Honda website
Honda website

APRIL 7, 2001

The way ahead for Formula 1

THERE are times when Formula 1 could do without the media. The last few days has seen a rash of stories about a civil war in Formula 1 and of a rival World Championship. These stories are all ludicrous. The car manufacturers needed to state their case and establish a bargaining position as the negotiations turn towards the future distribution of Formula 1 revenues. They have done so by taking an extreme position. But it is totally impractical and not even Leo Kirch, who has little experience of Formula 1 motor racing, is going to tall for it.

For a start, the car manufacturers have only limited power amongst the Formula 1 teams. Ferrari is controlled (in a fashion) by Fiat but in fact belongs to the Agnelli Family rather than Fiat Auto itself. Mercedes-Benz owns 40% of McLaren but as anyone in business knows 40% is not enough. BMW has no shareholding in Williams. Admittedly Benetton is owned by Renault, Jaguar Racing by Ford and the new Toyota Motorsport GmbH operation is directly owned by the Japanese. But that is it.

To make life more complicated all 12 of the existing teams (including Toyota) have signed the Concorde Agreement and are bound to the current World Championship until the end of the year 2006. If they decide to break that contract they are going to get into massive legal trouble as the FIA and SLEC, the organization which exploits the commercial rights to Formula 1, would (justifiably) have a good case against them.

The second point to bear in mind is that running a World Championship is not something that one can suddenly start to do overnight. Formula 1 is not like boxing. There are a limited number of safe racing circuits in the world and most of these have contracts with the existing authorities which stretch into the far distance. So where would the manufacturers race? And would they take the risk of using second-rate race tracks? Of course not. They need to promote safety more than anything else.

The logistics, the contracts and the complexity of Formula 1 are now such that thoughts of a rival series are remote, if not impossible. The car manufacturers either know this or are deeply naive and will soon find out.

The reality is that the teams (and therefore some of the manufacturers) want to get more out of the sport. They have a fair argument. At the moment they receive less than 50% of the television income from Formula 1. They receive none of the fees paid by race organizers. SLEC is being greedy. This is really the fault of the teams and testament to the deal-making skills of Bernie Ecclestone. The existing deal runs until 2006 and then there will have to be a renegotiation. Ecclestone, seeing the writing on the wall, has sold most of the business to Leo Kirch. He is staying on while new structures are put in place for the future. In his mind, perhaps, he is staying on forever.

The teams (and manufacturers) argue that in most big sporting series, the promoters take what amounts to a commission of around 15% on all the deals. SLEC is taking more than 60% of the money. This will have to change but with Kirch having just spent in the region of $1.5bn to buy control of 75% of SLEC he is not going to give up his "nice little earner" until he has to. He also has to pay off around $700m in debt which SLEC picked up with the issuing of a Eurobond and he will also need to shell out another $350m in order to secure the rights to F1 in the future. This is essential if his deal is to make sense.

But Kirch knows that once he has cleared the $2.5bn he will be in profit - pure profit - until the year 2110. And that is an amazing deal. Covering the investment is easy enough. He will take the revenues until the end of the current Concorde Agreement. Even if these do not increase at all that will collect him something in the region of $1.3bn. He can increase these. On top of that he has the potential to sell off a percentage of the shares in the business (perhaps 25%) and that will raise another $1bn and Kirch will still be the majority shareholder.

The concept that the car manufacturers will get together in one company to play the Formula 1 game is not very credible because they all know that there will come a time when they no longer need Formula 1 and want to invest in ice-dancing or whatever the marketing men tell them to do. So the best option for them is not to join together but rather to work as individual units. The best way for this to be achieved is for SLEC to become a company listed on a stock exchange. This requires a great deal of paperwork but Kirch has an easy way to make that happen. He can contrive to roll SLEC into EM.TV (which is already listed). EM.TV can trade off its programming assets in exchange of sports rights or TV deals and Kirch can emerge with a listed company, with a new name which deals in the profitable world of sports rights. Anyone who wants to buy into the business can do so and they will get their share of the profits.

It is so much easier than fighting civil wars...