CPPIB bolts on the racing tyres

It sounds kinda exciting, doesn’t it?

What could be more thrilling that owning part of a high performance motorcycle race marketing agency, to go along with banking the Formula One race organization? Sure beats investing in an airport in Australia or a Middle Eastern port. The board meetings will be more exotic, the revenue profile more volatile, and the groupies far more compelling.

Perhaps I’ve been missing something, given that I’ve never watched a high speed motocycle race. I do know a couple of guys who drive Ducatis on the weekend, but now that I own part of the speedbike “racing industry” via the recently announced CPP Investment Board deal, perhaps I should have a look. According to André Bourbonnais, CPPIB’s senior vice-president of private investments, there’s a “growing global interest in top-level racing, from spectators, advertisers and broadcasters” (via The Globe and Mail). NASCAR ratings are down of late, but I digress.

More intriguing beguiling was the announcement that Canadians are now banking Bernie Ecclestone. While I have seen a few Formula One races in my time, I must admit that I can’t name a single active F1 driver today; can you? And here were are, providing US$400 million of 7 year (likely subordinated, even unsecured) high yield debt. Gazooks.

It was only last week that I was lamenting the fact that our CPPIB hadn’t trusted any of its current pile to the Canadian VC industry over the past few years (see prior post “Canadian Business Leadership Forum 2012” Oct 23-12). And, as if by divine intervention, Canada’s $165 billion fund, goes and does something a lot more sexy — and potentially risky — than back a Canadian-based biotech fund.

How so, you ask?

It was only a few months ago that the Formula One organization pulled its proposed initial public offering. Although we are advised by CPPIB that the F1 company is backed by the “principality of Monaco”, it seems that the proposed IPO wasn’t going to be launched in Europe, the FTSE or even the NYSE. Singapore, in fact, was the target market. Proximity to Chinese investors perhaps.

Despite the fact that there have been 171 “Global IPO” pricings year to date (source: Renaissance), the F1 IPO was shelved due to “market conditions”. Thanks to reporting by Chris Smith at Fortune Magazine five weeks ago, perhaps there are some particularly F1-specific reasons why Mr. Market couldn’t stomach the valuation and/or structure being offered:

– the IPO was “expected to help pay off approximately $2.2 million in debt, and some of that debt will also be sold to investors in the form of loan notes bundled with shares.”
– “Some may view the decision to wait as a smart financial move, but the hesitation might also point towards some of Formula One’s recent financial struggles.”
– “The future of the sport is currently unclear because Formula One teams continue to negotiate a new Concorde Agreement with the FIA. The contract, which governs the financial details of the sport, remains unsigned despite rumors throughout the summer that unanimous agreement was imminent. The current Concorde Agreement expires at the end of the year, and uncertainty about the sport’s future likely has a role in the company’s IPO delays.”
– “While the sport is generally popular on television, viewership has dropped sharply this year. Much of the decline has to do with the over-the-air BBC now sharing its live telecasts with Sky Sports, a subscriber-only network. Formula One races averaged 2.2 million live viewers per race through the first 11 races of 2012, down from 4.2 million live viewers per race in the same races last year. Total viewership for those races fell from 45.7 million live viewers to 24.2 million, a stunning 47% drop.”

To make matters potentially worse for any near term IPO, it has been reported that Mr. Ecclestone received a demand last week from a German bank, seeking $390 million for “alleged illegal payments and lost earnings to the bank”. All in relation to a scandal that has jailed one so far, and may lead to an indictment against Mr. Ecclestone, too, according to the UK Daily Mail.

I suppose none of this affects what goes on at the race track, or how many F1-licenced ballcaps get sold on a given weekend. But what is fascinating is the premise of the CPPIB loan in the first place. If the F1 business is so profitable that it has long since attracted private equity backing, why does F1 need a new US$1 billion loan, but to help manage lender fatigue within the existing US$2.2 billion of debt syndicate (as reported by Fortune in September)?

The CPPIB team led the refi of a US$1 billion high yield note that had come due. The long nature (2019 maturity) of the CPPIB loan suggests our investment managers have a huge level of confidence in the present and future business of auto racing. The fact that CVC Capital Partners sold $500 million worth of F1 equity shares to Waddell & Reed Financial Inc. (NYSE: WDR) in a deal last June can’t be ignored. That deal, according to Dan Primack, valued the F1 company at US$9 billion or so, and took Waddell & Reed’s equity stake to 20.9%. That’s lots of enterprise value to cover us, provided that constructors agree to a new contract soon.

You might take comfort from Mr. Bourbonnais’ statement to the Globe that our “counterparty is the Principality of Monaco” (a tax haven and the 2nd smallest country in the world). But I wouldn’t. Unless Monaco has guaranteed our loan directly, no one should think for a minute that this is anything more than a funky (and likely) unsecured high yield debt deal for a very high profile PE-backed asset.

MRM