by Terry Lovell
The guarantees were actually covered by Ecclestone as an essential feature of an unusual arrangement that enriched the FIA by £5.3 million. It came about through a deadlock between the manufacturers and the FIA, who had insisted that, if they wanted the Deutsche Tourenwagen Meisterschaft to become an international FIA championship, they would have to undertake, jointly and severally, to provide a field of 24 cars, a stipulation they were not prepared to meet. At a World Motor Sport Council meeting on 30 March 1995, Ecclestone, after talks with the three manufacturers, offered to guarantee that they would take part; if any one of them failed to do so, he would pay the FIA $8 million. In that event, under the terms of an agreement with the three manufacturers, he would seek recovery of his money from them. When Opel and Alfa Romeo withdrew, blaming poor media coverage by ISC, Ecclestone promptly paid the FIA a total of $5.32 million, which he then claimed from the two companies. Mercedes, for their part, successfully argued that as they were prepared to continue, they ought not to be penalised. The FIA agreed and decided not to demand the full $8 million from Ecclestone, a gracious consideration that, in a reversal of similar circumstances, it is unlikely he would have granted them.
One of the ways in which ISC caused fatal harm to the coverage of the ITC series was illustrated by the experience of three Japanese television stations. Although no Japanese driver or car took part, they were nevertheless happy to screen highlights because Bridgestone, a Japanese company, supplied the tyres. Traditionally, they received the highlights free of charge with the blessing of the organisers and the manufacturers, who were delighted to get the exposure. This was particularly so for Mercedes, which had a major market in Japan. As the independent television production company was paid by the manufacturers for covering and distributing the film footage, it was a win-win situation for everyone. However, once ISC became involved, relationships with the Japanese television companies rapidly soured. When one of them contacted a German television production company requesting material of a championship round, they were referred, as the FIA had insisted, to ISC. The Japanese television company was told that film would no longer be supplied free of charge. Instead, it would have to pay $15,000 per race. It was the beginning of the end of television coverage of the series in Japan.
Another popular motor sport to suffer from the marketing monopoly of ISC was European Truck Racing, which had enjoyed the enthusiastic and generous patronage of truck manufacturers such as MAN, Daimler-Benz and DAF. Figures supplied by the Institut für Medienanalysen showed that the aggregate viewing audience of European Truck Racing in Germany in 1997 compared with the previous year had dropped from 540,000 to 370,000, with rally coverage, incidentally, down from 980,000 to 420,000. For the same period the coverage and viewing figures of Formula One showed a marked increase: the number of free-to-air, satellite and cable broadcasters increased from 41 to 51, news items from 790 to 1614 and the number of viewers from 481.56 million to 811.32 million. ‘The compulsory assignment of rights pushed through by the FIA,’ said MAN, ‘has the result that the organisers and manufacturers bear all economic risks and Mr Ecclestone receives all marketing profits’. Daimler-Benz claimed that when ISC was made responsible for the marketing of television rights, all those active in motor sport became dependent on one person and his companies.
ISC’s control of non-Formula One motor sport also produced another casualty. This was the small independent television companies whose principal business came from covering the more popular championship and international series. Such a company was AE TV Cooperation, based in Heidelberg, Germany, and owned by Wolfgang Eisele, an intense, quietly spoken German, who set up his small motor sport television production company in 1983. Over the next few years the business prospered and expanded to cover rallying, rallycross driving and drag racing for the international television market. Eisele, in conjunction with a sister company, also had spent ten years building up the international television market for the International Touringcar Championship. By 1995 the future for Eisele was looking good. At the age of 40, with no particular empire-building aspirations, he had reached a point where he was content with the size of his company and its turnover of 1.8 million Deutschmarks (about £760,000).
But the effect of ISC’s marketing stranglehold was so debilitating that he was eventually forced to reduce his staff from 12 to two. Suddenly the company he had worked so hard to build up was in dire trouble. He decided he had two choices: either roll over and die, or fight back. ‘What Ecclestone was doing was so wrong,’ said Eisele. ‘It was like me setting up the World Federation of Ball Sports and claiming the rights to every sport from football to lacrosse.’ He decided to catch a plane to London.
