15/11/2011
NEWS STORY
Last week Pitpass reported, following business editor Christian Sylt's lengthy meeting with Bernie Ecclestone, that the F1 supremo had declined the opportunity to control his family's trust - an issue at the heart of the trial in Germany of F1's former chairman Gerhard Gribkowsky. Then we reported that Ecclestone has given the group behind the United States Grand Prix venue a December deadline to sign a contract with him or risk losing the race. Now we can reveal that Ecclestone says the party behind a much-trumpeted lawsuit in the UK against him for allegedly undervaluing F1 in fact wants to settle the case.
It all stems from the German court case in which Ecclestone has been accused of paying £27.5m ($44m) to Gribkowsky to ensure he retained control of F1 when it was sold in 2006 to current owner private equity firm CVC.
Gribkowsky was responsible for selling the 47.2% stake in F1 owned by German bank BayernLB. It was sold to CVC for £511.7m ($814m) and this led to a civil action against Ecclestone and Gribkowsky in the UK by Constantin Medien, a former part owner of F1, which believes the sport was really worth £1.76m ($2.8bn).
As Pitpass has reported Constantin owned 16.7% of F1 which it sold to BayernLB in 2003 to give the bank its combined 47.2% stake. Constantin sold its shares to BayernLB for the tiny sum of €8.5m despite it having a balance sheet value of €204m. It agreed to sell for such a low price on condition that when BayernLB sold the 47.2% stake Constantin would get 10% of any proceeds above £628m ($1bn).
Before buying the 16.7% from Constantin, BayernLB had got a 30.5% stake in F1 from German media company Kirch when it defaulted on a $1bn loan given to it by the bank to buy the shares. BayernLB's principal aim from selling its F1 stake was to recoup its loan which is why it only agreed to give Constantin a share of any proceeds above $1bn.
Although CVC was the highest bidder for BayernLB's F1 stake, it paid less than $1bn so Constantin did not get a share of any proceeds from the sale. Constantin's UK lawsuit was triggered by the prosecutors' allegation that Gribkowsky was biased towards CVC because of a bribe he received from Ecclestone. This gives rise to the allegation that the bribe led to F1 being undervalued since CVC was only prepared to pay $814m. Ecclestone has not been charged with giving the bribe and was granted immunity in this case in return for giving evidence and co-operating with the prosecutors.
It is often said that BayernLB got all of its shares in F1 as a result of the loan it gave to Kirch but, as shown by the explanation above, this is not correct because it bought 16.7% from Constantin. Given that BayernLB did not want to become an F1 shareholder, and got its first shares purely accidentally because Kirch couldn't repay its loan, one wonders why the bank then decided to spend money on buying a bigger stake in the sport. It was however a very good deal because the price per share it got from selling 47.2% to CVC for $814m was far, far higher than the price it paid for buying 16.7% from Constantin for €8.5m. Nevertheless, it is worth noting that Constantin is not suing BayernLB itself.
It is highly ironic that Constantin, which sold its 16.7% stake for the measly price of €8.5m is now claiming that in fact, F1 was worth $2.8bn. It begs the question of why on earth it took the gamble of selling for a tiny sum and a percentage of a future sale.
Indeed, as Pitpass has reported, this is precisely the view of highly respected sports lawyer Jonathan Walters from Charles Russell, who said "it also appears that Constantin contributed to its own problems by negotiating a bad deal. Accepting a very small payment in the original sale to the banks in expectation of a bigger return on the next sale backfired and demonstrates the risk of selling shareholders agreeing to deferred payments without an adequate element of control over that payment."
Constantin's lawsuit came to light in articles by reporters who have little experience in writing about the complex and arcane business of F1. It was even suggested by the venerable Times newspaper that CVC could get dragged into the lawsuit. Now it seems that quite the opposite is the case.
From the very start Pitpass has pointed out what seem to be flaws with Constantin's claim. We wondered how it could be said that F1 was undervalued when the indictment against Gribkowsky confirms that BayernLB received numerous offers for its F1 shares but, except for the one from CVC, "none of these offers were regarded as being suitable, especially for reasons of price.
