John Malone, the billionaire chairman of Liberty Media Corporation, is widely understood to be in control of the Nasdaq-listed company but its recent acquisition of Formula One auto racing has called this into question.
Last month Liberty closed its takeover of Delta Topco, F1’s Commercial Rights Holder (CRH), and although it currently trades on the Nasdaq with the ticker FWONK it could still skid off track due to accusations of a severe conflict of interest at the heart of the deal.
Liberty’s takeover of F1’s parent company Delta Topco closed last month and although it currently trades on the Nasdaq with the ticker FWONK it could still skid off track due to accusations of a severe conflict of interest at the heart of the deal.
As Forbes recently reported, in order for the $8 billion takeover to proceed it needed approval from auto racing’s regulator the Fédération Internationale de l’Automobile (FIA) which knew that if it gave the green light Liberty would pay it $80 million for its 1% stake in Delta Topco.
On Tuesday the European Parliament voted in favour of an “immediate investigation” into F1 by Europe’s anti-trust watchdog the European Commission (EC). If it goes ahead and concludes that there was a conflict of interest it could call into question the legitimacy of the sale. This is because the FIA’s own ethics code prevents it from carrying out its duties if there is even a potential conflict of interest. However, it did indeed carry out its duties by approving the sale so it is possible that this decision would be void if it had a conflict of interest at the time.
The European Parliament vote was reported by a wide number of outlets including the BBC, The Times of London and ESPN, and in the wake of this coverage the FIA issued a press release on Thursday saying that it "has been made aware of certain declarations and comments, clearly inaccurately informed or made maliciously, relating to this process."
Despite receiving $80 million as a result of the sale going through, the FIA insists there was no conflict of interest as it says its decision-making body, the World Motor Sport Council, didn't take the financial benefit into consideration. It stated that "there is no conflict of interest on the part of the FIA with regard to its approval of the change of control of the CRH which has been approved by the World Motor Sport Council taking into consideration exclusively the terms of the existing agreements between the CRH and the FIA and the best interests of the Championship."
The FIA wasn’t the only regulator which needed to give its approval for the sale to go ahead. It also had to be cleared by anti-trust authorities. It was initially expected that this assessment would be done by the EC and as F1 blogger Joe Saward wrote in 2015, it is natural to assume that the 1% stake would “come under scrutiny if a European Commission investigation does go ahead” as it is a “strange situation for a sports regulator.”
The 1% is of particular relevance to the EC due to the outcome of an anti-trust investigation it carried out in 1999. It investigated claims that the FIA favored F1 and eventually closed the file after the two agreed to become more distant from one another.
The commercial rights to F1 are ultimately owned by the FIA but in 2001 it sold them for $313.6 million for a period of 100 years beginning in 2011. This pacified the EC which released a statement in October 2001 saying that “the FIA agreed to modify its rules to bring them into line with EU law...The modifications introduced by FIA will ensure that the role of FIA will be limited to that of a sports regulator, with no commercial conflicts of interest...To prevent conflicts of interest, FIA has sold all its rights in the FIA Formula One World Championship.”
Fast forward 12 years and the FIA bought the 1% stake in the owner of the rights to the FIA Formula One World Championship for the bargain-basement price of $458,197.34. It remains to be seen whether the EC would see this as a breach of the 2001 settlement but Max Mosley, the man who negotiated it on behalf of the FIA as he was its president at the time, has said he believes that indeed it “is a breach of the agreement with the European Commission.”
If the EC launches an investigation in light of Tuesday’s vote the 1% will surely “come under scrutiny” as Mr Saward said. The EC didn’t need to pass judgement over it before Liberty’s acquisition closed because it didn’t give anti-trust approval to the takeover. Instead it came from national authorities in Austria, Portugal, Spain and the United Kingdom. The question is why?
The answer is very simple. It is the responsibility of the purchasing company and the business which is being bought to decide whether to inform the EC of their merger. This decision is based largely on whether the combined revenue of the two companies meets certain thresholds.
