The Deal That Threatens Liberty Media's $8 Billion F1 Buyout
Europe’s governing body, the European Parliament, today voted for an “immediate investigation” into the takeover of Formula One auto racing by Liberty Media last month due to allegations that it broke the law.
The European Parliament publishes an annual Competition Report and amongst the anti-trust areas referenced in the 2017 edition is the motion to back “calls for an immediate investigation into competition concerns arising from the Formula One motorsport industry.” The vote to approve the report was passed through today with 476 in favor compared to 156 against.
It follows a formal complaint made in 2015 by two of F1’s smaller teams – Force India and Sauber. They raised concerned about F1’s governance and the distribution of its $903.8 million in prize money which is biased towards the top performers. An anti-trust investigation could lead to contracts at the core of the auto racing series being torn up if they are declared illegal. It would create uncertainty for Liberty and its investors about the structure of the business they have acquired but that’s just the start.
It could also jeopardise F1’s future as its best-known teams, including Ferrari, have built their business models around the multi-million Dollar bonuses they receive. There is a real risk they could reverse out of the series if Europe’s anti-trust regulator forced F1 to balance its prize money payments. However, that is by far and away not the most serious implication of an investigation for Liberty. The validity of its entire investment in F1 could be called into question.
The F1 championship has been held for the past 67 years but July 22 2013 could prove to be one of the most significant dates in its history. This is when auto racing’s regulator the Fédération Internationale de l’Automobile (FIA) signed a deal which granted it an option on a 1% stake in F1’s parent company Delta Topco. The FIA took the option up later in the year and bought the stake for $458,197.34 which was a bargain-basement price as it was informed at the time that it had a market value of $70 million.
In 2013 the FIA issued three press releases about the deal it had signed which also confirmed the terms of its governance of F1 until 2030. However not one of the releases mentioned that the FIA had acquired the stake in Delta Topco which was later
revealed by this author in an article in Britain’s Guardian newspaper. One crucial detail was yet to be revealed.
The FIA didn’t acquire the 1% stake from one of the shareholders in Delta Topco but from the company itself which was controlled by the private equity firm CVC. It owned a 38.1% stake in Delta Topco, worth around $3 billion, and in order to exit through a sale it needed the FIA’s approval as it would involve F1 changing control. This approval came last month and it fuelled claims that there was a conflict of interest.
According to a recent
report in The Economist, discussions about the agreement with the FIA had been going on for around a year prior to the deal being signed on 22 July 2013. At the start of the previous year CVC planned to exit F1 through a flotation which would not have needed the FIA’s approval. However, a flotation became increasingly less likely over the following 12 months as F1’s chief executive Bernie Ecclestone became embroiled in a bribery scandal.
He was accused of paying part of a $44 million bribe to German banker Gerhard Gribkowsky to steer the sale of F1 to CVC in 2006. On 27 June 2012 Mr Gribkowsky was found guilty of receiving a bribe and newspapers including Britain’s
Independent reported that in light of the outcome“German police were considering whether to prosecute” Mr Ecclestone.
On 17 July 2013 CVC
issued a press release confirming that Mr Ecclestone had received a bill of indictment, in English, from the Munich Regional Court and this effectively put the brakes on the Initial Public Offering (IPO). It would be almost inconceivable to successfully float a company which has a CEO who is facing the possibility of jail time as a result of criminal charges for bribery.
A spokesperson for Delta Topco told the Economist “there can be no inference” that the transfer of the 1% was an inducement to the FIA to approve a sale. It said “no such transaction was contemplated” at the time because Delta Topco was still “contemplating and preparing for an IPO.” The spokesperson added that the timing of the July 2013 options grant was not connected to the indictment of Mr Ecclestone but was “the result of a 12-month negotiation” over renewing the terms with the FIA.
The case against Mr Ecclestone was settled in 2014 with the judge in Munich saying that “prosecution of the defendant due to bribery is not probable.” By then CVC had changed its direction. As the chronology below shows, CVC’s co-chairman Donald Mackenzie told Reuters in November 2013 that the company had “no plans” to float F1 in the imminent future. Instead CVC was considering exiting through a sale which is exactly what happened when Liberty offered $8 billion putting an $80 million value on the FIA’s 1% stake.
