'F1 teams for the first time can look at being very profitable': Mark Hughes

McLaren boss Zak Brown reckons that an F1 team could be worth £1bn thanks to the cost cap and fairer income distribution. So investors are circling...

Last month the news was that the proposed Michael Andretti buyout of the Sauber F1 team had hit the rocks and would no longer be happening. This month the speculation is that Audi is interested in buying McLaren while Porsche is looking at purchasing Williams.

There’s a reason for it all: money. With the cost cap coming into full force and a fairer income distribution among teams, all while F1’s income is projected to grow, F1 teams for the first time can look at being very profitable operations. Despite Covid restrictions, the 2021 season is set to be a record profit year for F1. The huge Qatar and Saudi Arabia race-hosting fees play no small part in that. Around 60% of those profits are shared out between the teams – but their costs, by regulation, cannot increase. As such, for the first time F1 teams are being saved from themselves. That extra income becomes profit rather than being spent on more facilities to make the car go 0.1sec faster.

“Costs are fixed, the income is known,” says Toto Wolff, a one-third equity owner of the Mercedes-AMG F1 team. “A real business model is developing from this. Mercedes and its team are making a profit this year.” Other teams are expected to follow Mercedes into profitability.

Suddenly, owning an F1 team has become more attractive. Sauber’s owner, the multibillionaire Swedish businessman Finn Rausing had initially entertained a solid Michael Andretti group offer, reportedly of £300m for an 80% share in his company Islero Investments, which owns the team. Rausing hadn’t been looking to sell but as a businessman, if it was the right price, everything is for sale. Andretti believed he had a deal, but Rausing later insisted on an additional payment of £42m each year over the next five years as a precaution against any sponsorship shortfall, thereby adding another £210m to the price. That’s where Andretti’s group baulked, with Michael insisting it placed a ludicrously high valuation on the team.

Andretti’s friend, McLaren boss Zak Brown, might disagree with that assessment. “The day of the £1bn F1 team may soon be here,” he has said. Last year, MSP Sports Capital bought a 15% share of the McLaren team for a reported £185m – which nominally would put the valuation of the company at £1.2bn.

This year F1 made a £500m profit in Q3. If this can be maintained, it implies an annual profit of £2bn, 60% of which (£1.2bn) would be shared out among the teams, giving an average payment to each team of £120m. The cost cap is currently £110m but gliding down to £100m from 2023. Income £120m, cost £100m… A lot of assumptions in there, sure, but that’s the gist of the optimism and valuations.

Which brings us around to the VW Group’s expected entry into F1 when the new power unit regulations come into effect, probably in 2026. The VW Group owns Porsche and Audi and it is expected that both brands (and not VW) will be making their entry. But in what capacity? Although under group ownership, Audi and Porsche are still separate companies and to an extent operate independently.

Initially it was expected that the VW Group’s entry would dovetail with Red Bull Powertrains, the engine company set up last year by Red Bull in reaction to Honda’s departure. Multiple millions have been spent on this and there has been a strong recruitment drive, pulling engineers from Mercedes HPP in particular but also from Renault Sport.

It seems to offer VW a neat turnkey power unit facility which would lend itself perfectly to a reduced-cost entry into F1 with the knowledge base already there and fully functioning by the time of the VW Group’s entry. But it seems VW may want to do things in-house. It has already reportedly enquired about buying engine dynos from AVL – the sort of dynos that Red Bull Powertrains already has.

“It is expected that both Porsche and Audi will be making their F1 entry”

If VW decides to do it all in-house, Red Bull could end up with a difficult choice: to partner with Porsche (as has been discussed) or to continue with its own independent power unit programme. If it cannot reach agreement for a partnership with Red Bull, Porsche (not Audi) could well opt instead to try buying the Williams team (which is run on behalf of owners Dorilton Capital by ex-VW Motorsport boss Jost Capito). Audi (not Porsche) is understood to be in negotiations with McLaren about a power unit supply deal too but reportedly interested also in buying a controlling interest in the team. The cost of a power unit development programme could be offset quite quickly if it also owned the team and its potential £20m per annum profit… The logic is quite easy to discern.

It might also further explain Rausing’s hesitation in selling Sauber to Andretti. What if there was a VW offer on the table?

All this is making Mercedes, Ferrari and Renault nervous. If Red Bull Powertrains went ahead with its own project but under the VW umbrella, with the VW Group doing its own power unit supplying McLaren and Williams, maybe even Sauber, it could have two programmes in one. “You’d have twice as many test bench hours as we do,” points out Wolff, “and it would be a violation of the cost cap, because in this case two companies are working on one engine with twice the budget.”

It’s amazing how complicated things can get when there’s a profit motive. But, let’s not forget, this is all based upon the assumption that F1 income will continue to rise. “Warning, the value of your investment can go down as well as up,” as the small print often points out.

Since he began covering grand prix racing in 2000, Mark Hughes has forged a reputation as the finest Formula 1 analyst of his generation
Follow Mark on Twitter @SportmphMark