Friggen great article on Bernie Ecclestone and his F1 empire unmasked in this week's Economist.
Deep undercover stuff: BUSINESS SPECIAL. ON JUNE 28th, in the offices of the Fédération Internationale de
l’Automobile (FIA) in Geneva, delegates from over 70 national
motoring associations around the world, who comprise the FIA’s
supreme body, its general assembly, met in extraordinary session
and voted unanimously on a single resolution. It was to approve a
deal, recommended by the FIA’s senate, to grant the FIA’s
commercial rights to Formula One (F1) motor racing until December
31st 2110—ie, for more than 100 years—to one man, Bernard
(Bernie) Charles Ecclestone. There was no auction for these
valuable rights; Mr Ecclestone was the only bidder. The delegates
were sworn to strict secrecy to ensure no leaks.
The price for such a sweeping concession: $360m, payment of most
of which the FIA has deferred for many years. With this deal, Mr
Ecclestone, through Formula One Management (FOM, the key
trading company in his empire), has, in effect, sole rights to negotiate
with and collect lucrative fees from the promoters who put on grand
prix races. He also has sole authority to sell television rights
worldwide for a sport whose 17 races each year pull in an aggregate
TV audience of around 5 billion.
The FIA is a non-profit-making association that regards itself as the
world governing body for four-wheel motor sport, including F1. This
means it approves and enforces the sporting and technical rules
established for the F1 championship. The FIA has to approve every
circuit wishing to stage a grand prix; it subjects every F1 racing car to
technical scrutiny, and so on. The FIA is dependent on the F1
championship for a substantial proportion of its income.
The FIA’s president since 1991 has been a suave English lawyer,
Max Rufus Mosley (son of Sir Oswald Mosley). He is a
longstanding associate of Mr Ecclestone. Mr Mosley worked for Mr
Ecclestone and the other teams as their in-house lawyer from 1977
until he was elected as FIA president. The FIA presidency is an
unpaid post. During Mr Mosley’s presidency, Mr Ecclestone has
become the richest entrepreneur in Britain, thanks to F1.
In 1987, under the presidency of Mr Mosley’s predecessor,
Jean-Marie Balestre, a Frenchman, Mr Ecclestone became the FIA
vice-president with responsibility for promotional affairs. Mr
Ecclestone, Mr Mosley and Mr Balestre comprise three of the eight
members of the FIA’s powerful senate. Another member is Marco
Piccinini, a director of Ferrari. Mr Piccinini is one of two directors of
FOM apart from Mr Ecclestone.
As Mr Mosley puts it: “The FIA, in conjunction with [FOM],
essentially is F1...In short, the FIA and [FOM] co-operate to put on
the ‘circus’.” Everybody in F1 recognises “Bernie” and “Max” as
F1’s ringmasters.
The financial trail
Until very recently, there have been few clues about F1’s financial
structure; for 20 years Mr Ecclestone has been the person
best-placed to know how much money was flowing where and to
whom. A 1998 BBC “Panorama” investigation cast some light on the
sport’s highly unusual finances. Mr Ecclestone’s ultimately successful
attempt to raise $1.4 billion through a bond issue in June 1999 lifted
the veil a little. Over the past three months The Economist has
examined the extant filings of every British company of which Mr
Ecclestone has been a director since 1951. We have also followed
the flow of the billions of dollars generated by F1 through Mr
Ecclestone’s hands, and examined various deals involving the
commercial rights for F1. This article traces that flow, and raises a
number of questions about it.
A recent civil case in the English courts also shed some light on Mr
Ecclestone’s idiosyncratic business methods. “He conducts much of
his business by way of meetings without making notes and his
memory of what occurred at such meetings is somewhat hazy,” said
the judge, Mr Justice Longmore. Mr Ecclestone’s word is his bond,
or so people in F1 believe. Although FOM successfully defended the
case, the judge, referring to a promise made by Mr Ecclestone to
the plaintiff, said: “In fact [FOM] was doing exactly that at the same
moment Mr Ecclestone was agreeing that it would not. In this
respect, I do have to record that Mr Ecclestone has not been a man
of his word.” Neither was the judge too impressed with him as a
witness: “...I have some reservations about any evidence from him
that is not supported by other evidence in the case.”
Mr Ecclestone cut his business teeth selling second-hand motor
cycles. Early in his career, he showed a talent for financial trickery.
