As the momentum gathers behind a Virgin takeover of the Honda team, with Bernie Ecclestone throwing his weight behind the idea, I’ve been looking into how a deal might be structured and how that might compare with a management buyout, to see which is more likely and which Honda might prefer.
I should stress at the outset that this is just a look at how these deals are done, I don’t have any of the precise numbers or inside information, but these kinds of deals are not that hard to analyse from the outside if you know the right people to ask, which in this case are people working in Mergers and Acquisitions at merchant banks, because they do these kinds of deals all the time. So I’ve been asking around in those circles.
Looking at this from Honda’s point of view, they have to dispose of the F1 team in a way which will cost them the least in terms of money and loss of face. To close down the team and fulfil all their obligations, which include redundancy payments will cost around £40 million. There are assets to dispose of, which will bring income, such as the wind-tunnel, for which there is a potential buyer and the estimate is £10 million from striping out the assets. Honda has confirmed that this is still an option.
The problem with the management buyout option is the financial capital. Three years ago Nick Fry and Ross Brawn would have been able to go to a bank like RBS, or to a venture capital business like Apax or Bridgepoint and would probably have been able to get a deal which brought in working capital, in return for a 40% shareholding. But F1 is no longer very fashionable in the City, too many banks have lost money in the sport and it would be a very hard sell to any major bank at a time like this. They could look to the investment arm of an Emirate government, like Dubai or Qatar, but these too have become much more wary.
An operator like Richard Branson will be aware of Honda’s numbers. Let’s not forget he picked over the bones of Northern Rock bank with a view to taking it over. He will be in a position to say to them that he will take it off their hands if they pay him £30 million, which is cheaper for them than closing it down and it provides a credible buyer. With the £40 million they are due from TV money for last season’s results, he now has £70 million. Bruno Senna brings with him significant sponsorship, I’ve heard $14 million, which is around £10 million.
With costs due to come down that makes the team viable and I wouldn’t be surprised if he doesn’t get Ecclestone to advance him some money as a sweetener to commit to F1, or underwrite the Mercedes engine deal for example, because F1 would benefit massively from Virgin’s seal of approval at a time like this. Bernie has had an ‘involvement;’ in many teams over the years.
Branson would take the view that three years of F1 would give huge benefit to his brand globally and then he would either close it down himself, or sell it on once the downturn was over.
As I said earlier, he got a lot of headlines from his Northern Rock bid and he likes headlines, they provide free publicity for him and Virgin and this may just be another example of this. He is not a big spender, cuts everything to the bone. He has some good managers and would certainly leave Brawn in charge of the F1 team, if he had any sense. In some ways he would be an odd fit in F1.
But from Honda’s point of view, he represents a way out of a nightmare with minimum expense and maximum credibility.
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Buying Honda could also be a very good long term investment.
If the costs of competing in F1 are reduced massively and the share of TV revenue increases, an F1 team could be a very profitable business no matter where they are on the grid!
There could easily be a time when there’s 100s of potential teams wanting to get into the lucrative world of F1 but can’t due to the limited Grid slots. Nobody gets relegated from F1 so these grid slots could be worth a fortune.
Great article – insightful. How do you think Ross and Fry will feel if Branson ‘steals’ the deal from them? Maybe a joint buy out which gives Ross and Fry a stake would make sense to keep them on side?
Why would Branson want his brand associated with a Formula One back-marker when he already has such incredibly successful companies as Virgin Trains, Virgin Atlantic, Virgin Broadband… oh.
Very interesting analysis. Reading through it though my mind drifted to a ‘what if’…. What if F1 teams were still able to carry tobacco sponsorship on their cars today, would teams like Honda and Super Aguri still be around today as a result? Would be interested to hear your comments on the influence tobacco companies had on the financial running of F1 in a future blog.
Good article James. However I still have this nagging doubt in my head it’ll all fall through and F1 will have only 18 cars and the driver I have supported since 2000, Jenson Button, will not be racing. Every day I check online praying to read: “Virgin buy out Honda” or “Management buyout a success” or words to that effect but alas no. I read on the BBC that Mercedes have given a deadline of ‘days’ to secure finances for their engines. But after reading your article I can see light at the end of the tunnet and the way you put it would make Honda look very silly if they shut down the team.
They have had a history for pulling out of F1 (in the sixties, 1992 and now) so let’s hope this is the last time they grace the sport. Kudos to Renault, Toyota, BMW, Mercedes et all for braving the storm. I have so much more respect for those teams. Let’s hope ‘Virgin F1’ joins the field next year .
Seeing Richard Branson on the Beeb just now refusing to be drawn but suggesting that F1 would be something to get involved with if it were promoting cleaner fuel I am somewhat less than certain that this is more than a wing and a prayer story.
It has come at a time that Mr B is promoting a 25 year anniversary of Virgin Atlantic, hence the rather amusing but slightly sexist ad on the box at present. He’s get a lot of exposure and may be spending very little money on this. You mention above that he did this with Northern Rock.
I don’t think I’ll hold my breath on this……
Just tell Branson he can come onto the Starting Grid at each race and turn one of the Pit Board girls upside down, and it’s a done deal!
In view of what Richard Branson has said this morning it sounds like he is having second thoughts anyway – or maybe this was just a stunt in the first place. [ Listen to Branson interview with BBC ]
Branson’s green demands to join f1 are a joke. How can someone who runs an airline act like he cares abour the worlds ecology??? F1 is my life. To hear this hypocrite make demands is over the top. If you want to join, JOIN, get your checkbook out. Otherwise shut up. Thank you for your work, James.
Well maybe he can emulate Audi at Le Mans and use diesels and biofuel. I seem to remember that the Le Mans series cars (used to be called sports prototypes) go considerably faster than F1 cars.
Hoping to see an article based around the latest comments from Bernie that he offered to help out the Honda management buy-out deal to the tune of a hundred million pounds, but Fry and Brawn turned him down.
branson add credibility!? he states that he’ll only join F1 if Bernie is still in charge, and F1 becomes more green focussed, as it’s not very green at the moment… he has less credibility than the idiotic earth dream that killed honda in the first place!!
a single transatlantic flight will produce more carbon emissions than a whole season of F1 cars going round the track!