F1's Winning Formula

Formula One is one of the world's most popular and profitable sports, but can it expand in new markets while keeping its old fans?

by Matt Vella

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Now that legendary driver Michael Schumacher has hung up his helmet after 15 seasons and 90 victories, when the 2007 season opens on Mar. 18, Formula One's millions of fans will be looking for the sport's next hero. While most eyes will be on the cars hurtling at speeds of 190 mph or more down the racetrack, some of the most interesting action will be taking place in corporate offices, far away from the checkered flag and the roar of the crowd.

Despite generating an estimated $4 billion in broadcast and licensing revenues in 2006 and attracting a worldwide audience of approximately 580 million, the sport's television ratings sagged at the beginning of the decade. Much of the reason can be attributed to Schumacher's dominance of the sport, which led to many fans' boredom with his seemingly inevitable victories. But there are other factors at work: a growing emphasis on safety to curb fatalities, rampant commercialism, hard times in the automotive industry, and the behind-the-scenes struggle over the ownership and direction of the sport.

In late 2005, CVC Capital Partners, one of Europe's largest buyout firms, paid a reported $1.35 billion for SLEC Holdings, the company that controls the commercial assets of Formula One from three banks, Bayerische Landesbank, JPMorgan Chase (JPM), and Lehman Brothers (LEH). It also acquired the 25% of SLEC owned by Bambino Holdings, the family holding company created by Bernie Ecclestone, the man who has effectively controlled Formula One racing since the 1970s. (The name SLEC is derived from the first two letters of the first and last names of Ecclestone's wife, Slavica.)

Consolidation Cash

The deal, which was finalized in the spring of 2006 following approval by the European Union, was widely welcomed by aficionados, given CVC's experience in motor sports and the automobile industry. The company rebuilt the once-flailing Royal Automobile Club in Britain and also owned the international motorcycling series MotoGP.

The deal also paved the way for a high-profile reconciliation between the sport's organizers and the companies that build and race the high-tech cars, even as Ecclestone stayed on as the head of Alpha Prema, the CVC company that owns the commercial rights to Formula One. In May, the Grand Prix Manufacturers Assn., which is made up of automakers Toyota (TM), Honda (HMC), DaimlerChrysler's (DCX) Mercedes-Benz, BMW, and Renault, agreed that it would not break away from F1 as it had previously threatened. The agreement, which Ecclestone signed in May, 2006, increased the teams' share to 50% of the annual revenue generated by F1.

Now, in another twist, CVC has reportedly secured a $2.9 billion loan from the Royal Bank of Scotland and Lehman Brothers in a bid to protect Formula One's long-term future. This new infusion of cash is slated to help CVC consolidate the triumvirate of smaller companies—SLEC, Allsport Management, Allsopp Parker & Marsh—with management roles in the sport and make it possible for investors to begin taking money out of the company, securing cash on future revenues. More important, that would set up the sport's management to begin making investments in aggressive expansion into Asia and Latin America.

Big-Money Advertising

Though the sport's financial backing continues to evolve, the lucrative opportunities it represents have stayed much the same. In nearly every aspect, the sport means big money.