We also wondered how F1 could have been undervalued given that BayernLB's chief financial officer Stephan Winkelmeier, said that an internal investigation by the bank's management and supervisory board, as well as external checks by auditors, "have shown that the sale was carried out properly, in accordance with the bank's regulations and with a price that was in line with expectations."
Likewise, since the trial has started we have heard evidence from Kurt Faltlhauser who headed BayernLB's administrative board from July 2002 until July 200 and said "the price we were offered by CVC was surprisingly high and it came as a great relief." Former BayernLB management board member Dieter Burgmer added that "BayernLB's management board regarded the net proceeds from the sale of the Formula One stake to CVC as very attractive."
We fully appreciate that Constantin may believe that Gribkowsky was biased towards selling to CVC because of the alleged bribe received by him. However, all the evidence seems to point to the fact that not only was CVC the highest bidder, but there was no way BayernLB's F1 shares were going to sell for more.
If it is the case that there was no realistic probability of BayernLB’s stake selling for more than $1bn then Constantin’s case seems to have no merit as it had no hope of getting a share from the sale. In that case, as Walters says, it would be Constantin’s fault for agreeing to a deal which was dreadful for it but benefited BayernLB tremendously.
This is shown clearly through Ecclestone’s comment that "the price I got BayernLB for their bloody shares was double what they were in the books at." It is worth pointing out here that simply because BayernLB placed a low internal price on the shares (which is what Ecclestone is referring to when he mentions the value they were in the books at) that doesn’t mean to say they were worth no more than that. An assessment of their value is either determined by the sale price or, if there is a question mark over that (as Constantin suggests), by an external valuation.
It is worth pointing out here that as part of its investigations, BayernLB got accountancy firm Deloitte to assess whether the price paid by CVC was fair and, as Pitpass has reported, it concluded that it was not undervalued. So if Deloitte thought the 47.2% was fairly valued at $814m then how on earth could it reasonably be said that F1 was worth $2.8bn?
Bearing this in mind, it makes one wonder why Constantin is bothering to take legal action. This brings us to an article in the Independent by Sylt. Ecclestone makes the dramatic revelation that the lawsuit is being driven by Constantin shareholder and board member Dieter Hahn who has already approached him with a settlement offer, less than four months after the lawsuit was filed. It seems to leave egg on the face of those who trumpeted the case.
"Dieter Hahn just wants to shake down, to settle before it gets to court. He would like to settle. He would like somebody to pay him," says Ecclestone. He adds that the settlement approach has been firmly rebuffed.
"Dieter Hahn has started so now let's get on with it. I would be happy to see that case go to court. I 100% think it will go to court. We couldn't stop it if we wanted to. We could sue him if he withdrew."
Ecclestone says he is confident he will win in court because F1 was not undervalued. "All the people from Bayern said the price was bloody good," says Ecclestone adding "they were very happy with the price. Five other people offered a hell of a lot less"
Ecclestone admits to paying Gribkowsky but denies it was a bribe. He says he did this to stop Mr Gribkowsky reporting false allegations about his tax affairs to the Inland Revenue. Ecclestone took to the stand in Munich last week to say "I paid him to keep calm and not to do silly things." Reportedly it also came out that the Inland Revenue cleared Ecclestone of any liability for back tax for the trust in 2008 so the reports that he could be investigated again for precisely the same thing seem to be very wide of the mark.
Gribkowsky has been charged in Germany with bribery, breach of trust and tax evasion and Ecclestone says that the greatest danger to him from the German proceedings is if Gribkowsky is found guilty of receiving a bribe. "If Gribkowsky is found to have received a bribe then Hahn has got leverage," he says.
Constantin and its representative, Keith Oliver of Peters & Peters, declined to comment. Longtime readers of Pitpass may remember the name Keith Oliver as he represented a shadowy firm called Kamos which sued Ecclestone's family trust and F1's parent company in 2006 over an unpaid loan which was taken out to finance the acquisition of the 100-year rights to F1. Guess what? The case was settled as Pitpass reported at the time. Ecclestone claims that Hahn was in fact behind Kamos which doesn't sound like a surprise.
Interestingly, Sylt says that the biggest news from his briefing with Ecclestone is still to come. Rest assured that Pitpass readers will get the inside story first.