There is no suggestion that Liberty wasn’t suitable buyer but as Forbes has
revealed it didn’t make its first approach to CVC until September 2013 so when the FIA acquired its 1% stake two months earlier it could not have known for certain who would buy F1. What the FIA did know for certain is that its 1% stake came with the crucial condition that it could only be monetized in the event of a sale by CVC and this required its approval.
The FIA knew that if it approved the sale it would make a net profit of $79.5 million on its stake and the only way it could get it was by approving the sale. CVC on the other hand needed the FIA’s approval in order to sell its stake and make $3 billion on it. Liberty needed the approval to buy F1 and it paid a total of $80 million in cash and shares to the FIA.
Liberty is listed on the Nasdaq with the ticker FWONK and repeatedly disclosed in its filings with the Securities & Exchange Commission (SEC) that the FIA’s approval was needed to close the takeover. However, it didn’t highlight the fact that the FIA has a stake in F1 and that Liberty would therefore be paying the regulator if it approved the deal.
There is no suggestion that this was improper and it is not clear whether Liberty had to itemise in its filings all of the shareholders in the company it was buying. If the F1 takeover stays on track then Liberty’s shareholders will have no reason to complain but if it skids off course it is likely they will start asking questions.
There is no doubt that Liberty was aware of the FIA’s dual roles as a Delta Topco shareholder and regulator which needed to approve the takeover. Liberty needed to know the identities of all of the shareholders to pay them and it needed to know the hurdles standing in the way of the takeover to know when it had the green light. Speaking with analysts in November Liberty’s CEO Greg Maffei made it very clear that he and F1’s new chairman Chase Carey directly negotiated with the FIA.
“Chase Carey and I have met with the FIA, in particular, Jean Todt, the head of the FIA, several times and had good conversations with him. We’re proceeding forward with the necessary processes they have for change of control, and I have every reason to believe we’ll have a favorable outcome,” said Maffei.
As Forbes has
reported, British sports lawyer Charles Braithwaite said that “if the FIA approves the sale, people may question whether the approval was driven by the desire to get the multi-million sale proceeds from the sale of its share; despite the fact that the FIA is the governing body and regulator of Formula One and so one would expect it to be independent and to act in the interests of the sport rather than its own interests.”
Tim Owen QC, a public and criminal attorney at London’s Matrix Chambers added that “no regulator exercising quasi-judicial powers can have a financial interest in the very subject matter it is supposed to be regulating as an independent, unbiased body...Once a financial or proprietary interest is established, the risk of bias is presumed.”
Another sports lawyer, Kevin Carpenter, said that “taking that stake in the first place in 2013 was a prima facie breach of the 2001 settlement made with the EU.”
He is referring to the conclusion of an anti-trust investigation which began in 1999 and focused on claims that the FIA favoured F1. The commercial rights to F1 are ultimately owned by the FIA but in 2001, to distance itself from the series, it sold them for $313.6 million for a period of 100 years beginning in 2011. This is why the FIA had no shares in F1 when it bought the 1% stake.
Selling the rights pacified anti-trust regulators at the European Commission (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.”
Last year Max Mosley, who was president of the FIA when it signed the settlement with the EC,
said that he believes the 1% stake “is a breach of the agreement with the European Commission.”
British politician Anneliese Dodds concurs and last month wrote to the EC’s anti-trust chief Margrethe Vestager to say that the FIA’s “ownership of shares in the sport it regulates conflicts with the 2001 agreement between the FIA and European Commission; a view shared by the president of the FIA at the time.” She added “it looks extremely likely that the FIA have broken an agreement struck with the European Commission in 2001 regarding commercial conflict of interest.” As Britain's Daily Mail newspaper
reported her claim alone could call into question the validity of the sale.
Before today’s historic vote she reiterated that there was “significant conflict of interest over the recent sale of the Sport to Liberty Media, after the regulator received a $79.5m profit from authorising the sale.” Last month, another British politician, Damian Collins
told Britain’s ITV News at Ten programme that he believes it is a “severe conflict of interest” and he too has written to Mrs Vestager.
