As the Formula One drivers and teams prepare for Sunday’s race in Monaco —the most prestigious of the 20 races that make up this year’s F1 World Championship and an annual stop for the F1 circus since 1955 — the company behind the races is gearing up for its own challenge. Sources say investor education for its Singapore initial public offering is due to start today.
The deal is expected to raise about $2.5 billion, or close to $3 billion including the usual 15% greenshoe, which could make it the third-largest Singapore IPO since 1993, behind the $5.45 billion listing of HPH Trust in March last year and Global Logistic Properties’ $3 billion IPO in October 2010.
Formula One, which owns the commercial rights to the Grand Prix race series, received its listing approval from the Singapore Exchange yesterday and is wasting no time getting the deal on the road. In fact, in an attempt to gain pole position for its discussion with investors, it has already secured three pre-IPO investors this year, including US-based Waddell & Reed, which has bought a 14% stake in the company.
The pre-IPO placements were arranged by the syndicate banks and have determined a valuation for the company, which should be a helpful starting point as investors try to get their head around its unique business model. Whether they agree with that valuation or not, it sets a precedent around a company that doesn’t have any obvious listed comps.
According to a source, Waddell & Reed, Blackrock and Norges Bank Investment Management, which manages a fund that is in charge of investing Norway’s oil revenues, have invested a combined $1.6 billion into Formula One since January, at a price that gives the company an enterprise value of about $9.1 billion ($7.2 billion of equity and $1.9 billion of debt).
Waddell & Reed has committed the biggest amount with $1.1 billion, including $100 million that it received as a dividend in February. Blackrock has invested $196 million and Norges Bank $300 million. All three have bought non-voting securities from controlling shareholder CVC Capital Partners, which has reduced its stake to just over 42% from 63.4%. The investments come with no return guarantees and no put-backs in case the IPO doesn’t happen. The three investors will also be locked up for six months after the listing.
The Formula One races are watched by some 515 million TV viewers every year, many of whom will likely tune in this coming Sunday to see the world’s top drivers negotiate the narrow streets, tight corners and elevation changes at the Monaco Grand Prix. The track is viewed as one of the most demanding on the circuit and triple Formula One champion Nelson Piquet used to say that driving it was “like trying to cycle round your living room”.
The Formula One business is all about monetising those 515 million viewers. Revenues, which have been growing at about 10% a year during the past five to six years and reached $1.5 billion in 2011, come from three main sources: the tracks (the host nation of each of the 20 races pay a fee for the privilege, which currently average about $27 million per race but differs between the various organisers); broadcasting rights; and advertising/sponsorship linked both to the race tracks and the individual teams.
The income from the race hosts is seen to have huge growth potential as Formula One is looking to add more races to its series during the next few years — there is believed to be room to go to 24 races from the current 20. In addition to that, new host nations tend to pay a lot higher fees than the countries that have been part of the Formula One circuit for several decades. Russia, which will host its first Formula One race in 2014, will pay about $60 million for that right. Each race contract also has an annual fee increase of up to 10% written into it, ensuring a steady revenue increase even if no new races are added. The average race fee has increased from about $11 million in 2003.
The broadcasting rights are also expected to grow as pay-TV and the internet are starting to play a bigger role and are outbidding the traditional free-to-air channels for the viewing rights. TV rights in new host countries and in emerging economies where the sport is gaining popularity are also seen as a significant income earner. Sources say the company is particularly hopeful about the US, where the TV rights are currently worth about $20 million — significantly less than the $560 million it costs to show the popular Nascar races. Formula One has been staging races in the US on and off, and this year will return with a race in Austin, Texas, in November. A second US race will be added in New Jersey in 2013, which should help boost interest in the sport, observers say.
Much of the business is based on long-term contracts, which means revenues are both predictable and highly visible two to three years ahead — something that may help attract investors in the current volatile market environment. It is also a business that generates high cashflows as costs are very low. Formula One does pay a large portion of its revenues to the 12 race teams — under a new eight-year agreement that will be signed with the race teams later this year (the key teams have all agreed to sign already) the payment will increase to 63% of the so called “pre-team split Ebitda” from 56% at present — but even after doing so, it generated an Ebitda of around $500 million in 2011. And with a cash conversion ratio of 84% that meant it generated a bit more than $400 million of free cashflow.
In the future that will be paid to shareholders in the form of dividends, which should result in a dividend yield of about 4%, sources say.
The IPO
Formula One has yet to determine what proportion of the company will be put up for sale, but it is clear the majority of the deal will be made up of secondary shares. Only about $400 million is likely to come from the sale of new shares. The company doesn’t really need to raise cash, but will take the opportunity to de-lever its balance sheet a bit.
A key portion of the deal will come from the Lehman Brothers administrators, which own about 15% and will be selling their entire stake. A number of smaller owners are also expected to sell and CVC may reduce its current holdings further. Sources say the private equity firm intends to retain at least 30%, but as a financial investor it needs to provide a return to its own investors. CVC bought Formula One in 2006.
Bernie Ecclestone, the Formula One CEO who owns 5.3%, will not sell and nor will his wife Slavica, who owns about 8.5%.
The banks are currently trying to secure a number of cornerstone and anchor investors to get as much visibility on the deal as they can before launch. While declining equity markets have made it difficult to find cornerstones for Hong Kong IPOs recently, Formula One should have an easier time, simply because the Singapore regulators don’t require cornerstones to commit to a lockup.
Investors are likely to use a combination of metrics to value the company, including price-to-earnings, enterprise-value-to-Ebitda, yield and free cashflow-to-equity. The pre-IPO placement is likely to act as a floor, since that valuation was for illiquid, unlisted, non-voting securities and doesn’t take any of the potential growth from new races or broadcasting rights into account.
As a sport, Formula One is hugely popular in Asia and observers believe this is also where a large portion of the future growth of the business will come from. Hence the decision to list in Singapore. The Formula One race series has made an annual stop in Singapore since 2008 and the Lion City was the first venue to hold a night-time grand prix. However, Singapore’s race contract will end after this year’s race (in September) and will need to be renegotiated.
Contract negotiations are one of the potential risks for this business, but with the 12 race teams set to sign another eight-year contract later this year and countries lining up to arrange races, the short-term risk should be limited. The fact that the company’s many contracts are renewed at different times should also offer some protection during economic downturns, one source said. Another potential risk is Formula One’s dependence on Bernie Ecclestone, who built the sport into the business it is today, but sources argue that he is surrounded by a very able management team and that the business is a lot bigger than just one person.
Under the current timetable, investor education is expected to last for close to two weeks, with the start of the institutional roadshow scheduled for June 4 or 5. The pricing will be on June 14 or 15 and the trading debut on June 21 or 22.
Goldman Sachs, Morgan Stanley and UBS are joint global coordinators and bookrunners, while CIMB, DBS and Banco Santander are joint bookrunners.
