19/02/2014
NEWS STORY
CVC, the private equity firm which is the biggest shareholder in Formula One, is often criticised for taking money out of the sport. However, in fact it has protected it from hostile takeovers in the most unlikely of ways according to an article in the Telegraph by Christian Sylt.
Since CVC bought F1 in a £1.2bn ($2bn) takeover in 2006 it has made more than £2bn ($3.3bn) from the sport as Pitpass has reported in detail. In 2012 CVC made £1.3bn ($2.1bn) alone from selling shares in F1 leaving it with a 35% stake. Its windfalls have put it in the cross-hairs of many critics including some of the smaller F1 teams which sometimes struggle to stay afloat and ideally want more prize money. It is easy to sympathise with them but actually their financial outlook has accelerated since CVC arrived on the scene.
In 2012 the teams' prize money came to £450.7m ($751.8m) which is over four times more than the £103.9m ($173.4m) they took home in 2005. Likewise, their global footprint has grown as new races in wealthy nations such as Singapore, Russia and Abu Dhabi have been added to the calendar under CVC's watch.
True, this is largely down to F1's chief executive Bernie Ecclestone but CVC threw its support behind him from the moment that it became a shareholder so it too has played a significant part. Crucially, the teams don't just get increased exposure from the new races but more money too. Their prize money comes from a 63% share of F1's underlying profits which is more than double the cut that they previously received. It means that the more high-paying races which are added to the calendar, the more the teams benefit.
CVC has even come under fire for the way that it bought F1. As Pitpass revealed way back in 2007, it didn't use its own money and instead the purchase was fuelled by two loans – £660m ($1.1bn) from the Royal Bank of Scotland (RBS) and £578.8m ($965.6m) from a CVC fund which itself has external investors.
Since CVC invested in F1 it has refinanced the bank debt several times which means that the money was paid back with a new loan on different terms. The new loans were of a higher value than the initial one from RBS and the debt held by F1's parent company Delta Topco came to around £1.5bn ($2.5bn) in 2013.
In July last year Pitpass revealed that the latest refinancing, which was handled by RBS and Goldman Sachs, reduced the interest rate on the debt from 6% to 4%. It trimmed Delta Topco's debt-related charges which came to £70.9m ($118.3m) in 2011. They have been a lightning-rod for critics who claim that this is money which is leaving F1 as a result of CVC's involvement.
However, Delta Topco's debt seems to have a silver lining. This is found in the terms of the loan which are known as covenants. They remained confidential until 2012 when CVC planned to float F1 on the Singapore stock exchange and had to outline the key covenants in the prospectus.
As Pitpass can reveal here (right) page 36 of the prospectus states that F1 will default on its loans if any shareholder, other than CVC, gains more than 35% control. In specific, it says that "under the Senior Facilities Agreement, a change of control occurs where a person or a group of persons acting in concert gains the right to exercise more than 35% of the voting rights exercisable in a general meeting of the Company. A change of control is an event of default under the Senior Facilities Agreement, entitling the lenders to, amongst other things, cancel the Senior Debt Facilities."
As the Telegraph article reveals, the threshold has been increased from 35% to 50.1% since then and it has far-reaching implications. First let's consider what would happen if Delta Topco defaults which is the consequence of any shareholder getting its hands on more than 50.1% of F1.
The debt is secured on the shares and assets of almost all the key F1 companies which means that RBS and Goldman Sachs would have legal right to them in the event of a default. In summary, the two banks could ultimately get control of F1 if any shareholder other than CVC gains more than 50.1% of the sport. It would not be the first time that F1 has been owned by its lenders. CVC bought 75% of the sport from a trio of banks after they took over the stake when its previous owner, the German media company Kirch, failed to pay back a loan they had given it.
F1's lenders could agree to waive their change of control provision but there is no guarantee they would do this. Likewise, as the prospectus states, the debt could be refinanced with a loan which does not come with the change of control covenant but, again, there is no guarantee that lenders would agree to this.
The bottom line is that this could prove to be an important safety net as it means that if CVC or any of F1's other shareholders, wanted to sell up and give control of the sport to someone else, they would need to get consent from RBS and Goldman Sachs. If they didn't, the two banks would be entitled to take over F1 themselves. It is one measure which would prevent an unwelcome owner buying up stakes in F1 in a bid to build up more than 50% and take control of the sport.
CVC has put other measures in place to prevent Delta Topco from being forced into default by its co-shareholders combining their stakes to form a group with more than 50.1%. The company's minority shareholders include Ecclestone, his Bambino family trust and three other funds - BlackRock, Waddell & Reed and Norges, the investment division of Norway's central bank. However, if any of them wants to sell, not only does CVC have to give approval but it also has right of first refusal.
Rumours of other companies taking control of F1 have only come up a few times since CVC bought the sport. Most recently, earlier this month it emerged that American billionaire John Malone's Liberty Media had teamed up with Discovery Communications to consider mounting a bid for Delta Topco. Ecclestone told Pitpass that he had "never heard anything about Liberty buying into F1. I don't know anything about it." A source close to the situation added that "there are no real discussions with Liberty and nothing is imminent anyway."
Perhaps more interestingly, the banks' veto would have been yet another hurdle for the supposed bid for F1 from Rupert Murdoch's beleaguered News Corporation in 2011. When the bid was rumoured to be under consideration Pitpass outlined the many hurdles that it would face including likely opposition from News Corp shareholders and regulators. The Delta Topco debt covenants were confidential then so we were not aware that consent was also needed from the banks and there is no guarantee that they would have given it.
As the previous covenant was in force at that time, the most that News Corp could have acquired without the banks' agreement was 34.9% and that is assuming CVC would have been prepared to sell. It is yet another reason why News Corp's bid would have been doomed had it ever actually got off the grid.
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