Formula 1 Financial Success
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The 2024 Melbourne Grand Prix has just finished (congratulations Ferrari on taking out the top 2 podium spots) and it has set records for physical attendees (452,055).
Formula 1 itself has grown since Liberty Media took control in 2017. The Netflix docuseries “Drive to Survive” is often credited for much of the increased value of F1 teams, which is undoubtedly true – because increased fan numbers drives attendance at races, television rights revenue, and sponsorship revenue. But the new F1 owners have also injected some fiscal discipline with its closely monitored Cost Cap regime, which has gone a long way to turning many teams profitable.
Today we’re going to breakdown the finances of the most profitable F1 team to see what makes them the best financially: Mercedes AMG.
The Bernie Eccleston era
The Bernie Ecclestone era ended in 2017 when Liberty Media acquired Formula 1.
He didn’t invent the concept of a worldwide motor vehicle racing formula competition – that credit generally goes to Marquis Antonio Brivio Sforza. Sforza was an Alfa Romeo racing descendent of the rulers of Milan in the 15th and 16th centuries.
Bernie was simply a strong negotiator and dealmaker who managed to unlock the potential of motor racing as worldwide entertainment in the 1970’s. He made his fortune out of wheeling and dealing (pun intended) with countries and companies to ensure that broadcasting rights and sponsorships turned into a cashflow machine.
In 2015 Her Majesty’s Revenue & Customs caught up with Bernie, and in 2023 he was convicted of fraud after failing to declare ￡400m of overseas assets to the UK government. As a result he received a suspended jail sentence and was forced to pay more than ￡652m to HMRC.
He was good for the money though, having sold Formula 1 in 2006 to CVC Capital Partners for US$2 billion.
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F1 Profitability: The Liberty Media Effect
CVC Capital cashed out after 11 years for ￡6.4 billion, giving them approximately ￡4.9 billion profit (using avg GBP/USD rates for 2006). That’s a CAGR of 14.1% - not a bad return on investment (but is it PE-worthy?).
By the time Liberty Media took over though, CVC was almost finished squeezing the blood from their F1 stone. Profits were beginning to decline and fan numbers were starting to decline.
Liberty Media brought in a branding strategy fit for the new millennium – it started marketing to young people and actively sought them on social media … pretty amazing that this is something CVC didn’t really try earlier, but then they did keep Bernie on as CEO – here are his views on social media from 2014:
I don't know why people want to get to the so-called 'young generation'. Why do they want to do that? Is it to sell them something? Most of these kids haven't got any money. I'm not interested in tweets, Facebook and whatever this nonsense is. I'd rather get to the 70-year-old guy who's got plenty of cash
Liberty often gets credit for partnering with Netflix on the Drive to Survive series, and rightly so. It really helped expand their fan base:
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Expansion of the fan base leads to increased value of broadcasting rights, and moving into the American market via its own streaming platform F1TV (via ESPN) drove audience numbers by 58% YoY in 2022. In 2023 the new Las Vegas Grand Prix was a massive success, being the most watched race of 2023, reaching 2.7 billion people worldwide.
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For Liberty Media the financial equation is a simple one: Eyeballs = Dollars. Revenue was US$3.2 billion in 2023, an increase of 24.5% on 2022.
And the teams earn a lot of income from the broadcasting rights. This is no accident – financial sustainability of the teams is part of Formula 1’s Strategic Plan .
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F1 teams are entitled to share 50% of the profit Formula 1 makes from commercial rights (including broadcasting, sponsorship, merchandising etc). In 2022 this was worth roughly US$1.157 billion .
But this is money is not split equally between the teams, for reasons which I can only assume are meant to increase the drama (and therefore viewers) of F1. Here are a couple of reasons for teams to get a larger share, or indeed penalties for doing the wrong thing:
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But overall, Liberty Media’s approach of growing the entire pot available for itself AND the teams has resulted in teams being more profitable overall. In fact, the average value of an F1 team is now US$1.88 billion. This is a 276% increase in just four years .
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OK, for that I can forgive favouring Ferrari.
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Actually, Ferrari is estimated to be the most valuable F1 team, at US$3.9 billion – just pipping Mercedes AMG at US$3.8 billion.
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Valuations of F1 teams are a bit tricky though, because there’s not really a deep market for them so market value can’t be used reliably. Discounted Cashflows? Again, really difficult to estimate, especially given their variable performance-based revenue streams, and so highly variable. What we do know is their value does not correlate at all to their Balance Sheets.
So that’s why we’re going to look at what we do know – which is profitability. At least, for the teams that publish annual financial statements.
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Mercedes AMG
Of the six teams that publish financial statements, Mercedes AMG is the most profitable. The cumulative impact of steadily increasing prize money and the cost cap has really worked for them:
TBH this F1 team’s P&L should be used as a case study of how to successfully grow a business:
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When you can do those things, your Balance Sheet will look like this (well, it will look similarly good. Yours won't have some of the cool stuff an F1 team has, of course):
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(for those that noticed – “Heritage Assets” is exactly what it sounds like. This F1 team has ￡6.3m in classic cars.)
Should a Formula 1 Team make a lot of money?
For non-manufacturer teams, definitely yes. If they don’t make money, they go bankrupt – remember Force India? It lost almost $400m over a decade.
Some manufacturer teams make silly mistakes - Lotus almost went bankrupt in 2012, because they signed Kimi Raikonnen on a contract that guaranteed €50,000 per point. He then went on to score 390 points in two years, bringing the team to the brink of bankruptcy.
Some manufacturers don't even treat their teams as completely separate from their day to day operations. Ferrari famously doesn’t separate out the cost of its Formula 1 activities from its normal business.
Mercedes Benz AMG treat F1 as an integral part of its brand – which in 2023 was valued at $61.4 billion , enough to put them in 7th place of Best Global brands.
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That the team actually makes a decent return is simply German efficiency.
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?? Hi, I'm the founder of?Ascern Advisers . We do Strategic & CFO advisory for businesses with Growth Potential. DM me or email me at?[email protected] ?if you want to chat.