Team effort needed to overcome headwinds

Ferrari's Sebastian Vettel during the first free practice at the Italian Grand Prix in Monza on Sept 2, 2016.
Ferrari's Sebastian Vettel during the first free practice at the Italian Grand Prix in Monza on Sept 2, 2016.PHOTO: REUTERS

LONDON • Gaining control of Formula One is probably the easy part. For Liberty Media, the US media group, growing the high-octane motor racing franchise and justifying the generous valuation it has paid are the real challenges.

Long-term chief executive and shareholder Bernie Ecclestone has turned F1 into a cash-generating machine, but Liberty may have to shift things up a gear to make the deal work.

Based on an enterprise value of US$8 billion (S$10.8 billion), John Malone's media empire has agreed to pay cash and shares equivalent to 17 times F1's historic earnings before interest, tax, depreciation and amortisation (Ebitda) to a consortium of sellers led by CVC Capital Partners.

That is chunky compared to the valuations of other global sports brands. English football giants Manchester United are on a multiple of around 14 times Ebitda.

For that price to make sense, Liberty will have to work hard to expand the sport, selling rights to host additional races beyond the current 21 grands prix.

It would also need to squeeze more from television rights, which combined account for around two-thirds of its US$1.8 billion annual revenue.

It aims to revive global interest in F1 by building its underdeveloped digital presence and expanding in markets like the US, while retaining loyal followers in the circuit's European stronghold.

  • 17x

  • Libery Media is paying CVC Capital Partners US$8 billion (S$10.8 million) for control of Formula 1 , 17 times the Ebitda of the motor sport franchise.

But it faces a challenge: F1's global audience fell to 400 million last year from 600 million in 2008. Though television rights fees have grown as F1 has shifted to pay TV from free broadcasts in some markets, sponsorship revenue has stagnated.

"There's interest in this sport around the world," Chase Carey, a former top executive at Rupert Murdoch's media empire who will become chairman of Liberty Media Group, said in a conference call. "We want to continue to intelligently explore the opportunities to continue to grow it. We do think there are opportunities to enhance the race calendar."

Rolling out in new cities could be harder than it sounds.

Ecclestone expanded by targeting countries where governments will pay up for the trophy value of a grand prix, such as Bahrain, Azerbaijan and Russia.

American cities are unlikely to be so generous.

Squeezing more races into an already tightly packed calendar will probably be unpopular with teams, who are self-funding and get around half of F1's revenue.

Liberty may have to pass on a bigger share of its top line.

CVC, which has now owned F1 for 11 years, is also taking one for the crew. Rather than make a clean exit, it will hold a 65 per cent stake in the new company, but, because its so-called tracking stock does not come with votes, it will have little direct control in how the sport is managed.

For a sport of individuals, Liberty is relying on a fair bit of team spirit.

REUTERS, BLOOMBERG

Correction note: In an earlier version of the story, US$8 billion was reflected as S$10.8 million instead of S$10.8 billion. We are sorry for the error.

A version of this article appeared in the print edition of The Straits Times on September 09, 2016, with the headline 'Team effort needed to overcome headwinds'. Print Edition | Subscribe