After he sold his motor-cycle business, he put about £10,000 of its
money, rightfully belonging to the taxman, in his own pocket. When
the Inland Revenue sued him, the judge described Mr Ecclestone’s
“machinery” as “altogether extraordinary”, and ruled that he had
breached company law. Strangely, Mr Ecclestone, never normally
one to shirk a battle, did not appear as a witness. The judge said
that “...the documents themselves and the admissions made out of
court cry out for an explanation...and [Mr Ecclestone] does not
condescend to give one...” In December 1971, he ordered him to
pay over the £10,000.
Two months before that judgment, Mr Ecclestone had bought the
Brabham F1 team. At this point in his career he was selling
second-hand cars, and also providing finance for customers. In
1971, he also bought 26 acres of woodland adjacent to his house.
To do so, he borrowed money from a company, Rochelle, based in
Guernsey, an offshore tax haven—hardly the first port of call for
most people financing a land purchase.
The Ecclestone revolution
Our investigation into F1 shows that an estimated $120m was
forgone in unusual circumstances by the FIA between 1987 and
1996 in favour of two companies to which Mr Ecclestone is closely
linked. Moreover, Mr Ecclestone’s combined roles from 1987 as
president of the Formula One Constructors’ Association (FOCA, the
F1 teams’ collective voice), as a vice-president of the FIA and as
owner of several F1 companies involved him in conflicts of interest.
Our investigation also shows that the FIA’s senate in 1995 approved
a deal to grant FOM an exclusive 14-year lease on the FIA’s
commercial rights to F1. The then vice-president of FOCA, Ken
Tyrrell, says he was unaware of the deal until after it had been
concluded. Its effect was to substitute Mr Ecclestone’s company for
FOCA, which had been granted a series of leases on the commercial
rights since 1981. It was this deal that the FIA members voted to
extend by 100 years on June 28th.
How did Mr Ecclestone manage to get into such a powerful
position? When he bought the Brabham team in October 1971, he
was entering a sport dominated by well-heeled amateurs. Rich
businessmen, minor aristocrats and hangers-on would drift around
the grand prix circuit as if it were one huge, if rather louche, party.
The sport was governed by members of the “blazerati”, as they are
known.
The sport was unprofessional, the circuits and the cars were
dangerous, and drivers were often killed. The ordinary fans were
mad-keen enthusiasts prepared to put up with chaotic organisation
and muddy fields to see their heroes flash by in a couple of seconds
and a hail of spray. TV networks tended to broadcast only their
national grand prix race and maybe one or two famous foreign ones,
such as Monaco’s.
Mr Ecclestone saw that many of his fellow team-owners were
engineers or former drivers with little interest in the administration
and politics of F1. They were content to leave such matters to him,
as he developed a growing interest in negotiating with race
organisers on their behalf, and took over the complicated logistics of
moving the F1 circus around the world. He became president of
FOCA in the mid-1970s.
At this time, the costs of running F1 were rising, leading to growing
tensions inside the sport. Both FOCA and the FIA wanted control of
the money from TV broadcasters and race promoters. After a bitter
fight between Mr Ecclestone and Mr Mosley, on one side, and the
FIA on the other, a compromise was reached in 1980, known as the
Concorde Agreement (named after the Place de la Concorde, the
site of the FIA’s office in Paris).
The agreement split F1’s revenues between the interested parties, the
FIA and FOCA. The agreement also recognised the FIA as the
supreme rule-making body and owner of all the commercial rights,
including TV and radio broadcasting, to the sport. But the
commercial rights were leased exclusively to FOCA for four years. At
this time Mr Ecclestone was personally deputed to manage the rights
on behalf of FOCA.
The practical outcome of the Concorde deals was to make the
whole sport more professional. For instance, the teams who signed
them guaranteed to turn up to each race. This in turn meant that
broadcasters could rely on a proper spectacle. Mr Ecclestone,
spotting the potential to bring more money into the sport, signed a
deal with the European Broadcasting Union (EBU) in 1982. The EBU
is an umbrella organisation for public-service broadcasters in
Europe. Under the new deal, according to Mr Ecclestone, European
broadcasters agreed to show every grand prix, instead of the
previous ad hoc coverage. This was a turning-point for the teams’
finances. TV coverage oils the wheels of F1. Sponsorship had
become an essential source of income for an F1 team, and the price
that a sponsor pays is directly linked to the number of TV viewers.
