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.