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How Bernie Ecclestone Steered F1 To Make $1 Billion More Than Star Wars

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In 1977 the sci-fi epic Star Wars premièred and at warp-speed became the highest-grossing movie of the year. Cementing its status in Hollywood history it also eclipsed Steven Spielberg’s Jaws to become the most successful movie of all time and spawned six sequels which made a combined $6.4 billion at the box office.

When Star Wars was released Jimmy Carter was president and Elvis was alive. Some Formula One races still lacked barriers between the spectators and the track whilst corporate hospitality was little more than a warm beer. Who would have thought that F1 would go on to make more profits for it owners in just a decade than the total takings of every Star Wars movie? One man had just that vision.

Today’s F1 races bear little resemblance to their predecessors from the 1970s. The cars look and sound different, the drivers have all changed, the tracks are safer and the amount of money it takes to fuel the series has accelerated. However, there is one factor which has remained constant as F1’s keys are still in the hands of the same man now as they were 40 years ago.

F1’s future changed forever in 1972 when British businessman Bernie Ecclestone bought the Brabham team after he had built up one of the country’s biggest used car dealerships. Brabham driver Nelson Piquet proceeded to win the world championship twice but Mr Ecclestone had his eye on a bigger picture: television.

At the time, F1 races ran as ad hoc, almost amateur, events. Each team made separate deals with each event promoter and TV coverage was patchy as races could be cancelled at the last moment if there weren’t enough cars to fill the grid.

Mr Ecclestone seized the opportunity to change this and in 1981 he convinced the teams to sign a contract, called the Concorde Agreement, committing them to race. He took this to TV companies who could then guarantee coverage. The teams controlled F1’s commercial rights but Mr Ecclestone’s company Formula One Promotions and Administration (FOPA) negotiated the deals for them and took a share of the proceeds. The remainder went to the teams and F1’s governing body the Fédération Internationale de l’Automobile (FIA).

In 1982, he signed a three-year deal with the European Broadcasting Union (EBU) which would ensure consistent coverage in F1’s biggest markets in Europe.

With guaranteed TV exposure, sponsors’ rates increased in F1 and this gave the teams more money to spend on cutting edge technology in a bid to win. In turn, this attracted the best drivers which made the sport even more appealing to broadcasters so the fees from TV stations increased.

In 1988 Mr Ecclestone sold Brabham in order to concentrate on running FOPA. The top drivers soon commanded salaries of between $10 million and $12 million, five or six times what they received a decade earlier, and sponsors were spending hundreds of millions of Dollars a season. Big name car manufacturers, such as Honda, Renault, Porsche and Lamborghini, became involved through supplying engines to the teams.

Commercial interest was revving up exactly as Mr Ecclestone had predicted but that was thrown into doubt when F1’s biggest star, Ayrton Senna, was killed at the San Marino Grand Prix in 1994. Some suggested it would put the brakes on the rise in F1’s popularity but it had exactly the opposite effect.

Mr Senna’s death drove the world’s attention to F1 at a time when there was drama on the track and the sponsors were pumping in significant financial support. It hasn’t looked back since then.

In 1990 FOPA had revenues of just $12.5 million but by 1996 this had accelerated to $127.6 million and Mr Ecclestone’s salary of $83.7 million made him the world’s highest-paid executive. However, he still wasn’t satisfied with F1’s performance and took decisive action which made it the global sporting powerhouse that it is today.

At the time, although F1’s commercial rights were controlled by the teams, they were owned by the FIA and when its agreement with them came up for renewal Mr Ecclestone made an offer to take direct control through his personal investment vehicle F.O.C.A. Administration. On 19 December 1995 the FIA declared that F.O.C.A. Administration had won the bid for the commercial rights to F1 for 14 years beginning on 1 January 1997. Mr Ecclestone owned 100% of F.O.C.A. Administration, which is now known as Formula One Management (FOM), so this gave him complete control of F1’s rights for the first time in the sport’s history.

In return for the F1 rights. the FIA was paid $10 million annually by F.O.C.A. Administration giving the company an 800% return on investment on its $90.7 million net profit in 1997 alone. Buying the F1 rights was the best business move of Mr Ecclestone’s career and handed him the keys to the billionaire’s club. F1 itself was an even bigger beneficiary.