By the mid-1980s F1’s TV income had become more secure. Mr
Ecclestone renewed FOCA’s contract with the EBU in 1985 for a
further five years. However, he did not renew the deal in 1990
because he smelled more money for F1, and, by extension, himself.
So F1 became the first major global team sport to break ranks with
the EBU. Mr Ecclestone realised shrewdly that there were now more
bidders in Europe for the TV rights, because of the growth of
commercial channels. And, by this stage, the number and
demographic profile of F1 viewers were more attractive to
advertisers, so TV channels could afford to pay more.
Bernie in pole position
In 1987 Mr Ecclestone entered a new phase of his F1 career. That
year, he became a vice-president at the FIA. In 1988 he sold his
Brabham team. A new Concorde Agreement also came into effect
for five years; a similar agreement, known as the 1992 Concorde
Agreement, extended it to the end of 1996. Under these
agreements, the FIA once again leased its commercial rights to
FOCA. This time, however, FOCA members allowed Mr Ecclestone’s
then key trading company, Formula One Promotions and
Administration (FOPA), to manage the rights. So these agreements
were, in effect, trust arrangements between Mr Ecclestone and
FOCA.
There were two streams of revenue: fees paid by broadcasters, and
fees paid by race promoters (see diagram 1). TV revenues were split
47% to the F1 teams; 30% to the FIA; and 23% to FOPA.
Promoters’ fees were kept by FOPA, which undertook to pay prize
money to the teams, hitherto paid by the promoters. The teams
ceded the promoters’ fees to FOPA because Mr Ecclestone was
prepared to take some commercial risk, since not all the promoters
were considered good for the money. For Mr Ecclestone’s part, this
deal was a significant opportunity: the larger the fees, the more
money for him.
Promoters, who are not necessarily circuit owners, bear some of the
costs and financial risk of staging a grand prix. Their costs include
maintaining or renting a track, advertising, FIA fees, safety personnel,
and so on. They rely for their income on ticket sales, fees from
concession holders, and some corporate hospitality. They must cede
to Mr Ecclestone any media rights they have and agree to
restrictions on promoting other types of races. Most also give up
trackside advertising rights and set aside an area for the Paddock
Club (a swish corporate hospitality suite that is part of the F1 circus).
By the early 1990s Mr Ecclestone was to acquire yet another hat.
He himself became a promoter at several circuits. For instance, he
has run the Belgian grand prix at Spa for the past decade. As the
rights holder, FOCA’s name was on all contracts with TV companies
and promoters. So for those races that he promoted until 1996, this
led to Mr Ecclestone, wearing his FOCA hat, negotiating with himself
wearing his FOPA hat.
Formula One goes offshore
Given the background of Mr Ecclestone’s dealings with the EBU, the
transaction the FIA proceeded to conclude was peculiar, to say the
least. For the duration of both the 1987 and 1992 Concorde
Agreements, it surrendered its 30% of the TV revenues, which were
worth an estimated $120m, to two companies, both called Allsopp,
Parker & Marsh (APM), in return for a modest annual fee. The FIA
claims that the deal was done because of uncertainty over F1 TV
revenues. In the light of the EBU deals, this explanation is very hard
to credit. The FIA has declined to answer any of our detailed
questions on the APM companies. Mr Mosley has told us “...most of
your questions are misconceived and there is little I can usefully do,
short of attempting to write your article for you.”
The biggest question is: Who was behind the APM companies? The
first APM (APM1) was a British company incorporated in 1983. Its
first directors were Patrick (Paddy) McNally and Luc Argand, a
Swiss lawyer. Mr McNally used to work for Philip Morris, a
tobacco company, where one of his jobs was to act as gofer for the
late James Hunt, F1 world champion in 1976, who drove for a team
that was sponsored by a Philip Morris brand. Mr McNally has been
a close business associate of Mr Ecclestone since 1984. Mr Argand
is a trustee of an offshore trust set up by Mr Ecclestone’s Croatian
second wife as part of an elaborate tax-avoidance scheme (see
diagram 2). In 1996 Mr Ecclestone transferred two of his key
companies to his wife.
APM1 had 12 shares of equal nominal value. Legal (as opposed to
beneficial) ownership of ten of them can be traced via two other
companies to a trust in Guernsey. Whoever was the beneficial
owner, the secret was safe in Guernsey. There are other intriguing
facts about APM1. A firm of solicitors made its initial regulatory
filings; the person who signed some filings was Stephen Mullens.
