What’s happening to Formula 1 is a brazen example of greed crippling a once-great enterprise and the result of an investor model built to game the system for immediate gains with no substantive look at improving, or even sustaining, the product.
Keep your eye on what happens to Formula 1 over the next 18 months (hint: it will file for bankruptcy protection for starters) as the hedge funds and private equity firm that bankrolled American media mogul John Malone’s $4.4 billion takeover of the race circuit are cashing out all at once—and they’re doing so just seven months after throwing their chips into Malone’s umbrella company, Liberty Media.
Liberty bought a majority stake in Formula 1 in January from a consortium led by the private equity firm CVC. The sellers were paid $3 billion in cash with the remainder in shares of Liberty’s Formula 1 Group tracker stock, which is listed on NASDAQ.
While the sport has been facing dramatically shrinking audiences, disappearing sponsors and teams shuttering their doors for the last half decade, the infusion of cash from Liberty investors pumped up the stock. Initially, Liberty got $1.6 billion from seven investment funds which cumulatively took a 29.4 percent stake in the sport at a discounted price of $25 per share.
In the following six months, the fund surged 40-percent as the shares’ recent peak Monday was $35.01. Filings by Liberty on Friday show the lock-up period on the funds’ shares has expired “and all but one of these investors have registered the resale of their shares.”
Previous owners still tied to Formula 1 have also liquidated shares worth a total of $1.1 billion since January. On Friday, Liberty also revealed Formula 1’s former owners are now selling an additional 12.5 million shares in a separate offering led by Goldman Sachs, JP Morgan and Morgan Stanley.
Former majority owner CVC also is liquidating more than half of its remaining stake leaving it with a remaining paltry 3 percent ownership in the circuit. With their latest purge, CVC made approximately $4.4 billion off a $2 billion investment in 2006.
…Everyone out of the pool, as the giant floating turd is the race circuit itself.
A large return on investment is merited when investors go in, clean house, solve institutional problems and wait several years for a company’s comeback to pad their bottom line. A 40-percent ROI in six months, with no gained ground as the product continues to stagger, is nothing short of robbery. Formula 1’s massive stock dumping for insane short-term gains is the result of inflation based on the collusion of primary investors, not because the quality of the product or the overall financial solvency of the circuit improved in the last half year.
This kind of investor exploitation is a huge red flag not just for Formula 1 but how business is done when its sole purpose is to falsely create profit for the few and abandon the enterprise for the many—leaving nothing but destruction in their wake. This is the model most funds and private equity firms have used since being deregulated in the wake of the 2008 financial crisis. Get in, strip mine/pump up valuation and get out.
This unloading will also bring to the fore the fact that Formula 1 is in crisis—and may not recover. Most smaller teams still can’t make ends meet in spite of Malone’s token efforts to restrict the amount all teams can spend to level the playing field. Manor, formerly Marussia and Virgin Racing, shut its doors for good last month. Caterham’s assets were put up for auction in 2015 and larger teams like Lotus, Force India and Sauber are requesting a bigger revenue share to keep their garage doors open.
Teams do come and go, but the circuit has had to expand into distressed or otherwise dictator-rife/human rights-violating corners of the globe in order to take big payouts to remain solvent. Azerbaijan hosted a grand prix in 2016 as did Moscow, Bahrain, Abu Dhabi and Shanghai—unsavory locales for Formula 1 purists and casual fans alike.
Greed on a macro level has driven the sport’s audience away as well. Formula 1 has lost more than 200 million viewers, about one-third of its worldwide audience, since 2008. In the UK and most of Europe where free broadcasts were the norm, Formula 1 has inked big TV deals to cut out the core viewer. Over the last five years in the UK, half of all live races disappeared from free-to-air television. Last year, Formula 1 left the BBC whose two main channels have the greatest reach of any in Britain. Now, all races except the British Grand Prix are shown only on pay TV.
The only Formula 1 team that currently owns shares in Liberty is Ferrari, and those were grandfathered. No teams have actively invested in the circuit in spite of Malone’s appeal when Liberty took over—and that certainly won’t happen now the major players involved have taken their chips and flipped over the table.
Perhaps the teams knew what the audience and general public already does, there is nothing there but a grease spot to mop up. Instead of investing to fix existing problems for teams and viewers, profits were falsely inflated and the carcass will be left for the next wave of investment firms to pick clean once it bottoms out.