F1 owner Liberty Media has admitted making failed bids for assets which are believed to include the … [+]
Liberty Media has revealed that it attempted to buy businesses to complement its Formula One auto racing series but did not give the green light to the acquisitions as “prices remain high”.
Liberty bought F1 for $4.6 billion in January 2017 and listed it on the Nasdaq with the ticker FWONK. Its first maneuver was to replace F1’s long-standing chief executive Bernie Ecclestone with 21st Century Fox vice chairman Chase Carey who has boosted the profile of the series but has failed to rev up its revenue.
It reversed 0.7% to $1.8 billion in Liberty’s first year at the wheel but rose 2.4% in 2018. F1’s latest results show an 11.4% increase in revenue over the first nine months of this year driven by a blockbuster deal signed by Ecclestone with British Pay Television broadcaster Sky. There is no evidence that F1 is on track for a similar surge in the short to medium term.
Pay TV broadcasters can often afford to outbid their free-to-air rivals as they are flush with subscription fees and spend them to buy content which tempts new customers. However, F1 is already shown on Pay TV in most major markets leaving limited potential for growth. It explains why its revenue from broadcasting has begun to plateau in recent years as shown on the graph below.
F1’s revenue from broadcast rights has begun to plateau
Although Liberty launched a streaming service for F1 in May 2018, it has been plagued with problems so that too hasn’t driven up F1’s revenue. As we revealed, its revenue from subscription based services came to just $6.1 million last year with broadcasting bringing in a total of $603.9 million. F1’s two other core revenue streams face similar challenges.
Just days after stepping into the driving seat, Carey predicted that the revenue stream “that grows the fastest is probably sponsorships.” Since then he has been forced to do a U-Turn on this and admitted earlier this year that “the sponsorship world has probably been more challenging than we would have expected it to be a couple of years ago.”
Testimony to this, F1’s sponsorship revenue in 2018 came to $266.4 million which was just 1.7% up on the total the year before Liberty bought the business as shown on the graph below. F1 has failed to sign any big-ticket deals under Carey and although he recently said he still hopes to land a major partner, there is no guarantee it will get to the finish line.
Liberty Media has boosted F1’s sponsorship revenue by just 1.7%
There appears to be much more room for growth in race hosting fees which are F1’s biggest single revenue stream and generated $616.7 million in 2018. This year there were 21 races but F1’s contracts with auto racing’s governing body, the Fédération Internationale de l’Automobile (FIA), allow it to host up to 25. However, the teams have made it clear that they would not want that many races as it would increase their costs and the time spent away from home.
Historically, the increase in the teams’ costs from competing in more races has been offset by a boost in their prize money. The teams share 68% of F1’s underlying profit so, theoretically, the more races there are, the greater the revenue from hosting fees and the more money the teams will receive.
Ecclestone specifically targeted the governments of emerging markets which are prepared to pay top Dollar to host a race as it promotes their countries to the 490.2 million TV viewers who watch F1 every year. Combined with the limit to the number of slots on the calendar, this fueled an arms race between prospective race hosts and it drove up the race hosting fees.
As the graph below shows, over the five years before Liberty bought F1, its revenue from hosting fees increased by 14.5% to $653 million in 2016, giving an average of $31.1 million per race. However, during the two years under Liberty it has crashed by 5.6% and there is good reason for this.
F1’s race hosting fees have crashed under Liberty Media
The accelerating hosting fees put pressure on many of F1’s most well-established races in locations like Britain, Italy and Spain. These countries don’t need F1 to drive tourism so their governments don’t tend to invest as much in their home races as their counterparts in emerging nations. Adding to the pressure on them is the fact that F1 race hosting contracts typically contain escalator clauses which increase the hosting fee by arond 5% annually.
It put the classic races at risk of being replaced by bigger-paying new markets which was good for the business but bad for fans. It led to the British Racing Drivers Club (BRDC) putting the brakes on the British Grand Prix after burning up huge losses on the race. This year’s event was set to be the last but Liberty broke the gridlock by slashing its hosting fee. Although the new fee has not been disclosed, the BRDC’s 2018 financial statements give some insight into how greatly it has reversed.
Under the previous contract F1 allowed the BRDC to pay the hosting fee after the race to help with its cashflow. However, under its new deal it will have to pay it in advance like most other F1 tracks. The financial statements confirm that “the termination of the deferred payment terms associated with the Grand Prix contract will result in 18 months’ hosting fee having to be paid within a 12 month period.” However, the new fee is so low that the financial statements say that “no additional funding will be required by the company.”
Over the past year, Liberty has also reportedly slashed the fees for the races in Italy, Mexico and Spain. Their new contracts begin in 2020 when the German Grand Prix will get the red light and new races in the Netherlands and Vietnam will join the calendar, bringing the total to a record 22. Despite this, estimates show that four renewals, the two new races and the loss of the German Grand Prix will only boost F1’s fee revenue by a net total of $18.4 million next year.
The tiny increase is driven by the lower fees for the renewals and it sets a precedent which other race organizers will surely want to follow. It means that Liberty can’t bank on significant growth from race hosting fees so where could it come from?
Liberty doesn’t need to boost FWONK’s revenue but one way to do it would be to buy companies which are related to F1 and this is exactly what it has been trying to do.
Talking at a recent investors conference Liberty’s chief executive Greg Maffei said “we continue to look for M&A and synergistic investments. We think there are things we can do. We like the live event area. We like the sports area. There are things that are synergistic with Formula One. We bid on a bunch of assets. Unfortunately prices remain high and we will see but there are things we think we will do over the next four years in this space and we will certainly try.”
It isn’t clear which companies Liberty has bid for but it is understood that one of them is F1’s US rival IndyCar which was recently sold by the Hulman family to tycoon Roger Penske. After the deal closed, the Associated Press reported that “investment bank Allen & Co. was tasked with finding either a buyer or strategic partner and connected the family with Liberty Media.” However, reflecting Maffei’s comments, it added that “one person familiar with Liberty’s talks said the company balked at an initial asking price of $250 million.”
We forecast Liberty’s interest in IndyCar back in March 2017 in a report for Britain’s Daily Telegraph newspaper. Talking to investors, Maffei floated the idea of “potentially expanding Formula One into other motor sports. That could be interesting. Ones where we have synergies. Ones where we are starting to get some insights. There are emerging sports that could be as well.” He added that “starting with motor would be the most natural but that’s not to say there’s nothing else that could work.”
We wrote in the Telegraph that one possible target could be “IndyCar, a family-owned American rival to F1 which operates the famous Indianapolis 500 race and would boost the sport’s footprint in the US.” This acquisition has slipped through Liberty’s fingers but time will tell whether it is still in the chase for another.
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