From late 1990 until early 1993 the address of APM1’s registered
office was that of Marriott Harrison, a firm of solicitors of which Mr
Mullens was by then a partner. This firm acted for Mr Ecclestone’s
companies in last year’s bond issue. Mr Mullens is a legal adviser to
Mr Ecclestone’s family trust. Mr Mullens and Mr Argand are
directors of Excelis, a French company that owns the Paul Ricard
racing circuit. Excelis is ultimately owned by the same family trust.
APM1 was highly profitable: its total profits were nearly $34m on
sales of $46m between 1985 and 1988. This compares with profits
of just over £9m ($14m) for FOPA, Mr Ecclestone’s company.
APM1’s profits escaped British tax, as the firm was deemed to be
non-resident in Britain for tax purposes. After changes in British tax
rules in 1988, APM1 was no longer non-resident and ceased to
trade.
In September 1988, a company also called APM (APM2) was
formed in the Republic of Ireland. At that time the Irish authorities
allowed local companies to be non-resident for tax purposes,
subject to certain criteria. APM2 was deemed to fulfil a key criterion
as none of its directors, who appear to be nominees for its real
directors, lives in Ireland. Nor were its legal owners based in
Ireland. APM2 has two shares. Mr Argand has been the legal owner
of one share since 1989, and people in his office the other one.
APM2 has never filed any accounts in Ireland. In order to keep its
finances secret, it has claimed an exemption that is open only to “a
company not trading for the acquisition of profit by [its
shareholders]”. To qualify for this exemption, a company’s
constitution must include an explicit provision to this effect. Although
APM2’s constitution does contain such a provision, it was clearly
trading for profit.
Documents show that APM1 and APM2 were really the same
company. So the beneficial owners of both must have been one and
the same. Mr Ecclestone has told us that he has “always understood
Mr McNally to be the owner of Allsopp, Parker & Marsh.”
However, according to audited accounts for APM1, which Mr
McNally signed, he held only one of APM1’s 12 shares. The
accounts tell the same story for Mr Argand.
As Mr Ecclestone was responsible for distributing FOCA’s TV
income, he should have known about payments of the size and
importance of those made to the APM companies. However, Mr
Ecclestone has challenged this inference, saying: “Insofar as it
involves payments by FOCA, your information about an agreement
between Allsopp, Parker & Marsh and the FIA is not correct.”
Mr Ecclestone has further links to APM2. In 1987, the FIA
transferred to APM the right to exploit the broadcasting rights to FIA
championships other than F1. From 1990 until 1996, APM2 asked
International Sportsworld Communicators (ISC), another company
controlled by Mr Ecclestone, to administer some of these rights. In
August 1996, ISC concluded an agreement with the FIA under which
it obtained the rights previously held by APM. This year Mr
Ecclestone’s family sold ISC for an undisclosed sum, but certainly
many millions of dollars.
As well as the FIA’s 30% share of F1 TV revenues, two other
sources of F1 revenues appear to have passed through the APM
companies: income from the Paddock Club and money from
trackside advertising which, together, now run to tens of millions of
dollars a year. The financial manager for one promoter told The
Economist that Mr Ecclestone had given his company no alternative
but to surrender trackside advertising rights to the APM companies.
Similarly, the Paddock Club got a prime site free. He also said that
he believed that Mr McNally was in charge of APM2; and that he
had never heard of its registered directors. Yet Mr McNally has
never been a director of APM2. It is surprising that Mr Ecclestone
insisted on these benefits going to APM2 if he was not absolutely
certain about its beneficial ownership.
The APM companies also have a trading relationship with Allsport
Management SA (Allsport), a Swiss company set up in 1984. A
Swiss company’s financial information is not available for public
inspection, nor can its beneficial ownership be traced. Today
Allsport is the name associated with trackside advertising rights and
the Paddock Club. The current directors of Allsport are Mr
McNally, Mr Argand and a Swiss woman. Mr Ecclestone has told
the press that Allsport is Mr McNally’s company. While it could be
argued that Mr Argand adds gravitas to the board, it is equally
possible that he represents the interests of a beneficial shareholder of
Allsport other than Mr McNally. Mr McNally has declined to
answer any detailed questions on the APM companies or on
Allsport.