If the combined revenue comes to more than $5.3bn (€5bn) worldwide and at least $265m (€250m) for each company across Europe then it falls under the EC’s radar. Article 5.1 of of EC Regulation 139/2004 states that the revenue data must come from the year prior to the acquisition which is 2015 in this case.
Britain’s Daily Telegraph newspaper revealed in August that Delta Topco’s revenue for the year-ending 31 December 2015 came to $1.7 billion whilst Liberty’s financial statements show that it made $4.8 billion in the same year. Accordingly the acquisition races past the first of the two EC thresholds.
Around 60% of Delta Topco’s revenue comes from Europe so it leaves the second threshold in its dust too. However, Liberty is less clear as its financial statements don’t include a geographic breakdown of its revenue. Its investments include stakes in event promoter Live Nation and media giants Time Warner and Viacom. Analysis of their financial statements shows that the revenue Liberty receives from them would not push it across the $265 million mark across Europe. However that’s just the start of the story.
Mr Malone isn’t just the chairman of Liberty Media Corporation but also Liberty Global which is heavily invested in Europe. Its investments include British television network Virgin Media, 9.9% of British broadcaster ITV and a minority position in the electric racing series Formula E alongside co-investor Discovery Communications. The revenue of Virgin Media came to $6.7 billion (€6.1 billion) in 2015 so this alone would have pushed Liberty well over the second threshold and put its acquisition on the EC’s radar. It all depends on whether Liberty Media and Liberty Global are under common control and this is where Mr Malone comes into play.
European Union merger rules are very clear and state that the revenue of all subsidiaries and parent companies under common control should be included in the calculation. So if Liberty Global is under Mr Malone’s control then it would seem that its revenue should have been included which would have led to the EC assessing the acquisition. However, analysis of the definition of “common control” in Articles 5(4) and 5(5) of the EU Merger Regulation yields a startling conclusion.
These clauses define control by ownership of more than 50% of the equity or voting rights in a company and although Mr Malone doesn’t qualify for the former category it was thought he did for the latter. Far from it. In fact, as Britain’s Daily Mail newspaper revealed in November, filings from Liberty Media Corporation show that Mr Malone only owns 47.6% of its voting rights so, in the EC’s eyes, he doesn’t control the company which bought F1. In turn this makes it pointless to consider whether Mr Malone does or doesn’t have control of Liberty Global. Or does it?
In its summary of the acquisition, Britain’s Competition & Markets Authority (CMA) stated that “Mr John Malone holds shares in, and is on the board of, Liberty Media, Liberty Global plc (Liberty Global) and Discovery Communications (Discovery), which own businesses in the media and broadcasting sectors (including Virgin Media and Eurosport) and hold interests in Formula E, an all-electric motorcar racing series, approved and regulated by the FIA. On a cautious basis, the CMA has treated these companies as being under common control.”
This seems to seal it and if that wasn’t enough, it added that “in light of Mr Malone’s shareholdings and voting power in each of these companies, the CMA has on a cautious basis assumed that Mr Malone has material influence over each of Liberty Media, Liberty Global, Virgin Media, Discovery, Eurosport and Formula E and has therefore treated, for the purpose of its competitive assessment, each of these companies as ceasing to be distinct from F1 Group as a result of the Merger.”
You’re not going to get much more of an official statement than one from a government’s anti-trust department and the one in the UK says that Liberty Media and Liberty Global were under the common control of Mr Malone. That should mean that their revenue needs to be combined when considering an acquisition by one of their subsidiaries and it would exceed the EC’s thresholds. Not so fast.
The CMA didn’t say it had concluded that Liberty Media and Liberty Global were under common control by Mr Malone but instead said that it was treating them as such “on a cautious basis.” Essentially the CMA assumed, for the purposes of the assessment, the worst case scenario whereby all relevant companies would be under common control. The EC didn’t do this but the CMA did. Likewise, again taking a cautious approach, the CMA stated that John Malone has “material influence” over the companies but this is a different concept to “control” under EU merger rules and it requires a lesser level of influence.
So there you have it. John Malone, the man who has been nicknamed “Darth Vader” for his iron grip on Liberty’s deals, isn’t actually in the driving seat at all. Time will tell who really holds the keys to F1.
