Formula One races away from being just a money pit

By Chris Bryant

Investing in Formula One was once only for motorsport masochists; teams splurged on technology in an often fruitless quest for glory, with some ending up bankrupt or changing hands for only a few cents.

Thanks to canny decisions by Liberty Media Corp., the sport’s commercial rights holder, F1’s 10 independently owned teams (each running two drivers) are no longer just trophy assets or marketing fripperies: several are profitable (gasp!) and, on average, their values have soared to almost $2 billion apiece, according to an estimate by Forbes magazine.

But there’s an irony in this rags-to-riches transformation: Liberty Media has made F1 more investable by making it less capitalist. And its goal of fostering more rivalry on the track has been accompanied by limiting competition off it.

There’s no question that the Netflix documentary Drive to Survive has transformed interest in the sport, with an F1 movie starring Brad Pitt set to follow. F1 is attracting new US fans and Miami’s star-studded race at the weekend was a sellout. Having acquired the commercial rights for $4.4 billion in 2017, the Liberty Formula One group’s market capitalization has soared to more than $16 billion, according to the tracking stock used by the conglomerate to highlight the value of this particular business, rather than the company as a whole.

Team valuations are soaring too. Fashion billionaire Lawrence Stroll, who acquired a racing team out of administration in 2018 prior to rebranding it as Aston Martin, is reportedly in talks to sell a minority stake that would value the team in excess of £1 billion, having already achieved similar levels in a private equity deal last year. That’s a striking contrast with Aston Martin Lagonda Global Holdings Plc, the British luxury carmaker Stroll co-owns separately, which has a similar market value despite generating much more revenue.

However, these prices make more sense if you think about why investors often steer clear of car companies — the industry is notoriously capital intensive, and intense competition hurts margins.

Liberty Media has transformed the fortunes of Grand Prix racing by copying aspects of how many US sports are run. It persuaded F1’s teams to embrace more equitable terms starting in 2021, capping how much teams could spend with a carveout for driver salaries and a separate limit on power-unit costs. This has largely put an end to the financial self-sabotage and made budgeting more predictable.

Storied racing teams such as Ferrari, Mercedes and Red Bull were also persuaded to accept a fairer split of the sport’s media rights and promoter fees — an annual prize fund that’s now worth around $1.2 billion.

While there are still significant financial incentives to win races, and Ferrari and others get extra money due for past achievements, minnows now compete based on a more sustainable financial footing. Furthermore, encouraged by incumbents worried about diluting their slice of the cake, F1 has also set a high bar for admitting new teams: Anyone joining the sport has to pony up a $200 million fee, and some teams now argue the financial barrier to entry should be even higher.

With F1 pursuing a more sustainable image — from 2026, cars will use 100% e-fuels and greater electrical propulsion — Volkswagen AG’s Audi brand and Ford Motor Co. and are preparing to enter the sport by respectively acquiring and partnering with existing outfits.

In theory, there’s room for 12 teams on the grid, but so far clean-sheet applications — such as former racing drivers Michael and Mario Andretti’s bid with General Motors Co. — have been turned down. For now, this approach has boosted teams’ scarcity value, a tactic that reminds me of Ferrari — the only traditional automaker to have decisively escaped the car industry’s valuation trap, achieved by always building fewer vehicles than the prevailing level of demand.

Thanks to the sport’s greater US exposure, teams have been able to negotiate more lucrative sponsorship deals, including with deep-pocketed tech companies. Last month, Ferrari signed up HP Inc. as its title sponsor, which should help the Scuderia cover the cost of new hire Lewis Hamilton’s wages from next season. McLaren Racing’s sponsors include Alphabet Inc.’s Google, while Mercedes has a partnership with Meta Platforms Inc.’s WhatApp.

Not all F1 teams have become profitable, but most are in better financial shape: Mercedes-Benz Grand Prix Ltd, whose operations include the racing team and an engineering services division, achieved a 21 per cent operating return on revenue of £546 million in 2023, according to accounts filed at the UK’s Companies House, which is higher than the margins achieved by the luxury car unit of shareholder Mercedes-Benz Group AG.

Meanwhile, Renault SA’s Alpine Racing Ltd achieved an impressive 14% operating profit margin in 2022, the latest year for which figures are available. Renault’s £1 ($1.25) investment to acquire the debt-laden Lotus F1 team in 2015 looks like one of the French group’s better decisions — Alpine sold a 24 per cent stake to a consortium including actor Ryan Reynolds last year for €200 million ($214 million), valuing the team at around $900 million.

Values have risen so fast there’s a danger of investors getting carried away.

Efforts to boost F1’s popularity and broadcasting revenue in the US remain a work in progress, and the way Andretti-GM’s failed application was handled looks like an own-goal; the chairman of the US House Judiciary Committee, Jim Jordan, has demanded an explanation from Liberty Media and Formula One.

Notwithstanding McLaren’s Lando Norris win in Miami — the British driver’s first victory — Red Bull’s Max Verstappen continues to dominate the sport, which could become dreary.

Unless drivers’ salaries are capped as they are in US sports, pay inflation might one day threaten the sport’s fairness and financial stability — Hamilton’s salary for switching to Ferrari from Mercedes hasn’t been revealed, but the prancing horse’s annual report notes that these personalities “are typically among the most highly paid athletes in the world.” (Unsurprisingly, drivers who risk life and limb oppose wage socialism.)

I don’t think these risks will dissuade investors and automakers from continuing to bid up the value of F1 franchises. So if you still want in, start with one pound as before — and then add nine zeroes.