A new twist for the Formula One group
 
February 4, 2014 by Joe Saward
 
Financial rumours are always to be treated with care because one never knows why the news is being leaked and who gains the most from such leaks. Quite often such stories are not at all what they seem to be. The word, however, is that US media billionaire John Malone, who is in the middle of a major expansion into European markets, is looking to buy control of Delta Topco, the parent company of the Formula One group, in order to be in a position to decide which TV channels would be buying the media rights to F1 racing, so as to either boost the revenues of other companies in his empire, or to charge his rivals more for the same privilege.
 
In recent months Malone has bought British cable company Virgin Media, which added 25 million customers in 12 European countries, plus the Dutch cable company Ziggo, Belgium’s Telenet, Germany’s Unitymedia and, in the last couple of days, Eurosport, of which he now controls 51 percent with a put option to acquire the remaining 49 percent. A put option gives the owner (Eurosport in this case) the right, but not the obligation, to sell the shares at a specified price on a specified date.
 
The goal of all of these moves is to create growth for his companies by acquiring new programming and new channels.
 
The word is that he wants to acquire the Formula One shares currently controlled by CVC Capital Partners, which wants to cash out in F1 because its plans for a stock market flotation have been blocked by the legal troubles surrounding F1 boss Bernie Ecclestone.
 
It is entirely possible that such stories may have been leaked to try to inflate the value of the Formula One group for another buyer as the rumoured $9 billion price tag seems rather high in the circumstances. CVC bought control of the Formula One group for a fraction of that and has taken a great deal of money out of the sport, in terms of dividends and loans.
 
There is clearly an opportunity coming up for a change as another Formula One shareholder called LBI Group Inc, an entity which exists only to sell off the remaining assets of the defunct Lehmann Brothers, in order to generate as much money as possible for creditors, has said that it will sell its 12.3 percent share by the end of June, or hand over the equivalent money. If CVC Capital Partners adds its own 35.5 percent to the deal that will be close to the figure needed to buy a majority of the ordinary shares. There are other investors who would probably cash in as well (and may have to do so with tag-along, drag-along rights). CVC is believed to have some kind of veto over the sale of the LBI Group Inc shares, which means that it would buy the stock and then sell a bigger stake to a buyer.
 
However, this does not necessarily mean that a buyer would actually control the Formula One empire because this appears to influenced by a parallel company called Delta Prefco, which has some of the same shareholders as Delta Topco. These investors get a different (and preferential) deal to those involved in Topco. It is understood that rather than getting a dividend based on annual profits, Prefco shareholders get pre-determined sums. In exchange for this benefit, the Prefco shareholders seem to have agreed to allow Bernie Ecclestone to have the right to veto all Delta Prefco decisions if he chooses to do so, so the acquisition of the Topco shares would not necessarily give a buyer control of the empire and purchasing the golden share from Ecclestone would, no doubt, be wildly expensive, unless there was a way in which it could be annulled. Much of this is information is covered by confidentiality agreements so it is hard to know exactly what is going on.
 
The last sale of shares in Delta Topco was in October 2012 and this valued the business at $6.6 billion. That deal was for three percent, which had been held by LBI Group Inc, which was acquired by the Teachers Retirement System of Texas (TRS) for $200 million. The Formula One group had previously been valued at $7.6 billion after CVC offloaded 21 percent of the business in May 2012 for $1.6 billion.
 
It is hard to imagine that Malone would want to buy the company just as a financial investment, as the private equity and pension fund people do. He is more interested in exploiting the media rights to the sport in a different way.

The puzzling case of Delta Prefco
 
Tongues have certainly been wagging following the recent news that Formula One boss Bernie Ecclestone says he doesn't know anything about a bid for F1's parent company Delta Topco by media firms Liberty Global and Discovery Communications. One of the most entertaining reports said that even if a sale took place it would "not necessarily mean that a buyer would actually control the Formula One empire because this appears to influenced by a parallel company called Delta Prefco, which has some of the same shareholders as Delta Topco." In fact, this is far from the case because Delta Prefco does not even exist.
 
To recap, recent reports suggested that Liberty and Discovery are considering buying a 49% stake in Delta Topco from its largest shareholder, the private equity firm CVC. As Pitpass pointed out, Ecclestone said he had "never heard anything about" the rumoured deal and, perhaps more pertinently, CVC doesn't have 49% to sell as it only owns a 35% stake.
 
