Formula One’s teams made combined net losses of $561.6 million over the five years to 2013 according to recently-released financial statements.
Remarkably, more than half of the total loss was made by one outfit – Britain’s Lotus F1 team which is controlled by the private equity firm Genii Capital. It lost $308.8 million and is one of three small teams which are pushing for a greater share of F1’s prize money.
The turbo-charged losses highlight the hurdle facing the teams as they head into F1’s season-ender in Abu Dhabi tomorrow. Two of them, Caterham and Marussia, collapsed last month with several others understood to be at risk.
The financial statements reveal that the teams’ red ink raced to $210.3 million in 2013 making it the fourth consecutive year that they have made a combined net loss. Financial performance has reversed since 2009 when F1 was still hanging onto the coat-tails of a booming economy and all but one of the teams – Force India – made a net profit. The combined total profit after tax came to $190 million in 2009 but the vast majority of it came from one team – the Brawn outfit which was formed from a management buy-out of Honda’s F1 squad.
Brawn was seen as a under-dog independent team but the London Evening Standard newspaper
revealed that, in fact, it was far from it. The team’s 2009 financial statements showed that it had revenue of $373.4 million which is still the highest-ever recorded by an F1 team. To put it into perspective, Brawn’s after-tax profit of $156.9 million was more than the revenue made by the rival Williams team the following year.
Brawn’s financial success was fuelled by a $147.5 million boost from Honda as the Japanese car manufacturer paid the team the money which would have been spent on redundancy payment if it had been closed down. Careful cost management led to the bumper profits and brought the team to the attention of Mercedes which bought it for an estimated $200 million at the end of 2009.
Establishing the financial performance of F1’s teams is far from guesswork. Nine of the 11 outfits file publicly-available financial statements with only Swiss-based Sauber and Italian marque Ferrari not needing to do so.
The financial statements show the true extent of the gulf between the rich and the poor in F1. It is a subject which has dominated discussion in the series over the past few races and generated rumours aplenty.
In recent years F1 races have been ruled by Red Bull Racing, Mercedes, McLaren and Ferrari – the Big Four teams. Underneath them in the hierarchy comes Williams, which is F1’s second-most successful team as a result of winning nine constructors’ championships. Next up is Toro Rosso, another team owned by the energy drinks manufacturer Red Bull. It is followed by the three small outfits – Force India, Lotus and Sauber – with the collapsed Caterham and Marussia teams rounding out the line up. The teams’ financial performance generally reflects their on-track ranking.
The only teams which were in the black in each of the past five years were Red Bull Racing and Toro Rosso whilst McLaren recorded the largest combined net profit of $158.7 million. In contrast, the biggest loss in any single year was made by Lotus in 2013 when it burned up $107 million as Forbes
revealed in August.
The teams’ losses peaked at $287.6 million in 2012 when more of them than usual finished in the red. It is the only year in the period when Williams made a net loss and this came to $3.9 million. It is nothing compared to the sums which put Caterham and Marussia out of business.
On 24 October Caterham Sports, the company that designs and builds the team’s cars, went into administration which is the British equivalent of Chapter 11 bankruptcy. Two days later Forbes broke
the news that Marussia was also on the brink of collapse and, sure enough, it formally ceased trading on 7 November.
The latest financial statements of Marussia’s parent Manor Holdco, which are for the year ending 31 December 2012, show that the team made a net loss of $95.9 million. It has driven Marussia’s total red ink to $221.5 million since it joined F1 in 2010 giving it the second-highest losses after Lotus.
Marussia is not racing in Abu Dhabi but Caterham has managed to get there after raising $3.5 million through crowd-funding. It will keep the wheels turning during tomorrow’s race but doesn’t even scratch the surface of its debts.
In October Britain’s Daily Telegraph
reported that Caterham Sports has $25.4 million of creditors with its biggest being French auto manufacturer Renault which is alone owed $11.6 million. The money is part of the fee for supplying 1.6-liter V6 turbo engines to Caterham. At a total annual cost of around $30 million per team they are double the price of their V8 predecessors which were dropped at the end of last year.