It is thanks to this manoeuvre that Mr Ecclestone has been able to steer F1 to huge commercial success . Unlike some other sports, it has been under the control of one man and still is. Despite turning 86 this year Mr Ecclestone is still chief executive of FOM’s parent, the F1 Group and works from 9am till 6pm five days a week as well as many weekends. Over the past 40 years he has personally signed all of the key contracts that modern-day F1 is built on and is still at the heart of the biggest deals in the business.

Some critics claim that he shouldn’t have so much control but what they miss is that if it wasn’t for this F1 wouldn’t be where it is today. The decision to sign a single multi-territory broadcast deal with the EBU transformed F1’s finances but by the time the series had established itself in 1987 Mr Ecclestone unshackled it by dealing directly with the broadcasters. This was even more ground-breaking. Some sports have been slow to catch on and the first time the International Olympic Committee (IOC) dealt directly with individual TV networks in Europe was for the 2014 Olympic Games.

In an interview with GQ magazine in 2013 Mr Ecclestone said: “The most important decision I ever made was doing deals with television channels directly rather than letting Formula One only be broadcast by European Broadcasting Union (EBU) stations. Everyone said there was no way I could ever deal with the companies individually. They are all EBU and you’ve got to deal with the EBU. But the first people I signed was the BBC. I think that was a big stepping stone for Formula One. The other thing that wasn’t easy, was getting broadcasters and teams to take the on-board camera, if you can believe it. We overcame that and it goes to show you’ve got to stick at what you believe in.”

In 1985 F1 broadcast the first live footage from an on-board camera in a single-seater race and that too was a decision made by Mr Ecclestone which has been copied by almost every other major auto championship since then. Likewise, back in 1996 he invested an estimated $80 million in a cutting-edge multi-view digital TV service which rival sports have only started to copy in the past decade.

Putting the keys in the hands of one man who has more experience and perspective than anyone else in the field has made F1 a speedboat rather than a tanker when it comes to decision-making. Perhaps the clearest example of this is F1’s geographic expansion. Whilst most blue chip brands and international sports have only made a major push into China in the past five years, F1 held its first Grand Prix there in 2004.

One of the few global juggernauts which has also pulled this off it is the Walt Disney Company, which is probably the world’s most forward-thinking and cutting-edge media business. The doors to its first Chinese theme park swung open in Hong Kong in 2005 and in June this year it launched a counterpart in Shanghai. It is estimated to have cost $5.5 billion and, like the Chinese Grand Prix, is a partnership with the government.

Being ahead of the curve is crucial to success in business and the quicker a company can make decisions, the easier this is to pull off. F1 has reaped the rewards from it.

Owning the F1 rights gave F.O.C.A. Administration assets which generated in excess of $6.7 billion over the lifetime of its 14-year contract with the FIA. It has made the most of it.

In 1999 the F1 Group secured a $1.4 billion bond on its future revenues with the proceeds ultimately paid to Mr Ecclestone’s family’s trust. It later benefited from the sale of stakes in the business after an estate planning move saw Mr Ecclestone transfer all of his shares in F.O.C.A. Administration to his then-wife Slavica who put them in a family trust.

The most recent sale came in 2006 when private equity firm CVC took over the F1 Group in a leveraged buyout for $2 billion. A loan from the Royal Bank of Scotland (RBS) comprised $1.1 billion of this with $965.6 million coming from CVC’s investment Fund IV. This was repaid through a loan refinancing in the months following the takeover but that was just the start.

Six years later CVC attempted to float the F1 Group on the Singapore stock exchange but the eurozone market crisis put the brakes on it. CVC didn’t come away empty-handed as it raised $2.1 billion in 2012 by selling 28.3% of the F1 Group to Norway’s Norges sovereign wealth fund as well as money managers Waddell & Reed and Blackrock. During the same year, the estate of collapsed bank Lehman Brothers, which owned 15.3% of the F1 Group, sold 3% of the company to the Texas Teachers’ pension fund for $200 million.

