Maneuvering to Control Future of Formula One
The fortunes of a Formula One race can change in a split second. When Sebastian Vettel, the 23-year-old star of the Red Bull Racing team, slipped up on the last lap of the Canadian Grand Prix this month, he allowed Jenson Button of McLaren to snatch away the victor’s Jeroboam of Champagne.
The business of Formula One could be set for a similarly drastic swing. Much more than a trophy and a big check is at stake: the future ownership of the world’s most widely followed auto racing series — and, perhaps, the way in which hundreds of millions of fans watch it on television — is ultimately up for grabs.
The starting gun in this contest was fired this spring when News Corporation, controlled by Rupert Murdoch, and an investment company owned by the Agnelli family of Italy, overlords of the storied Ferrari racing team, expressed interest in taking over Formula One Management, which organizes the races.
Since then, in trackside chats and informal conversations, officials of the two companies have been trying to convince skeptical team owners and other interested parties that they are the best future stewards of Formula One.
People with knowledge of the talks say the pitch goes something like this: News Corporation could do for Formula One what it did for English soccer, which was transformed by an infusion of billions of pounds of television rights fees from a News Corporation pay-television affiliate in Britain. News Corporation’s global reach and considerable financial resources could generate interest in markets where Formula One has lagged, particularly the United States.
Meanwhile, by aligning themselves with the Agnelli company called Exor and Ferrari, the team owners might be able to extract a larger portion of the commercial proceeds of the races, rather than handing over half to the central organization, as they do now.
Still, questions abound. Would team owners agree to part ownership by another team? Would regulators allow Formula One to move from free television, as stipulated in its current operating agreement, to pay-television outlets in Europe and Asia owned by News Corporation? If so, would fans and sponsors stick with the sport?
And perhaps most important, would this marriage of a media company and a sports organization work better than other recent examples, most of which have broken down after failing to deliver the expected benefits?
“I can’t see how a media group could take over without changing fundamentally how the sport is run,” said Nigel Currie, the director of BrandRapport, a sponsorship agency. “Media companies are now one spoke in the wheel of Formula One, but in this case, a media company would become the hub.”
Precedents for media companies owning sports franchises or organizations are not especially encouraging. News Corporation bought the Los Angeles Dodgers in 1998, hoping to generate viewership for its Fox TV network. It sold the team six years later when the hoped-for synergies failed to emerge.
American media companies, like Tribune Company and Disney , have also been bailing out of team ownership. The New York Times Company is trying to sell its stake in the Boston Red Sox.
The hurdles are so high that some analysts say they think News Corporation and Exor do not intend to make an actual bid for Formula One, which is majority-owned by CVC Capital Partners, a private equity firm. Instead, they may be trying to persuade key teams to peel away and create a new race series — a threat that has been dangled several times in the past.
Bernie Ecclestone, the 80-year-old impresario who has been the driving force behind the race series for four decades, said that officials of News Corporation and Exor had not made any formal presentations to CVC or to him.
“It’s a pity they don’t come along and sit down with the people that own the shares,” Ecclestone said. “That conversation hasn’t ever taken place.”
By keeping everyone guessing about their intentions, News Corporation and Exor figure they cannot lose, insiders say. An agreement between the teams and Formula One Management expires next year. If the teams were to break away and set up a new series, the value of CVC’s investment in Formula One, which it bought for about $2.6 billion, would plunge.
CVC does not want to sell, Ecclestone said. “Having said that, the type of company they are — a private equity firm — if the price was right, they would sell,” he said.
John Elkann, the 35-year-old chief executive of Exor and scion of the Agnelli family, and James Murdoch, 38, who runs News Corporation’s European and Asian operations, are said to have discussed a move on Formula One for several years. This spring, with more than the usual amount of political and financial turbulence swirling around the organization, they saw their opportunity.
Political unrest in the Gulf state of Bahrain disrupted plans for a race that had been set to take place there in March. The race was rescheduled for the fall, but team directors protested, fearing that they would be seen as endorsing a crackdown on dissidents. Finally, race organizers in Bahrain canceled the event.
Meanwhile, Ecclestone is embroiled in a German investigation of bribery accusations related to the sale of Formula One to CVC in 2006. Ecclestone, the chief executive of Formula One Management, said he was said he was cooperating with the investigators and has vehemently denied any wrongdoing. The investigation stems from a change of ownership that followed the bankruptcy of the Kirch Group of Germany, a media company that briefly held a controlling stake in Formula One before it collapsed under the weight of its debts in 2001.
Turmoil is nothing new to Formula One, which seems to careen from one tabloid scandal to the next, only to emerge stronger. Television viewership has bounced back after a dip a few seasons ago.