The price of the engines was due to be limited to $7 million in 2010 under plans developed by F1’s teams association and its governing body the Federation Internationale de l’Automobile (FIA). However, this fell by the wayside when the FIA attempted to introduce a $55 million cap on team budgets which currently average around $230 million. The cap was dropped in 2009 when eight of the teams threatened to leave F1 though, ironically, it would have kept their wheels turning now.
The cap was the brainchild of the FIA’s former president Max Mosley and its technical adviser Tony Purnell
who told Britain’s Independent on Friday that “we were probably too ambitious. You can do it policy by policy and one policy would be to set the sale price of these new engines. It’s a very small move, and people wouldn’t really notice it, but it would be hugely important. Without doubt the engine bill used to be one of the biggest headaches for any small team and I’m sure it still is. It’s a massive wedge of money. To me it is crystal clear that it is the FIA’s job to do it.”
It echoes comments from F1’s chief executive Bernie Ecclestone. He has been one of the biggest critics of the V6 engines which were trumpeted as making F1 more environmentally-friendly. However, they have attracted widespread criticism for lacking the high-pitched screeching sound that the V8s were famous for. “The biggest problem we have is this current power unit which we don’t need and does nothing in the world for Formula One. It’s expensive, in fact it’s very expensive, and this is probably what has caused most of the problems,” says Mr Ecclestone.
It is a problem which particularly afflicts F1’s smallest teams as they buy engines rather than making them themselves. Even outfits with wealthy owners aren’t immune to financial difficulty.
Force India’s shareholders are the trio of Indian conglomerate Sahara, Dutch businessman Michiel Mol and tycoon Vijay Mallya who has an estimated fortune of $750 million according to Forbes. However, as Britain’s Daily Mail recently
revealed, the team’s auditor has cast doubt over its future due to the “material uncertainty” that its owners will continue to fund it. They paid $28 million to it last year but the team still lost $63.5 million and Mr Ecclestone says that this is the core of the problem.
“I tell you the way forward: it is very easy. Don’t spend as much,”
he told racing magazine Autosport. “To survive…start running the business like a business rather than a hobby.”
F1 teams are in particular financial trouble because, unlike most businesses, profit is not their hallmark of success. Instead, their benchmark is winning races which increases their prize money and raises the value of the team. They tend to spend almost all of the money they receive in a bid for victory which leaves them with low profits and little savings to rely on if sponsorship or prize money falls.
It is a different story for F1’s parent company which is controlled by the private equity firm CVC. As the Daily Telegraph
revealed last month, F1 made operating profits of $530.7 million in 2013 on revenue of $1.7 billion so where does it go and why are so many of the teams at risk?
Casual observers have attempted to answer these questions but it has led to conflicting information and confusion as they have little official documentation to base their analysis on.
It is widely reported that F1’s teams take 63% of the revenues from the series as prize money but in fact this is far from true. Likewise, F1 blogger Joe Saward recently
claimed that F1’s operating profit comes to $1.8 billion and is divided into two with half going to the teams and the bulk of the remainder being used to pay expenses, CVC and the other shareholders. This is severely flawed on a number of levels.
Firstly, the teams’ share comes to much more than 50% and is paid out after expenses have been deducted, rather than from the operating profit, which, crucially, is far lower than $1.8 billion. With these errors embedded in the first principles of Mr Saward’s analysis, the calculations he derived from them were equally flawed. So what is the truth?
The data used by the Daily Telegraph to calculate F1’s financial performance in 2013 comes from financial statements for each of its business divisions since the consolidated set is not publicly available. This makes it difficult to point to single pages of official information which show the big picture. The most recent year for which this is available is 2011 as it was contained in the prospectus for the stalled flotation of F1 on the Singapore Stock Exchange. As shown on page 13, F1’s revenue in 2011 was $200 million less than in 2013 at $1,521,884,000.
F1’s costs and expenses came to $352,866,000 leaving Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of $1,169,018,000. The teams’ prize money is calculated from this and in 2011 it came to $685,869,000 which was 58.7% of the EBITDA. As shown on the document above, this left an operating profit of $483,149,000 which is far less than the $1.8 billion suggested by Mr Saward.
