does not assume the liabilities of a company unless British law doesn’t allow for that, which I am unfamiliar with, or Lawrence reckons an all-in number of $150m for the team is worth the bother including paying past due debt

In the end, this is how messy these situations can get and there is big money at play here. In the end, Lawrence may have bought a team for £119m thereabouts. IF you consider the prize money payout in 2017 to be approximately £70m and the 2018 payout to be around £55m then perhaps the all-in number of is an digestible figure.

What I also note is that the current power units are, as I stated in 2014, killing this sport. They bankrupted HRT, Manor and Caterham and ultimately Force India with a whopping £14m past due. These mid-field teams cannot continue paying $20+ million dollars for engine supplies and if F1 doesn’t seek more prize money for these teams, then the engines need to be reduced in complexity and expense.

While the Russian consortium is sour about the purchase deal, I understand why BWT wasn’t too interested in any other deal than the Stroll cash infusion to get their £5-6m loans back out of the company. If I were the head of BWT, I would look for the first deal that saw my investment dollars returned on a team heading down the drain. I’m curious if BWT’s logos on the cars are a contractual obligation or if they have worked a new continuing deal with Lawrence. If the cars are devoid of the BWT pink color next year, we’ll know.

All a very messy affair and it most likely isn’t over yet. Check out the full article for more detail.

Hat Tip: Independent

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Tom Firth

Just remember that Merc also supplied them with gearboxes and other aspects as well as the Power Unit. Gearboxes based on usage across a season potentially accounted for £4m. We don’t know when the debt started to build to Merc either or when they stopped paying creditors.

There’s an interesting counter-story online that builds on this one that HMRC, not Merc and Perez brought down the Mallya era eventually.

MIE

I agree that the cost of the power unit is too much. However I don’t believe that changing the specification will reduce the amount that the manufacturers spend on development. If anything it would increase their rate of spend as they try and out-develop the opposition. Through F1 history they only successful way of controlling engine costs was when the specification of the most recent V8s was frozen, so only very limited development was permitted. The original token system was supposed to replicate this situation, but complaints about Mercedes advantage at the start of these regulations forced the FIA to… Read more »

jakobusvdl

Good comments Dave.
At the same time as the token system was dropped, didn’t the FIA negotiate a cap on the price the manufacturers could charge the customers for the p.u’s?
So the costs to the teams reduced, and the manufacturers have borne the cost of development.

Tom Firth

Not quite, Ferrari veto’d the original plan to reduce the cost to €12m-€14m. I think eventually was an agreement that they could reduce it by €1m in 2017 and a further €2m in 2018 but that meant it dropped to circa €17m on the conservative estimates that many put the original costs at. When you remember by the end of the V8 era, the cost was about €7m it is a fact that it still a substantially more expensive power unit, although some of that is due to the complexity too. I would be curious to know what the costs… Read more »

Tom Firth

Paddy Lowe (whilst at Williams) and Toto Wolff have argued that the current higher cost of the power unit when you take into account the whole operating cost of an F1 team accounts for a relatively low percentage of the overall cost and that aero is were most the money is spent. That said, considering you are spending around perhaps 10m euros additional per engine than you were pre 2014 and sometimes more, its clearly taking a larger part of your budget than it was doing before. Its also much easier for Liberty/FIA in time to reduce engine costs you… Read more »

jakobusvdl

That first Christian Sylt article doesn’t reflect a $10m step up in budget between the V8 and hybrid era’s. It may be that F.I chose to allocate their budget differently, but whatever they chose to fo, they became more competitive in the hybrid era (6th in the WCC up to 4th in 2016 & 2017).

jakobusvdl

As you, Paddy and Toto say, the biggest part of the budget goes on aero (and I’d argue chassis).
How L.M and the FIA go about negotiating a set of regulations and a cost cap that the full grid will sign up for is a very difficult task, but they have said they are committed to F1 having hybrid p.u’s.
So its more likely there will be resource restrictions on the Teams that limit what they can spend than specifying ‘cheaper’ engines.

jakobusvdl

Thanks Tom, I didn’t know that’s how the p.u cost negotiations had gone. I’m trying to remember the source (I think Mark Hughes at Motorsport) which said that with getting to 3 p.u’s per season, the cost to the teams was back on par with the previous V8 era. That was due to going through more engines per season previously. And I definitely remember Pat Symonds and Clare Williams chuckling about how much used to be spent on engines and gearboxes in the 1990’s and early 2000’s, when there was endless tobacco sponsorship about. That was on a 2014 Motorsport… Read more »

Tom Firth

Sure. also just thought that other story was interesting hence mentioning, others suggested it was Merc and Perez previously hence wondering what thought. :-)

Also you aren’t kidding when you say it sounds messy. I’ve never seen an asset sale that includes the liabilities though, that seems odd. Seems more an act on Stroll’s part than a legal thing though admittedly I don’t know much.

jakobusvdl

Most other assessments of Force India’s financial issues relate them to “Malaya’s personal legal issues in India, where he faces fraud charges”, including your old mate Christian Sylt. His article below explains the bizarre business model that F1 teams operate, AND FI’s costs over the period 2007 to 2016. Those costs jumped in 2008, but conspicuously don’t jump between the pre-hybrid era 2011 to 2013, and hybrid era 2014 to 2016. Sorry to put facts in the way of a good meme, but you do need to consider that the introduction of hybrid p.u’s is far from the most significant… Read more »

Tom Firth

Mallya’s mess is the main cause of Force India’s decline. I don’t think anyone disputes that but as Mercedes were the largest creditor, think its fair to explore costs associated with it.

jakobusvdl

Fair to explore them, but important to keep an open mind about what they mean.
Have you had a read of the Christian Sylt article?
Here’s another one about the overall costs and income of the F1 teams.
The teams are much closer to a balanced spend than I would have expected, with most of the independents making a profit (!!!!!)
https://www.forbes.com/sites/csylt/2018/04/08/revealed-the-2-6-billion-budget-that-fuels-f1s-ten-teams/#31921d7a6595

Schumie Toronto

I just HAD to add this! I just today saw that part of the money owed was 175 British pounds for “Hire A Princess”!

Look well down in: https://www.planetf1.com/news/pit-chat-ferrari-from-contenders-to-clowns/