Between them, Liberty and Discovery own stakes in the British Virgin Media cable company and the EuroSport television station. It explains why talk of a takeover sparked reports that it could lead to F1 being dropped from Sky in the UK, particularly since 39.1% of it is owned by beleaguered media mogul Rupert Murdoch who is a longstanding rival of Liberty's founder John Malone. However, according to one report, a buyout wouldn't give Liberty the power to change channels for F1.
 
This brings us back to Delta Prefco as the report claims that the investors in it "get a different (and preferential) deal to those involved in Topco. It is understood that rather than getting a dividend based on annual profits, Prefco shareholders get pre-determined sums. In exchange for this benefit, the Prefco shareholders seem to have agreed to allow Bernie Ecclestone to have the right to veto all Delta Prefco decisions if he chooses to do so, so the acquisition of the Topco shares would not necessarily give a buyer control of the empire and purchasing the golden share from Ecclestone would, no doubt, be wildly expensive, unless there was a way in which it could be annulled."
 
In summary, the allegation is that even if Liberty and Discovery bought 49% of F1's parent company Delta Topco, it would not have control of the sport because that is vested in Delta Prefco and, in particular, in Ecclestone himself through his supposed "golden share" in it. It certainly sounds interesting but it couldn't be much further from the truth.
 
You won't find much information about Delta Prefco online. At the time of writing, typing it into Google yielded just 755 results with this Pitpass article at the top of the list. Our article said that Ecclestone has just one share in Delta Prefco and suggested that F1's Investment and Shareholders' Agreement could confer special rights, essentially making it a "golden share." Clearly, the author of the recent report read our piece which was printed in 2011 but doesn't seem to have done adequate research about Delta Prefco since then.
 
It's easy to get confused about the business of F1 as it is an incredibly complex field and similarly named companies abound. It is especially easy to make errors if facts aren't checked before they are printed. Articles in newspapers are read by editors, deputy editors, sub editors and lawyers before being printed but the piece in question appeared on a blog. It shows what can happen if the necessary checks and balances are not in place.
 
There may not be much about Delta Prefco online but there is one crucial piece of information. It can be found on the following link which shows in big red capital letters at the top of the page that "the entity is Dissolved."
 
You don't have to be a genius to find this out but you do need to have a habit of checking your facts. Anyone can do it. All you need to do is go on the website of the UK companies registry (companieshouse.gov.uk) then scroll to the bottom of the page and click on 'links'. From there you click on 'Jersey' as it is no secret that the F1 parent companies are based there.
 
That takes you to the Jersey companies registry where you can click on the tab marked 'Registry' which takes you to a page with another tab marked 'Easy company registry and search'. Hovering over that brings up the option marked 'company search' which, unsurprisingly, brings up a search page. Typing Delta Prefco into the search box eventually brings up the page which shows that the company was dissolved way back on 31 May 2012.
 
Seasoned F1 business analysts will immediately know the significance of that date as it pretty much coincides with when F1 was due to float on the Singapore stock exchange. Indeed, its preliminary flotation prospectus was dated 21 May 2012 and it is no accident that Delta Prefco was closed ten days later.
 
As Pitpass revealed in 2011 although CVC only has a 35% stake in Delta Topco, it controls the company. This is because its directors, who are known as I-Directors, have the power to outvote anyone else on the board of the company. It is another term which is outlined in the Investment and Shareholders' Agreement and when F1 eventually floats this document will be torn up. It will mean that board decisions are passed by a majority vote is what public shareholders would expect.
 
Likewise, closing Delta Prefco was part of this corporate housekeeping plan and it is understood that because dissolving a company takes a little longer than tearing up the shareholders' agreement, it was put into motion before the float was due to take place. This would explain why the Investment and Shareholders' Agreement, and CVC's I-Director powers which come with it, are still in place yet Delta Prefco was closed even though F1 did not float.
 
The bottom line is that Liberty and Discovery certainly don't need to buy Delta Prefco to gain control of F1 as it no longer exists. The important point to draw from this is that only way to get control of F1 is to acquire a stake of more than 50% in Delta Topco and get CVC to agree to waive its I-Director powers in the Investment and Shareholders' Agreement. That's no mean feat.
 
Christian Sylt