Cashing in
Mr Ecclestone’s main company made a profit before tax (and his
own pay) of £59m in the year to March 1996. He foresaw fabulous
wealth if he could float it on the stockmarket. One potential problem
was that Mr Ecclestone’s name was not on any of the contracts for
F1 rights: FOCA’s was. This problem was solved when, in late 1995,
the FIA’s senate granted the FIA’s F1 rights to FOM (ie, Mr
Ecclestone) for 14 years for $8m-9m a year, instead of 30% of the
TV revenues as under past Concorde Agreements. In other words,
from 1997, the FIA surrendered directly to FOM income that had
previously gone to the APM companies.
The teams were furious that Mr Ecclestone, as president of their
association, FOCA, had done a deal with the FIA to swap his
company, FOM, for FOCA as the rights holder. Three F1
teams—McLaren, Williams and Tyrrell—stood up to him. The
remaining eight teams promised support, but this soon evaporated.
The three teams refused to sign a new Concorde Agreement, even
though this hurt them financially.
Mr Ecclestone appointed an investment bank, Salomon Brothers, to
prepare for the flotation of Formula One Holdings (FOH), but the
quarrel with the three teams overshadowed his plans. These were
put on hold after the European Commission started an antitrust
investigation. In June 1999 it made an initial ruling that F1 was in
breach of European competition laws, though Mr Mosley and Mr
Ecclestone hotly dispute this. The case continues. The commissioner
who launched it, Karel Van Miert, refuses to comment other than to
say it was “the most menacing case” he had undertaken.
Mr Ecclestone soon came up with an alternative to a flotation: a
bond issue underpinned by revenues from race promoters and TV
broadcasters. To launch this the Concorde Agreement needed to be
extended to ten years, for which Mr Ecclestone wanted the support
of all the F1 teams. The rebel teams, one of which was under new
ownership, changed their minds and signed the new 1998 Concorde
Agreement. It is not clear why they did so, but the best clue may lie
in the bond-issue prospectus, which states that: “Upon any flotation
of FOH...some of the Formula One teams are expected to become
significant shareholders in FOH.”
Despite the European Commission’s investigation, the bond issue
was launched last summer, raising $1 billion for the Ecclestone trust.
The co-lead managers of the bond issue were Westdeutsche
Landesbank (WestLB), a German state-owned bank, and an
American bank, Morgan Stanley Dean Witter. As there was little
appetite for the bonds, WestLB initially took as much as two-thirds
of them on to its own books, financing that purchase by issuing
bonds of its own. As WestLB’s bonds were state-guaranteed, they
carried a lower rate of interest than the bonds issued by Formula 1
Finance.
Since the bond issue, Mr Ecclestone’s family trust has raised a
further $1 billion by selling 50% of SLEC Holdings (a holding
company for FOM) to two firms, which, in turn, have sold out to
EM.TV, a quoted German media company, for $1.8 billion.
Companies issuing bonds that are to be listed on a stock exchange
have to prepare a prospectus. This document discloses all material
matters, like important contracts, affecting a company’s business. A
likely candidate for disclosure in such a prospectus was the
arrangement between Mr Ecclestone and the FIA. The royalty of
$8m-9m a year payable by FOM rose to $38m a year, though this
still seems a small amount given that F1’s total TV revenues for 1999
were $241m. A 30% share for the FIA would be equivalent to
$72m, and F1’s TV revenue can be expected to rise over the next
few years.
The relatively small size of F1’s total TV revenue surprises some
observers. “Mr Ecclestone is not extracting full rents from his TV
rights,” says one leading sports-rights consultant. One explanation
may be the 33.3% discount that Mr Ecclestone has given to
broadcasters if they agree not to show other races, such as
America’s Indy 500. Another may be that Mr Ecclestone is, in
effect, FOM; he spreads himself extremely thinly as he handles the
negotiations with TV companies. But a cynic might predict that the
rents may rise now that FOM has bought the FIA’s F1 rights for a
further 100 years for a multiple of less than one times FOM’s 1998
revenues ($404m). In 1998, FOM made pre-tax profits of $202m.
Other motor-sports rights are soaring in value: the American TV
rights for NASCAR, an American stock car championship, fetch
$400m a year. FOM, in fact, makes most of its profits from
promoters’ fees rather than TV income. FOM’s share of TV revenues
has to pay the millions of dollars that it costs to provide the
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