How Formula One Could End Up With Soccer’s Ownership Structure

The fortunes of Formula One auto racing have been dented by the coronavirus outbreak perhaps more than any other sport. Its races take place all over the world and attracted 4.2 million spectators last year so they depend on borders being open and governments allowing mass gatherings. It explains why F1’s 2020 season has yet to get the green light and the effect of this might be felt for a long time to come.

F1’s parent company Delta Topco is owned by Liberty Media and a tracking stock which reflects its performance is listed on the Nasdaq with the ticker FWONK. As we have reported, F1 has more than enough resources to cover its own costs through the shutdown thanks to $402 million of cash in the bank and a $500 million credit facility. The spanner in the works could be its teams and races.

Company filings show that F1’s teams have average annual costs of around $235 million and this high-octane expenditure is covered by three revenue sources. Two have ground to a halt and the other is running out of gas.

The first is sponsorship which depends on brands getting television exposure in races. The second is prize money which represents a 68% share of F1’s profits. The lack of races has driven down F1’s revenue which largely comes from Grand Prix hosting fees, broadcasters, sponsors and corporate hospitality ticket buyers. In turn, F1’s profits, and therefore the teams’ prize money, is expected to reverse.

Even the investment from team owners is at risk. Auto makers Ferrari, McLaren, Mercedes and Renault own four of F1’s most well-known squads and their businesses have stalled as dealerships have shuttered. According to a recent report in the Financial Times, the auto industry’s shutdown is set to cost more than $100 billion in lost revenues if plants across Europe and North America remain closed until the end of April.

It has fueled concerns over the teams’ future which are accelerating as every day goes by. Earlier this month McLaren boss Zak Brown told the BBC that he “could see four teams disappearing” and since then several of the smallest squads have warned that they are in a race against time.

Talking to Motorsport.com, AlphaTauri boss Franz Tost said that “if nothing comes in at all all year round, it will be a very critical matter. If you don’t get any income at all, it’s obviously a disaster economically.”

Echoing this, Claire Williams, deputy boss of the Williams team told British broadcaster Sky Sports that “going racing is absolutely critical this year.” However, there is no visibility on when borders will re-open or when countries will be clear of coronavirus.

The longer that the teams’ wheels aren’t turning, the more money they spend and the greater the chance that they could hit the wall. It explains why Red Bull Racing boss Christian Horner recently said he believes that Liberty “would help to facilitate, which means paying, to ensure that those teams would be around to compete next year.” F1’s race organizers are in even more need of help.

The first nine races of the season have been postponed or canceled but 13 others are still on the calendar. They are in a Catch 22 as they need to start spending on preparation for the event but lack the cashflow to do so. This is because advance ticket sales have stalled as race fans don’t know if they will be able to travel or even whether governments will allow the races to take place.

As we recently reported in British newspaper The Independent, some of the race organizers have called on Liberty to compensate them for the fall in ticket sales. That’s just the start.

In order to stand a chance of getting the season off the grid, F1 has said it may host races without spectators. However, no spectators means no ticket sales and they cover the running costs of a race. To make ends meet, many race organizers may have to use the funding they receive from governments which is usually paid to Liberty as a hosting fee.

Some races don’t receive any government funding so Liberty may need to pay them instead of being paid by them as is usually the case. Testimony to this, Joan Fontsere, general manager of the Spanish Grand Prix, told The Associated Press today that Liberty is “obviously on the same page. If they want to keep some races on…they know that our income (will be reduced), they realize that this year it will be like that.”

If F1 has to make turbocharged payments to race organizers and teams it could put it under immense pressure and raises the possibility of it ending up in the pits.

Only two weeks ago F1’s motorsport director Ross Brawn said that “if the sport collapses there’s thousands and thousands of people out of work.” That wouldn’t be the only consequence.

Although Liberty’s subsidiary Delta Topco runs F1, it doesn’t own it. In fact, filings reveal that F1’s regulator, “the Fédération Internationale de l’Automobile (FIA) owns the Championship”.

In 2001 the FIA sold Delta Topco’s subsidiary SLEC a 100-year license to the F1 commercial rights for $313.7 million. It came with a number of conditions, chief of which is that “the FIA may terminate Formula 1’s license if certain Delta Topco subsidiaries party to the 100-Year Agreements become insolvent.” In summary, if F1’s operating companies crash into bankruptcy, the FIA would become F1’s rights holder.

There is no suggestion that F1 is insolvent or that it is on track to go insolvent. The teams and race organizers are third parties so F1 wouldn’t even have to pay them. However, if it didn’t do this it would increase the chance of them hitting the wall which could cause even greater problems for F1. It appears to put Liberty in a no-win situation whereas the FIA has everything to gain.

In 2018 the FIA had total revenue of $138.9 million (€130.4 million) and costs of $138.5 million (€130 million) giving it a $0.4 million profit. In contrast, at its peak in 2014 F1 made a $482 million underlying profit on $1.7 billion of revenue.

Although F1 would only end up in the FIA’s hands if the company that operates it hit the wall, the sport’s commercial rights would still be immensely valuable. The FIA could either sell them again for a blockbuster sum or boost its coffers by running the sport itself. It is far from uncommon as a number of national and international sport federations hold stakes in competitions, and even own and manage some of them on their own.

Perhaps the most well-known example is the Fédération Internationale de Football Association (FIFA). In addition to being the international governing body of soccer, FIFA signs rights deals for the World Cup with broadcasters such as the BBC. Similarly, the Football Association regulates soccer in England and also runs numerous tournaments including the FA Cup, the oldest national soccer competition in the world.

There is even a precedent for this in auto racing as the FIA ran the World Rally Championship in early 2012 after it terminated its contract with production company North One Sport when its parent, Convers Sports Initiatives, became insolvent. The FIA later sold the rights to energy drinks company Red Bull and marketing agency Sportsman Media which remain the organizers to this day. Time will tell whether Liberty lasts that long at the wheel of F1.