ivi23g
Recently, the 2024 running of the legendary Monaco Grand Prix was won by hometown hero Charles Leclerc, making him the first-ever Monegasque to win his home race and the first on the podium since Louis Chiron in 1950. As a huge motorsport fan – and a shareholder of Ferrari N.V. (RACE) – I was delighted to witness this. Something I am considerably less delighted to see is Formula One Group’s (NASDAQ:FWONA;OTCQB:FWONB;NASDAQ:FWONK) plan to acquire a majority stake in Dorna S.L., the commercial rights holder of MotoGP. In this article, I explain why I believe the transaction to be a mistake and how it impacts my investment thesis.
Q1 Takeaways
To begin with, allow me to take a look at recent financial results. Q1 revenue increased 45 percent YoY to $553 million (excluding corporate and other revenue of 44 million). While this is markedly lower compared to Q4 revenue of $1.23 billion, it should be taken into account that there are fewer F1 Grand Prix during the first quarter due to the winter break. The more important figure is revenue per race. At a mere three races, that figure amounts to $184 million (Q4: $136.66 million). Operating income grew even faster, more than tripling within a year to $136 million (from $35 million). For comparison: Q4 operating income amounted to only $17 million more, despite twice as many races. With a strong start to the year, Formula 1 appears set to continue to perform quite well in 2024.
MotoGP Takeover
So far, so good. Now to the less pleasant part. Liberty Media/Formula One Group has entered into an agreement to acquire an 86 percent stake in Dorna, while management retains the remaining 14 percent. At an equity valuation of €3.5 billion, this means that the Formula One group will pay up to around 3 billion in cash. The plan is to pay for 21 percent of Dorna equity in the form of Series C Formula One Group Tracking stock (FWONK), but Liberty Media has the option to pay in cash instead. So, the minimum cash component is €2,275 million, but it could end up being more.
Given 2023 revenue of €486 million with an adjusted EBITDA of €179 million, Dorna is not cheap by any means. Notably, the equity valuation of €3.5 billion translates to markedly higher multiples than what Formula One Group itself trades for. And Formula One Group is less indebted on a relative basis and net profitable, whereas MotoGP posted consolidated losses for three years in a row. Apparently, there had also been interest from TKO Group Holdings, Inc. (TKO). So, the price tag might in part be the result of a bidding war. Bidding wars, as a rule of thumb, are seldom good for buyers.
Furthermore, I do not think that MotoGP and Formula One are a particularly good fit to be grouped together. On the contrary, being bundled with another series somewhat dilutes F1’s “premium appeal”, thereby weakening the argument for a higher standalone valuation of the stock. With all due respect for the series, MotoGP does not have the same cachet as Formula One has. Frankly, I do not presently see any indication that it even has the potential to ever be on par. At the end of the day, two-wheel racing is and always was much more of a niche sport than four-wheel racing is. The potential for synergies appears rather limited, too. There is, of course, the opportunity for cross promotion, but, in my assessment, that is more or less where it stops. Exacting more favorable conditions from sponsors, broadcasters and track owners is most likely a non-starter due to antitrust matters. Shared logistics would not work out either, as you cannot hold F1 Grand Prix and MotoGP races at the same track on the same weekend.
There is also the issue of balance sheet quality. Based on cash and equivalents attributed to Formula One Group of €1.2 billion and attributed debt of €2.9 billion as of May 31st, net debt is set to more than double due to the cash component alone. Additionally, post-transaction Formula One Group will also have to consolidate pre-existing Dorna debt to the tune of around €600 million, which will further deteriorate the balance sheet (although it should be noted that most of these debts are presumably non-recourse). Having minority shareholders adds further complexity.
There is still a chance for the deal to fail on account of lack of regulatory approval. Notably, CVC was required to divest MotoGP in order to be greenlit to acquire Formula One in 2006. But I see a good chance to succeed.
And What About The Formula E Takeover?
In case you were wondering why I am not discussing the recent acquisition of a majority interest in electric racing championship Formula E from Warner Bros. Discovery, Inc. (WBD): the acquirer is Liberty Global Ltd. (LBTYA;LBTYB;LBTYK), not Liberty Media. While the two companies do indeed have a shared history, they are entirely separate entities today.
Risk Factors
The potential negative impact of the Dorna acquisition is not the only risk to be considered when investing in Formula One Group. There is an inherent conflict between exclusive media rights and sponsorship. A sponsor has a vested interest in maximizing exposure by capturing as many eyeballs as possible. Naturally, a paywall is detrimental to that goal. Thus, increasing revenue on the media side must be weighed against the attractiveness for sponsors. Furthermore, Formula One Group may face increasing demands by the teams during negotiations for a new Concorde agreement from 2026 onward. The teams have ample incentives to try to increase their piece of the cake. I did more of a deep dive on this issue in a previous article.
Also, as I keep repeating, investors should be aware of the fact that Formula One Group is not an independent entity, but a division of Liberty Media Corp. listed through a tracking stock. That means that Formula One Group is not fully insulated from liabilities incurred by other parts of Liberty Media. To be perfectly clear, I doubt that this is much of a near term concern in practice. Still, I believe it is something that should be taken note of.
Valuation and Conclusion
Previously, I based my fair value assumption on a revenue multiple of around 6.5. I derive this from multiples implied in private equity deals entered into by other major sports leagues, Spain’s LaLiga in particular, with a sizeable discount applied. The addition of MotoGP changes that. For once, the Formula One Group would no longer be pure play, that alone calls for a certain discount in my opinion. MotoGP is furthermore less profitable on a relative basis. Synergies between two-wheel and four-wheel racing are unlikely to outweigh that. Naturally, the acquisition would also deteriorate balance sheet quality, both through the need to finance the purchase itself and the pre-existing Dorna debt being consolidated. Hence, there should be a lower revenue multiple post-acquisition. Ironically, one of the biggest positive factors is that the transaction may well be blocked by regulators. I am just spit-balling here, but the best case might actually be a spin-off of Formula 1 to shareholders of the tracking stock. However, the likelihood of this scenario is fairly low.
Of course, it is not impossible that Liberty Media might be able to increase the value of MotoGP materially. After all, Formula One is quite the success story, too, indicating that there is the know-how of how to develop a racing series. However, I am skeptical that two-wheel racing will ever have the same mass appeal that four-wheel racing has. Consequently, I am downgrading the stock to a hold for now.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
