Why the Ecclestone case doesn’t add up

Life in Formula One without Bernie Ecclestone would be unimaginable according to Red Bull boss Christian Horner. The 82-year-old has ran the business for 40 years and made millionaires out of gentlemen racers and team owners. His ruthless deal-making has secured CVC Capital it’s highest performing investment in a very impressive portfolio. The sport as we know it is largely due to the efforts of one man and that’s not easily replaced. Horner said:

“Bernie is a unique individual who has run Formula One tremendously successfully for the last 40 or 45 years,” said Horner.

“The business, as it is today, is because of the way he has run it and operated it. It is unimaginable for him not to be there.”

Horner reckons Ecclestone is the man for the job as long as he is capable of doing the job but that has come under fire with the German legal battle set to begin late October. Ecclestone is being accused of bribery and German media group, Constantin Medien, is seeking £111 million in damages due to what it believes was under valued stock at the time of the sale of Formula 1seven years ago.

What is missing from this argument is that accounting firm Deloitte did another valuation of Formula 1 two years ago and said that the price was a fair price at the time of the sale. BayerLB is also on the public record of saying they were pleased with the transaction at the time of the sale.

Having read a few comments from those involved, I reached out to Formula Money’s Christian Sylt to get his insight on what I felt were some snags in the German Media group’s allegations. Christian said:

“Constantin claims that F1 was undervalued because CVC refinanced its debt in November 2006 for $2.8bn but only paid $1.7bn in November 2005. What this fails to take into consideration is that in the meantime CVC bought Allsport and signed the MOU with the teams which formed the basis of the previous Concorde Agreement.”

The key here is that the asset does not remain static in value and the signing of the Concorde Agreement adds value to the series…a lot of value. It is also hurting the value of the series as we speak because there is no Concorde Agreement and this asset would be needed before they float the series in Singapore’s exchange.

Constantin maintains the value is much lower than it should have been due to the bribe but irrespective of the alleged bribe, selling an asset is not mandated by a universal valuation process.

If you went to buy a car and the sales person was a buddy of yours, you might feel you have a good chance of getting a better deal. Let’s say you told your buddy that you would give him $300 if he could sell you the car for $3,000 under invoice. Everything goes to plan until the sales manager reviews the proposed deal. The manager knows your buddy is selling it way too low and he decides to scuttle the deal…unless that car was a Chevy Volt and maybe the manager needs to dump the asset to get it off the lot as he has tons of them and they aren’t selling.

Was F1 the Chevy Volt on BayernLB’s lot? It is incumbent upon the bank to vet the work of its employees and to have a comfort level with its transactions. They publicly said they were happy with the sale. Constantin says they aren’t happy as they stood to gain a portion of BayernLB’s sale so if they felt they could get more money by litigation, they will do it.

I’m not advocating Ecclestone’s innocence or guilt in the bribery issue but what I am saying is that no one is assured that selling an assets will garner them the absolute maximum profit. Selling at a loss to rid yourself of a difficult asset has been done since the time of bartering. Nor is a seller obligated to sell to the highest bidder unless that language is built into a legal document about the sell of the asset.

While others maintain this is certain doom for Ecclestone, I find the entire thing a bit specious to be honest. The numbers don’t add up because the valuation isn’t static. It changes over time and to try and forensically determine the value at the time, seven years removed, is nonsensical

The value of an object is what a person will pay for it and you are not obligated to sell to the highest bidder if you aren’t comfortable that this bidder has the wherewithal to complete the transaction or if you feel it would not make a good owner of the asset…keep in mind that the new owners had a lot of lives in their hands as this particular asset is the entirety of Formula 1 with teams, employees and more.

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