Formula One Management says 527 million people watched at least part of a race on television or in person last year, up from 520 million in 2009. Sponsorship is expected to bring in a total of $4.4 billion this year for the teams and the central organization, according to Formula Money, a research report on the finances of Formula One.
In Vettel, Button and Lewis Hamilton, Formula One has bankable young stars. This season has produced exciting races. There is even a comeback story: Michael Schumacher, the seven-time world champion who retired in 2006, returned last year.
Still, there are questions about the future. Formula One, whose most famous race twists and turns through the streets of Monaco, has struggled to expand its appeal beyond white European men, an audience that is aging. Sponsorship of the race teams has recovered slowly after a steep drop during the global financial crisis. And there are no obvious candidates in Ecclestone’s family or in the Formula One organization to succeed him as chief deal maker.
“There’s no line of succession, no one waiting to take over, so what you’re left with is a vacuum,” said Simon Chadwick, a professor of sport business strategy and marketing at Coventry University in Britain.
Against this backdrop, officials of four of the most powerful teams in Formula One — Ferrari, McLaren, Red Bull and Mercedes — gathered in mid-May in Stuttgart, Germany, at the headquarters of Daimler, which controls the Mercedes team, to discuss the approach from Exor and News Corporation, as well as the negotiations on a renewal of their deal with Formula One Management, called the Concorde Agreement.
Those four teams then called a separate, secret meeting to consider the Exor and News Corporation situation in more detail. This gathering took place at the end of May in Rome, according to a person who was briefed on the discussions.
Any takeover involving News Corporation could require a rethinking of the Formula One business model. The Concorde Agreement stipulates that races should be shown on free television whenever possible, so as to maximize audiences, which typically reach 50 million to 60 million, more than most any sporting event other than the World Cup final and the Super Bowl.
“If it were to become a pay-TV product rather than a predominantly free one now, it would be one of the most seismic changes in the history of the sport,” said Kevin Alavy, who analyzes television audiences at Initiative, a media buying agency, in London.
Sponsors, the biggest source of revenue for the individual racing teams, could demand compensation for lost television exposure. On the other hand, revenue from television rights would probably rise, because pay-TV companies typically have deeper pockets than free broadcasters like the BBC, which now owns the rights in Britain.
A newspaper owned by News Corporation, The Sunday Times of London, appeared to jump the gun on such a change, reporting on a recent weekend, “BBC axes F1.” The story cited unidentified sources as saying the BBC, a frequent subject of criticism from Murdoch and his father, Rupert, was considering dropping Formula One to save money. The BBC responded that this was speculation.
Tony Fernandes, a Malaysian entrepreneur who owns Team Lotus, said Formula One officials and team owners ought to keep open minds about pay television.
“I don’t know if it is right or wrong, but I think it would be foolish to say it’s a bad thing,” he said in an interview at the Canadian Grand Prix in Montreal. “Pay TV has worked. It has worked in America; it has worked in Europe.”
Neither News Corporation nor Exor has commented publicly since issuing a brief statement in May, in which they said they were “in the early stages of exploring the possibility of creating a consortium with a view to formulating a long-term plan for the development of Formula One in the interests of the participants and the fans.”
Other parties are said to be potentially interested in Formula One, too, either with a group led by News Corporation and Exor or alone. These include Carlos Slim Helú, a Mexican billionaire; Mubadala, an Abu Dhabi investment company; and Raine Group, a New York investment firm.
Spokesmen for Mubadala and Raine declined to comment. A spokesman for Slim, a major shareholder and creditor of The New York Times Company, did not respond to an e-mail requesting comment.
CVC declined to comment beyond a statement issued in May, when it said Formula One was “not currently for sale.” Rather than shutting the door, however, the firm added: “CVC recognizes the quality of Exor and News Corp. as potential investors, but any investment in Formula One will require CVC’s agreement and will need to demonstrate that it is in the interest of the sport and its stakeholders.”
At the center of all this strategizing is Ecclestone, who owns a minority stake in Formula One Management but who knows how all the parts are bolted together.
Ecclestone can claim credit for guiding Formula One through several major challenges in recent years, including the loss of sponsorship money from tobacco companies and the departure of racing teams owned by BMW, Honda and Toyota. Ecclestone also held Formula One together in 2009 when team owners revolted against the International Automobile Federation, which sets Formula One rules, over proposed changes championed by Max Mosley, then the president of the federation.
The team owners won that battle, and also ousted Mosley, the subject of an embarrassing tabloid exposé — by a News Corporation publication, The News of the World — of a sadomasochistic romp with prostitutes. Mosley sued the paper for invasion of privacy and won.
Ecclestone said he planned to “carry on doing what I want to do until people don’t want me doing it.”
He added: “People say to me, ‘What do you do?’ I say, ‘I’m a firefighter.’ And generally the answer comes back, if there are no fires, you light them.”