F1: Liberty Media Fuels a Air of Uncertainty, Stock Tanks
Liberty Media claims that F1 reversing stock price may have been fueled by an air of uncertainty over if it will strike a new deal with the 10 racing Teams before their current contract expires in years.
Liberty bought F1 for $4.6-B, and listed it on the NAS as FWONK.
Then replaced F1’s Boss Bernie Ecclestone with 21st Century Fox V-C Chase Carey. He made changes to the series including re-branding it, doubling the headcount, moving to plush new offices, commissioning a Hollywood composer to write a theme tune and launching street demonstrations of F1 cars, costly!
Initially investors responded favorably on the expectation that this investment would soon yield improved results.
Liberty’s appointed F1 President Greg Maffei said in March of Y 2017 that “there is enormous opportunity in areas like sponsorship, in the short term.” He added that “there are some near-term wins around things like advertising.”
With an optimistic outlook, the stock ran up 91.6% on its pre-takeover price to a peak of 40.73 in October last year. Some analysts raised the target price to to 47 in January, it has not come near that mark
Since its highs, the stock has fallen 20.7% based on Wednesday’s closing price of 32.18, the hammered stock price has wiped around $1.5-B off F1’s value.
This is the Why
In Y 2017, F1’s revenue reversed by $12-M to $1.8-B which was the biggest fall of the past decade. It was driven by a reduction in the fee of the Brazilian Grand Prix and the loss of several sponsors including insurance firm Allianz and banking giant UBS.
New Boss Carey failed to sign any major new races or sponsors to compensate and sponsorship grew less last year than in any other over the past 10 years.
At the same time, Boss Carey’s new initiatives boosted costs by 12.4% to $427-M leaving F1 with a $37-M operating loss which was down from a $47-M profit in Y 2016. Again, Costly!
That action dampened investor confidence but Liberty says a bigger-picture factor may have also fueled the plummeting share price.
“Formula One is probably in some ways a building story. We knew when we purchased it that there would be efforts that needed to be done. Investments to be made in headcount, investments to be made in a lot of areas where there was no personnel,” said Liberty’s CEO Greg Maffei on an earnings call last week.
“Have there been, as always, surprises for the upside and surprises for the downside when you buy a business? Yes. I think the fundamental thesis is there and probably some overhang on the stock around the Concorde Agreement and the perception of uncertainty that is not positive on what it could trade at. I think we remain very Bullish.”
The Concorde Agreement is the contract which transformed F1 into 1 of the world’s most-watched annual sports series.
The Agreement was 1st signed in Y 1981 by the teams, Boss Ecclestone and F1’s regulator, the Fédération Internationale de l’Automobile (FIA).
Before then, races were almost amateur events as they could be cancelled at the last moment if there were not enough cars to fill the grid. In turn this meant that TV coverage was iffy, so the financial rewards for the teams were meager.
Boss Ecclestone convinced them all to sign the Concorde, which committed them to race, and TV companies then agreed to guarantee coverage.
Boss Ecclestone’s company Formula One Promotions and Administration (FOPA) negotiated the deals and took a share of the proceeds whilst the remainder went to the teams and the FIA.
Since then, the Concorde has been modified and the current version is supplemented with separate contracts signed by each team.
This is Key, all of these agreements expire at the end of Y 2020 which gives Liberty just 2 years of guaranteed revenue for F1. It looks like a big risk and even the teams have started to express concern about the need for a new contract.
It is difficult to compare the outcome in previous years with the current scenario as Liberty wants to shake up the status quo.
When the current contracts expire it plans to level out the prize money which represents around 68% of F1’s underlying profit and is currently weighted towards the biggest teams.
Ferrari, F1’s Top name, currently gets an annual bonus of around $100-M before a single race begins. Liberty’s new rules would slash that. Whereas, Boss Ecclestone always boosted the iconic Italian team’s entitlements in return for it signing the Concorde.
And that is not all.
Liberty also wants to introduce a cap on team budgets which currently come to an average of $268-M annually. Again, it affects the biggest names more than the others as they have the deepest pockets and spend the most in a runs for victory.
The huge expansion in F1’s costs last year has already led to the teams’ prize money reversing by $47-M to $919-M.
F1’s operating profit has been down in every Quarter except for the 3 months to the end of September when it came to $39-M on $647-M of revenue. It was driven by more races being scheduled then than there were during the same fame in Y 2017. However, calculating the revenue per race shows that it was down by 3.1% in the Quarter compared to the same frame last year.
Instead of assuring the market analysts that the results in the next Quarter will be more, Boss Carey said something which sent chills through the group. “We want to make sure we prioritize building that value over maximizing a short term profit opportunity but, that being said, certainly 2019 we do expect that we start to deliver on the opportunities that exist inside Formula One.”
There’s no doubt that building value is laudable but in this case it could be a gamble as almost all of Liberty’s new initiatives are steps in a completely new direction for F1.
The degree of frustration at the mounting losses became clear when Citi (NYSE:C) analyst Jason Bazinet challenged Boss Carey.
“From the moment you bought Formula One, Liberty stock reacted very favorably because the buy side likes the asset, they have a lot of confidence in Mr Carey and the broader Liberty team but every quarter that you guys have reported, I think over the last five or six, have been disappointing even though you have been very clear about these being foundational years to build for long term growth.
“So my question is this: as we take these steps forward, as you describe it, in 2019, 2020 and 2021, what is a reasonable range of expectations for top line growth? Is it low single digit? Mid single digit? High single digit? Anything to help the buy side dimensionalize what success looks like, or what failure looks like, I think would be quite helpful.”
In response, Boss Carey reiterated his long-term focus. “We have tried to be as clear as we can, that our priority is, I think I said from the get-go, ‘where are we going to be in 2020?’
Where are we going to be in 3 to 4 years, not 3 to 4 months.” It makes it harder to criticize short-term losses whilst the long-term gains have yet to materialize.
It is important to note that hosting fees are F1’s biggest single revenue source and provide 34.1% of the total after Boss Ecclestone spent years building them up and keeping race organizers happy.
If this revenue stream gets dented by Liberty the stockholders might wonder what was the point in ejecting the man who built up the business that they paid $4.6-B to buy.
If Boss Ecclestone had kept F1 on the same track it would have continued to make profits and given Liberty’s stockholders the smooth ride that they were presumably looking for.
We wait, we see is Boss Carey planning pays off.
Meanwhile, remember that Ferrari’s former Boss Sergio Marchionne threatened to pull the team out of F1 as a result of these new rules but unexpectedly passed away in July.
His successor Louis Camilleri recently revealed that there hasn’t been any progress with the financial discussion.
“If we talk about the economics and the introduction of budget restrictions, there is no progress at all. In my opinion, there is a sense in such a restriction, but as always, everything depends on the details.”
Ferrari is F1!
|NYSE:RACE||111.75||14 November 2018||2.14||112.57||113.14||110.06||306,957|
|HeffX-LT Analysis for RACE:||Overall||Short||Intermediate||Long|
|Bearish (-0.38)||Neutral (-0.24)||Bearish (-0.40)||Very Bearish (-0.50)|
|NASDAQ:FWONK||32.19||14 November 2018||-0.16||32.65||33.1||32.05||597,475|
|HeffX-LTN Analysis for FWONK:||Overall||Short||Intermediate||Long|
|Bearish (-0.48)||Bearish (-0.32)||Very Bearish (-0.52)||Very Bearish (-0.58)|
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