Formula One’s Most Valuable Teams

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Ferrari And Mercedes Gain Ground Amid A Cost-Cutting Tug-Of-War

Photo: Depositphotos.com/efecreata.com

In early November, Lewis Hamilton took second place at Austin’s Circuit of the Americas, finishing just a few seconds behind teammate Valtteri Bottas. The runner-up finish secured enough points for Hamilton to clinch his sixth Formula One championship, leaving him just one shy of matching Michael Schumacher’s record. It’s an incredible feat, and the 34-year-old Brit has rightly been anointed one of racing’s all-time greats. But Hamilton’s continued dominance—five of his championships have come in the last six years—is also a bellwether of the biggest threat to Formula One’s future success: the rampant influence of unchecked spending.

Much of Hamilton’s on-track success has been made possible by the simple fact that his team, Mercedes, is willing to outspend the competition: The German-owned outfit shells out some $430 million per year, more than double what most F1 teams are able to spend in a given season. And Mercedes has subsequently been untouchable on the track, winning each of the last six championships with ease (the team has clinched all but one of those season titles with at least three races still left on the calendar). The sport’s least valuable teams are forced to fight for the scraps while struggling to remain solvent; in fact, F1’s history is littered with the corpses of teams that couldn’t withstand the financial pressures.

There’s nothing new about that massive wealth gap or the way it distorts on-track competition in the world’s most expensive sport. But those issues are suddenly at the forefront as F1 owner Liberty Media prepares to implement long-awaited cost-control measures, among a number of other major reforms. The end goal is a renewed series defined by exciting racing and financial viability, but those changes will erode some advantages currently held by the sport’s top teams. And since F1 still hasn’t secured long-term commitments from its teams—the current lineup is locked in only through next season—the clock is running down as it tries to keep racing’s biggest spenders on the grid into the next decade.

Not too long ago, Formula One was a bit of a mess. Financial instability forced the series to repeatedly back away from attempts to go public in Singapore, and a parade of potential private buyers abandoned their plans after getting a closer look at what was a clandestine spiderweb of holding companies constructed by former F1 boss Bernie Ecclestone. The series shed 12% of its value—more than $1 billion—in less than five years.

That benchmark was set in January 2017, when billionaire John Malone’s Liberty Media finally stepped in to buy the series for $8 billion. F1 has since seemed to find some solid ground. Last year, the series generated $1.83 billion in revenue, a 2.5% year-over-year increase. F1’s tracking stock, FWONK, has a $10 billion market cap and is trading around an all-time high (the share price is up 48% since Liberty’s purchase). American television audiences are growing—up 22% this season—as is global race attendance.

But F1 is not yet a successful turnaround story, and some cracks are showing. Almost the entirety of 2018’s year-over-year revenue growth was from ancillary businesses: the second-tier Formula Two, TV production, hospitality and travel services. Meanwhile, series-level sponsorship revenues were down, and track sanctioning fees jumped just $1 million despite an added race. The series has shed global TV viewership as it’s moved from free-to-air to cable networks, yet broadcast revenues have largely remained flat. And although U.S. viewership is climbing, the total audience is still minuscule—F1’s audience of 680,000 American viewers per race is just one-fifth of Nascar’s average—and it’s been reported that ESPN doesn’t even pay a rights fee.

So the series isn’t left with much room to navigate as it aims to implement wide-ranging reforms that will level the playing field. Beginning in 2021, the series will introduce standardized parts, reduce testing and shift to new car designs to diminish downforce, thereby allowing more competitive racing. Most notably, F1 will also cap team spending at $175 million per season, although with some notable carve-outs (engine costs and driver salaries, among other line items, won’t count against that cap).

It’s a radical, but necessary, adjustment. While most teams are fine with losing some money—on-track success is mainly a marketing play for the teams’ corporate owners, so any net profits are often just potential championship points left on the table—the cost of competing in F1 has been unsustainable for the sport’s mid-tier teams. The last few years have seen the likes of Lotus, Force India and Manor Racing either go bankrupt or sell for pennies on the dollar.

The financial pressure has been on the rise, too, as increased series-level spending under Liberty has eaten into the teams’ prize money—the total pool was $913 million last year, down nearly 6% from the $966 million paid out in 2016—and Brexit’s adverse impact on currency values has eroded team spending power since the majority of teams spend in British pounds while booking revenue in U.S. dollars and/or euros.

The challenge for F1, however, is to persuade the sport’s top teams—Ferrari, Mercedes, Red Bull—to put the brakes on their spending and give the rest of the field a chance to catch up. F1’s well-heeled teams aren’t too keen on losing their current advantages, and with their commitments to the sport expiring after next year, they’re taking the opportunity to put pressure on Liberty.

Mercedes has done nothing to quash the rumors that it might sell its operations rather than sign on. Red Bull seems perpetually on the verge of leaving the sport, with its most recent threat coming just this year. Ferrari, long the poster child for throwing its weight around, has been uncharacteristically cooperative thus far, although the team has expressed concerns about the new rules package. It’s not hard to understand why since those teams’ free-spending ways allowed them to build some of the most valuable brands in professional sports.

Just look at the recent dominance of Mercedes. The Silver Arrows first ascended to the top of the standings in 2014 after making a massive financial commitment; the team spent a total of $380 million that year, up 26% from 2013 and a staggering 59% from the 2012 season. And while those expenses forced the team to eat a $150 million loss that first championship year, the sustained dominance eventually led to financial dividends. Last year, Mercedes reported a $22 million operational profit, and that was while spending over $100 million more than any other team not named Ferrari. Mercedes is now worth $1.15 billion, up 46% from our last examination of team values two years ago.

Ferrari is similarly a juggernaut, and the world’s most valuable racing team is now worth $1.35 billion. Although Ferrari’s series-high spending results in an operational loss—we estimate Ferrari lost $12 million on $426 million in revenue in 2018—it still outpaces even Mercedes in value because of the longevity of its success. A stretch of strong on-track results and subsequent riches can be fleeting—just look at McLaren, which was a championship contender and among the revenue leaders until some recent disastrous seasons sent the team tumbling—but Ferrari is as old as the sport and hasn’t finished outside the top four since 1981. F1 has granted the Italian team veto powers and an annual bonus payment just for the cachet it brings to the series.

No other team is yet close to catching the two leaders, but the rest of the field offers even more examples of how team value has been built on the back of exorbitant spending. Red Bull, which has finished outside the top three in the standings just once since 2008, is worth $640 million; the team turns a nominal profit, but only because some $92 million, or 28%, of its revenue is a “sponsorship” investment from Red Bull GmbH, the team’s parent company. McLaren, despite recent struggles, is worth $620 million because it has spent more than five decades investing in the sport, and Renault is quickly on the rise—its $430 million team value has more than doubled over the last two years—as a result of its French owners ratcheting up spending by 35% since taking over before the 2016 season.

But with a spending cap on the horizon, the continued growth of F1’s team values will soon rely largely on Liberty’s ability to hold the sport’s competitive lineup together as it retools the series for longterm viability. The upshot is that, should F1 successfully navigate this latest set of challenges, it has a chance to recapture much of the sport’s lost luster; in fact, potential investors are watching closely, and if the series’ CEO is to be believed, multiple prospective new owners are already considering entry to the sport as soon as 2021.

Chris Smith, Forbes Staff

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