The amount of prize money paid to the teams from the EBITDA is based on a calculation which was written into a contract known as the Concorde Agreement. This was signed by all of the teams and was in force until the end of 2012. The following year they each signed separate bilateral contracts, known as Team Agreements, which commit them to F1 until the end of 2020. The Team Agreements increased the amount of prize money paid to the teams and page 176 from the prospectus outlines precisely what they receive.
The core of the prize money payment is 47.5% of F1’s EBITDA which is split between the top ten teams. As the prospectus states, this division is “based upon their results in prior Constructors’ Championships.”
In addition, as sports broadcaster ESPN
revealed last year, a further 7.5% of F1’s EBITDA is handed to “the top three Teams determined primarily on Events won in the four seasons prior to 2012.” In descending order they are are Red Bull Racing, McLaren and Ferrari. The prospectus shows that this sum, known as the Constructors’ Championship Bonus (CCB) Fund, comes to at least $100 million with “the Team ranked first receiving 37% of the CCB Fund (with a minimum payment of US$37 million), the second Team receiving 33% of the CCB Fund (minimum US$33 million) and the third Team receiving 30% of the CCB Fund (minimum US$30 million).”
With Red Bull having won the championship for the past four years running it leads the CCB pack which explains why its spending hit a record $323.5 million last year according to a recent
report by the Independent. Nevertheless, it still can’t keep up with Ferrari.
This is because the Italian marque gets its own dedicated prize pot as well as sharing in the 47.5% and the CCB Fund. It gives Ferrari “the greater of an amount which is capped at 5% of our Prize Fund EBITDA and US$62.2 million.” This comes in return for Ferrari being F1’s longest-standing team having been racing in it since the birth of the championship in 1950.
Other payments of between $65 million and $150 million are made to Williams and Mercedes on account of their historical significance to F1. Finally, as Britain’s Guardian newspaper
revealed in 2012, F1 made “signing payments to the Teams following entry into their Team Agreement which total US$180.0 million.”
The prospectus states that the Team Agreements increased the payments to teams from 58.7% of F1’s EBITDA to “approximately 63%.” So how much does this give them now?
As the Daily Telegraph reported, in 2013 F1’s revenue came to $1.7 billion but its costs are still around $352.9 million as they were in 2011. This is because the increase in revenue is not down to expansion of the business but escalators built into F1’s key contracts which increase the fees paid by 10% every year. It leaves EBITDA of $1.3 billion in 2013 with 63% going to the teams. This gives them $848.7 million which reflects Mr Ecclestone’s recent
comments to Autosport that “we give the teams nearly $900 million a year.”
With the escalators built into F1’s key contracts, its EBITDA, and thereby the team payments, aren’t likely to fall but if they did then the series would really be heading for the pits. This is because Ferrari, McLaren and Red Bull Racing, the three teams which receive the CCB Fund, can pull out of F1 if its EBITDA falls below $715 million. It is revealed on page 180 of the prospectus which also shows that Ferrari has its own special deal which allows it to leave if there is a change of control of F1 and its EBITDA falls 25% over the next two years.
That’s not all. The page also confirms a long-reported rumour that Ferrari can veto changes to F1’s regulations such is its significance to the series. There is no doubt about this as the prospectus states that “in respect of Ferrari only, Ferrari may terminate if the regulatory safeguards agreed between the FIA and Ferrari do not allow Ferrari to veto any change to the regulations already announced or introduced (subject to certain exceptions).”
As the Daily Telegraph also
revealed in September, Ferrari even has an option on a 0.25% stake in F1’s parent company Delta Topco. The prospectus states that this was originally granted to Ferrari’s former chairman Luca di Montezemolo who stepped down in September. However, a source close to the Italian marque confirmed to the Daily Telegraph that “Ferrari, not Mr Montezemolo, is entitled to exercise/receive the rights.”
It may not seem like it but, in fact, F1 is obliged to treat all of the teams equally and that is exactly what it does.
The financial and regulatory benefits that Ferrari receives could apply to any of the teams if they stick around for longer than it. Testimony to this, the bilateral agreements which commit each team to stay in F1 until the end of 2020 refer to the beneficiary of these advantages as being the “Longest Standing Team” rather than Ferrari.