It didn’t stop there as the F1 Group paid out an $850 million dividend in May 2012 followed by another for $1.2 billion at the end of the year driven by income from a further debt refinancing. There was also a payout the following year when a $332 million dividend was distributed in 2013 and in 2014 the F1 Group boosted its borrowings by $2 billion to fuel a $1 billion payment to shareholders.

The latest windfall came last month when CVC agreed to sell the F1 Group to investment firm Liberty Media for $8 billion in a deal which is now being scrutinised by regulators. As Forbes has revealed, Liberty is far from the finish line as one of the regulators which needs to approve the sale is the FIA and it stands to gain $44 million if it gives the green light. This is because the FIA owns a 1% stake in the F1 Group which it can only cash in when CVC sells up. It has fuelled allegations of bias which another regulator, the European Commission (EC), has been notified of. In itself this is also a potential roadblock as the EC’s approval is needed for the deal to go ahead.

Nevertheless, last month Liberty began the process by buying an 18.7% stake in the F1 Group. It paid $746 million of the total $1.1 billion it has offered in cash with a further $3.3 billion coming from a loan and shares. That gives the F1 Group equity value of $4.4 billion and it also has $4.1 billion of third party loans on its books along with $700 million of cash bringing its net debt to $3.4 billion. Adding the equity value to the net debt and $200 million of deal-related adjustments gives the F1 Group a staggering $8 billion enterprise value.

To put that in perspective, Lucasfilm, owner of the Indiana Jones and Star Wars movie franchises, was sold to Disney in 2012 for $4 billion. Star Wars alone has been a cultural phenomenon for four decades and was sold by its creator George Lucas, who is himself is one of the most shrewd and skilled deal-makers in the movie industry. So it says a great deal about Mr Ecclestone’s creation and the power of F1 that the business is worth double the price paid for Lucasfilm.

As Forbes has revealed, the F1 Group was actually valued at $9.1 billion - $1.1 billion more than Liberty offered - just two months before the recent deal was announced. An independent valuation was commissioned by luxury motor marque Ferrari as it owns as option on a 0.25% stake in the F1 Group. Ever since Ferrari floated on the New York Stock Exchange in October last year it has needed to list the value of all of its assets, including the F1 Group share options, in its financial statements.

Given that F1 was practically worthless 40 years ago but now has a valuation of between $8 billion and $9.1 billion it is no surprise that Mr Ecclestone’s commercialisation of the series is seen by many in the sports industry as one of the greatest-ever creations of value and a feat which is never likely to be repeated.

Indeed, in just the past decade the F1 Group has generated a total of $7.4 billion through dividends, loan repayments and the sale of stakes in the business. Remarkably, as the table below shows, this is $1 billion more than the combined takings of all seven Star Wars movies according to industry analyst Box Office Mojo.

This doesn’t include the revenue or profits of the F1 Group. The former comes to a combined $14.8 billion over the past decade with the latter at around $4 billion. Neither the teams’ revenue nor profit is included, just the return that the owners of the F1 Group have got from the business in the past decade and that alone exceeds the lifetime box office takings of every Star Wars movie by $1 billion.

If F1’s financial returns over more than the past decade were calculated the gulf between it and Star Wars would be even greater. That is saying something given that the Star Wars series is quite probably the most beloved, respected and accomplished film franchise in history.

Disney’s takeover of Lucasfilm has reignited the interest in Star Wars which explains why the latest movie in the series is by far the most successful. However, Disney is at the start of this journey and has only just began to rev up the Star Wars franchise again whereas F1 has been in top gear for years.

This is clear from comparing F1’s performance to the money markets. As the graph below shows, according to Ferrari’s data, the value of F1 increased 14.3% between 31 December 2014 and the latest valuation on 30 June this year. Ferrari’s 0.25% F1 option was worth $12.8 million (€10.5 million) at the end of 2014 but by the end of June this year it had hit $13.3 million (€12 million) which considerably outperformed the 0.9% decrease in Britain’s FTSE 100 share index over the same period.

The race is far from over as Liberty’s buyout has not got the green light and if it hits the skids it would open the door for CVC to take more time to find a higher bidder. Like any classic Grand Prix, there could still be some last-minute twists and turns and the only racing certainty is that as long as Mr Ecclestone is in the driving seat F1’s value will continue to accelerate.