Turning Formula 1 Teams into Profitable Investments

Operating a Formula 1 team is not traditionally an endeavor in maximizing profits. Teams utilize all of their possible revenue on engineering and race operations in order to field the most competitive car. Strong finishes on track result in increased revenue from the commercial rights prize split and attract new, more valuable sponsorships. This break even model is generally accepted by teams backed by an auto manufacturer, such as Mercedes or Ferrari, since Formula 1 provides a massive global marketing opportunity as well as a platform for technology development.

Having the support and the global brand recognition of a manufacturer as a works team provides a massive leap towards a highly competitive operating budget.  However, the independent customer teams, such as Williams or Haas, find themselves operating with a fraction of the budget then those of the large manufacturer teams. The means to compete is severally handicapped by the economic disparity as evidenced by the sport being dominated by the same couple of teams. Attracting sponsorships becomes difficult, the share of the commercial rights payments is insufficient, and ultimately these teams operate at a loss.

A BIG CHANGE FOR THE SPORT

The new Formula 1 Concorde Agreement, in effect for the 2021 season, sets out to eliminate that economic disparity. The Concorde Agreement is a contract between the FIA, Formula 1 Management (commercial rights holder), and the 10 teams, primarily structuring the distribution of commercial revenue and the financial parameters of competing in the series. The agreement will run five years, until the end of the 2025 season, and now imposes a $145 million annual budget cap on each team as well as a more even distribution of revenue. The budget cap presents a drastic change from the unlimited spending teams had available prior. Additionally, in order to avoid any dilution to the 10 original teams of the agreement, any new team entering the sport must pay a $200 million entry fee.

From a sporting perspective, the agreement begins the challenge of leveling out the competitiveness of the field. However, from a business perspective, the agreement creates a path to turn a Formula 1 team from an economic stalemate into a profitable franchise. Many teams already have revenues in excess of the $145 million budget cap. Ferrari’s annual revenue tops $400 million, as does Mercedes, with Red Bull and Renault also comfortably ahead of the cap. Investors have definitely took notice.

Only a couple days after Formula 1 announced that a new Concorde Agreement had been reached with all 10 teams on August 19th, Williams Racing announced the team had been sold to Dorilton Capital. The New York Times reported that the New York based investment company had purchased the team for around $200 million. The sale of Williams was no longer a surprise by that point in August though. The team had lost over $13 million in 2019, then 2020 brought additional economic challenges due to the COVID-19 pandemic. The lack of races in the first half of the year meant there was little opportunity for revenue. The title sponsor partnership with ROKiT was also terminated. By the end of May, in a bid to save the team, Williams and its shareholders had announced it was conducting a strategic review in preparation of a buyer. However, it wasn’t until negations around the new Concorde Agreement had been finalized that the sale and the announcement was made. As Williams’ press release on the sale of the team highlights,

The new Concorde Agreement is set to transform the sport and will help address the historical challenges that Williams has faced as an independent constructor, by reducing the financial and on-track disparities between teams and creating a fairer, more competitive sport. The new changes present an exciting opportunity for Williams…

Williams Racing

GRABBING A STAKE

The end of the season then brought further news of investments into other Formula 1 teams. On December 13th, McLaren Racing announced that MSP Sports Capital will invest a total of £185 million into McLaren Racing, initially acquiring a 15% stake that will increase to a maximum of a 33% by the end of 2022. There was initial concerns over the health of the team in the middle of the season when Zak Brown, CEO of McLaren Racing, announced the sale of the McLaren Technology Center (with a lease agreement for McLaren) to free up cash. However, the team finished the year 3rd in the Constructors Standings which will help boost its prize distribution revenue next year. Investments in a new wind tunnel and Mercedes power units for 2021 are creating excitement for the growing competitiveness of the team, further reinforced by the new Concorde Agreement.  As Zak Brown explains,

If you look at what Liberty has put together, with the revenue distribution, the governance, the technical rules, but fiscally most importantly, the cost cap, I now have and we now have a business plan and a trajectory ultimately to profitability. I think prior to the cost cap, that scenario was not achievable, so now we’re sitting on a plan that gives us the opportunity to get back to the front of the field, and hopefully the top step of the podium, while at the same time having a trajectory towards profitability.

Finally, and most notably, was INEOS acquiring a 33% stake of the Mercedes AMG Formula 1 team, leaving Daimler with 33% and allowing Toto Wolff to raise his stake in the team to 33% to create three equal partners. Mercedes has dominated the sport in this turbo-hybrid era of Formula 1, a combination of producing the best car and having the best driver on the grid in Lewis Hamilton. The cars are relatively unchanged for next year and the new formula regulations, beginning in 2022, still leave the turbo-hybrid V6 power units. It is hard to imagine Mercedes wouldn’t be at, or near, the top of the Constructor Standings for years to come. Then why bring on a large equity partner?

Toto Wolff, Sir Jim Ratcliffe and Ola Källenius with the Mercedes-AMG F1 W11 EQ Performance (Copyright: Mercedes AMG)

RETURN ON INVESTMENT

This investment is the clearest signal yet that the new Concorde Agreement has created the opportunity to turn Formula 1 teams in real sport franchises. Franchises that generate significant value and growth for shareholders, as you would see in the Premier League or in Major League Baseball. As Formula 1 viewership continues to grow, its teams will continue to attract investors.  Even for the series top teams, these investments will begin to provide a significant return on investment in operating the team, as it has for Daimler here, and increase the post money valuation of the team.  Daimler is a publicly traded company and the value of the stake it has sold, while unknown currently, will be welcomed by shareholders as the company looks to invest in new powertrain technologies. The remaining 33% stake ensures the company still has its hand in a value growing asset.

The 2021 Formula 1 season is likely to see more investors seeking to grab a share of the limited number of teams on the grid.

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