Likewise, the CCB Fund is shared by the top three teams according to the number of races they have won over the four seasons prior to 2012. Again, this is a criteria which was open to all teams and not specifically Ferrari, McLaren and Red Bull Racing.
Treating all the teams equally is a legacy of the Concorde Agreement which stated that F1 must not “confer on any Team any material preferential right, benefit or privilege or discriminate against any other Team or subject it to more onerous material obligations than any other Team.” It is a point which was recently lost on certain sports writers in F1.
Little more than a day before the Grand Prix in Austin, Texas, at the start of this month it was rumoured that Force India, Lotus and Sauber would boycott the race in a bid to extract more money from F1 and CVC. The chance of this proceeding was practically zero as if the teams had voluntarily sat out the race their sponsors could have taken legal action against them for failing to get the exposure they paid for. In turn this could have caused the very collapse that the teams have been fighting to prevent.
The boycott talk soon fizzled out and in a recent
podcast Mr Saward explained why. “I think there was a conversation which went on with a specific journalist and I think this specific journalist jumped to a few conclusions and didn’t really have much of an argument when the stories were, sort of, shot down in flames because at the end of the day I don’t think that the stories were followed up upon correctly,” he said. “I went around the teams when the story came out and I asked the question. I got ‘no’, ‘no’, ‘no’ as the answer.”
Unsurprisingly, the alleged boycott was never officially confirmed, never took place and was subsequently denied by representatives of Force India and Lotus with Gerard Lopez, team principal of the latter, referring to it as a “conspiracy theory.” Nevertheless, The Times claimed that “the boycott was only averted after Donald Mackenzie, chairman of CVC Capital Partners, the controlling shareholders, telephoned Gérard Lopez, the Lotus owner, in Austin to offer a compromise. It is thought that CVC may be willing to find as much as £100 million for the three struggling teams to prevent the sport splitting in two.”
Like the boycott, the chances of a payout to the backmarkers is also practically zero under the existing contracts because F1 is obliged to treat all of the teams equally. Mr Ecclestone confirmed this to British broadcaster Sky Sports but even that ended up getting misreported with many outlets claiming that he had “refused” to pay and “ruled out” paying the £100 million. In fact, this was completely inaccurate as all Mr Ecclestone was doing was abiding by the contracts in place. As the original report was inherently flawed it is no surprise that the follow-up analysis also contained errors. It goes to show the importance of rooting out errors at the source before they become accepted as fact.
So where does this leave F1? Since Caterham and Marussia collapsed there has been constant talk of the series being in crisis but there are question marks over whether this fear is justified. Both Marussia and Caterham joined F1 on the understanding that the $55 million budget cap would be introduced for their first season in 2010. The cap was dropped eight months before then but the teams carried on regardless.
Critics may claim that it would have been more prudent to put the brakes on their race plans as it was only a matter of time before they ground to a halt. The gulf between the budgets of teams at the back and front of the grid is now so wide that Red Bull Racing team boss Christian Horner recently said “I am not convinced that even if you double the money to Caterham and Marussia it would have solved their issues.”
Despite these perceived problems, new entrants are still lining up to join F1. As Forbes
revealed in June, American entrepreneur Gene Haas is on track to field a team in 2016 and the Independent recently broke
the news that the FIA has given the green light to new Romanian team Forza Rossa joining F1 over the next two years.
It was disclosed in a sworn witness
statement given to London’s High Court as part of the administration proceedings for Caterham Sports. Forza Rossa’s intentions have since been confirmed by the wider F1 community including Mr Saward who nevertheless recently cautioned that “the defeat of Romanian Prime Minister, Victor Ponta, in the country’s presidential election over the weekend appears to be a major blow to the ambitions of the Forza Rossa F1 project, that was aiming to enter the sport in 2015.”
Time will tell whether Caterham or Marussia return next year but it is far from the first time that this kind of question has hung over F1. At the end of 2008 Honda announced that it would be pulling out of F1 and the following year BMW and Toyota followed suit. Together the trio invested nearly $1 billion in F1 annually and the series has survived without them. It makes its current problems look like little more than a speed bump in comparison.
