Profit swell makes racing hot property

Profit swell makes racing hot proper

Since April rumours have been circulating that Rupert Murdoch's News Corporation media empire and Exor, an investment fund which ultimately owns a stake in Ferrari, would make a bid for Formula 1.

As Motor Sport went to press a bid still hadn't been made and experts have cited numerous hurdles that it would face. They include opposition from the teams, due to the bias it could give to Ferrari, and from regulators which would be concerned by a media company owning a sport. It may be an uphill task but there is good reason why News Corp would want to step into F1's driving seat. According to data released by F1 industry monitor Formula Money, the revenue generated by the sport's rights-holder has increased by 65 per cent over the past five years to a record $1.6 billion in 2010. This has been driven by accelerating racehosting fees, which increase

by around 10 per cent annually due to escalator clauses in the contracts.

In 2007 hosting fees brought in an estimated $329 million but by last year this had increased to $568m. As more races have been added to the calendar the total has risen. It has also been boosted by more races being held in Far Eastern countries such as Singapore, South Korea and Abu Dhabi. These countries use F1 to put themselves on a sporting landscape alongside prestigious developed nations and the television exposure drives tourism. Accordingly, the governments tend to foot the hosting fee, triggering an arms race in its price and putting it out of reach of traditional European venues such as France and Austria. This year, for the first time, there are more races in Asia than Europe and the trend is set to continue. Formula Money's data shows that by the end of the decade the first $100m per year host fee will

be charged an Impressive feat since as recently as 2003 the total fees came to $180m.

In contrast, the price of television rights has relatively stalled. In 2007 they brought in $380m but this had only increased by $90m last year. The market is saturated with F1 broadcast in 187 territories worldwide. Unlike some countries, broadcasters tend to lack benefactors who are prepared to foot the cost of F1 come what may.

Likewise, F1's viewing figures have spluttered over the past few years (see table below). Despite a thrilling season in 2010, the total number of F1 viewers only increased by 1.3 per cent to 527m. This is significantly down from the peak of 600m in '08 and, ironically, the drop came as a result of the introduction of twilight and night-time races. Although such races are broadcast at prime time in Europe to appeal to F1's traditional audience, they clash with local evening sports in the Far East, which has some of the largest audiences. China, for example, had F1's second biggest audience last year with 75.7m viewers. Despite this decline, F1's overall fortunes are on the up

thanks to the race-hosting fees. This has given F1 an average growth rate of 12.7 per cent over the past five years, and if this trend continues it will give the sport revenue of $3.7bn by 2017. Remarkably, nearly half of this will be profit.

Perhaps the biggest ball and chain around F1's bottom line is repaying the $2.9bn of debt which its current owner CVC Capital used to buy the sport in 2006. Last year F1 paid off $338.5m of the loan itself and made $59.2m in interest payments. Once the debt is clear it will free up a huge amount of money for F1. The sport's boss Bernie Ecclestone has said that the debt is due to be cleared by the end of 2014 and, according to Formula Money's data, it can expect to be making annual profits of $1.5bn by 2017.

It is little wonder that buyers are looking at F1. Once the loan is clear a new owner could take out more debt to buy the sport and reap profits at the same time. However, CVC has said F1 is not for sale, and one spanner in the works in future could be the teams.

Prize money paid to the teams is F1's biggest single cost and amounts to 50 per cent of the sport's profit. Their contract to race expires at the end of 2012 and they are said to want to increase their share to around 70 per cent. If this were to happen it would reduce the $1.5bn projection and give a new owner much less cash to pay off a new loan. Ecclestone has said the teams will not get an increase in prize money and has threatened to charge them to race if they delay signing a new contract. The next move is theirs. Ecclestone is in the driving seat and it remains to be seen if the teams hold the keys to F1's future. Christian Sylt and Caroline Reid