If they are right it could raise questions about the FIA’s decision to approve the sale as Clause 2.2.2 of its ethics
code states that “FIA Parties and Third Parties may not perform their duties in situations involving an existing or potential conflict of interest.”
If was a potential, let alone an actual, conflict of interest, for the regulator to approve the sale of a sport in which it had a stake then according to the FIA’s own ethics code, its representatives “may not perform their duties.” However, they most certainly did perform their duties by approving the sale. If they shouldn’t have done this then it could call into question whether the takeover was valid.
What’s more, as ITV
reported, if the FIA broke its ethics code then in turn it may have broken a warranty it gave to Liberty Media stating that entering into the deal would not cause it to break “any deed, agreement or arrangement to which it is a party, under which it enjoys rights or by which it is bound.”
The FIA and Liberty deny that it was a conflict of interest for the regulator to decide whether to approve the sale of F1 even though it knew that it would get $79.5 million if it gave the green light. The key justification which has been given for this is that CVC was planning to exit F1 through a flotation and this would not have needed the FIA’s approval.
However, the flotation effectively got the red light when Mr Ecclestone was indicted and that was before the deal with the FIA was even signed. Moreover, F1 did not float in the end, it was sold to Liberty. So if the defence of the ownership of the 1% hinges on a flotation then surely the FIA should have returned the shares, not cashed them in, when it became clear that F1 would be sold instead.
Indeed, if the FIA hadn’t approved the takeover it could still have been said to be motivated by money as it may have wanted to sell to a buyer who paid more for its stake. Even if there isn’t actually any bias, as Mr Owen said, “once a financial or proprietary interest is established, the risk of bias is presumed.”
The problem at the heart of this is that the FIA owned the stake and cashed it in when it approved the sale. The deal was done in 2013 and it was embedded last month so it is too late to change the facts. This is what could force Europe’s anti-trust regulator into launching a full-blown probe.
ITV put it to Mr Carey that the FIA is “the regulator. They are meant to be at arm’s length from the sport and they stand to gain from approving the deal. Isn’t that a conflict of interest?” He denied this but the reason he gave can only be described as a non sequitur – something which doesn’t logically follow.
Looking flustered Carey said “No. I think they have regulated the sport from what I have seen. My experience with them is a handful of months. They regulate the sport in a fair and even-handed way.” That’s as may be but it doesn’t explain why it isn’t a conflict of interest for a regulator to decide whether to approve the sale of a sport in which it has a stake.
The FIA’s response is similar to Carey’s as a spokesperson says “The FIA would like to make clear that there is no conflict of interest with regard to its decision to approve the change of control of the Formula 1 World Championship. The FIA is a not for profit organisation with the regulation of motor sports as our sole concern and we are confident the new owners will oversee an exciting new chapter for f1 [sic].”
The FIA is indeed not-for-profit but the $79.5 million was revenue for it so it is unclear how its corporate status could be relevant to this. The issue at the heart of the matter is that if the FIA hadn’t approved the sale it wouldn’t have got the $79.5 million. Liberty needed its approval to buy and CVC needed it to sell.
To give an example with another not-for-profit organisation, if the British Board of Film Classification (BBFC) had a stake in the proceeds of a movie it was assessing it could introduce the risk of bias. It could be accused of giving the film a lower rating in order to open it up to more viewers and boost sales.
It is therefore perhaps no coincidence that a spokesperson confirms that “the BBFC holds no stake in any of the content it classifies and receives no additional income from a film as a result of its box office performance. Consequently the success of a film at the box office has no impact on the classification decisions made by the BBFC.”
Time will tell whether the EC or any other bodies decide that the FIA should have followed its lead. In 2015 F1 blogger Joe Saward
said that “the FIA under Jean Todt has got itself into some strange situations for a sports regulator,” and added that it “now owns a percentage of the Formula One group. One assumes that all of these things will come under scrutiny if an European Commission investigation does go ahead.” We should soon find out.