On a dull November day in 1996, Eisele sat in Ecclestone’s expansive, immaculately furnished Knightsbridge office opposite Hyde Park to plead his case. He knew well Ecclestone’s reputation and expected little, but he held on to the hope that Ecclestone might throw him a bone and at least let him continue to cover European Truck Racing, one of the more popular international series on the FIA calendar, with races in France, Italy, Spain, Germany, Finland, Great Britain, Czechoslovakia and Belgium. The event had been a major source of income for Eisele, and now, as he sat before the poker-faced Ecclestone, he attempted to persuade the Formula One boss to relent. His best efforts were in vain. As he reflected later: ‘It was as if we were on different planets. It was as if he was up there and I was down here; we couldn’t connect.’
At the end of the two-hour meeting, the German, despondent and fearful for the fate of his business, left Ecclestone’s office for his return flight to Frankfurt. He now believed he had nothing to lose by playing his only card – a complaint to the European Commission in Brussels that Ecclestone’s relationship with the teams, the FIA, the organisers and television broadcasters amounted to a flagrant breach of competition law. A motor sport contact advised him to see a young German lawyer, Dr Wolfgang Deselaers, a specialist in European competition law and a partner in Oppenhoff & Rädler, a German law company with offices in Brussels, where Deselaers was based. Deselaers had his doubts about taking Eisele as a client. His initial reaction was that Eisele was way out of his league, lacking both the cash and political clout to take on the combined forces of Ecclestone and Mosley. At the same time, in this classic David-and-Goliath conflict, he was attracted by Eisele’s determination to fight back.
His new client’s improbable situation caused Deselaers to advise a cautious approach to save costs, with, first, legal action in a civil court to clarify whether the FIA’s centralised television marketing of all international championships contravened European cartel law. Deselaers proposed to argue that television rights should belong to the parties who took the financial risks. On 10 and 27 February 1997 he filed complaints at districts courts in Frankfurt and Cologne respectively against the FIA to freeze their claim to the ownership of all television rights and against Ecclestone and ISC to restrain implementation of that claim. On 27 May he moved on to the second stage: a formal complaint to the European Commission in Brussels against the FIA and ISC, alleging they had infringed European Community competition laws under Articles 85 and 86 of the EC Treaty, which prohibit cartels and abuse of a dominant position. Deselaers believed that Ecclestone’s various commercial interests and executive roles within the FIA constituted a clear conflict of interest by allowing him to regulate the market activities of Formula One’s competitors.
The complaint by Eisele was filed at the office of the European Commission’s Directorate-General for Competition, whose Commissioner was a 55-year-old Belgian, Karel van Miert, a former vice-chairman of the European Community’s Confederation of Socialist Parties and a Socialist Member of the European Parliament, who became the European Commissioner in charge of competition policy in 1993. It marked the beginning of a highly bitter and personal battle between Max Mosley and van Miert that would last for three years, and which would prove a major obstacle in Ecclestone’s ambitious plans for Formula One, and the
furtherance of his wealth.
Notes
1. Autosport, 3 October 1991.
2. Financial Times, 16 November 1998.
3. Reuters, 13 April 1996.
13
THE SINKING OF BERNIE’S $2.5 BILLION FLOTATION PLANS
Bernie Ecclestone was gambling big on his digital television plans. He had begun exploring its commercial potential as early as 1992 and three years later, at the Belgian Grand Prix, was so enthused by the results of experimental tests by his FOCA TV that the following year he invested £36 million of his own money in the company’s further development, which was responsible for reducing his salary in 1996 from £29 million to a mere bagatelle of £600,000. But Ecclestone believed it was a salary cut worth taking when compared with the revenue he believed that digital television coverage of Formula One would generate within the next few years. Such was his confidence in its long-term financial returns that he predicted that it would one day make Formula One independent of sponsors, who at that time were contributing about £135 million a year.
He believed a major draw would be a multi-feed broadcast – actually his concept – to persuade the more enthusiastic Formula One fan to pay at least $20 (about £12.50) in return for ‘directing’ his own race. At the press of a button he would be able to select any one of several options: general coverage, the contest between the leading cars, the competition between other cars, pitlane activities featuring interviews with drivers and team managers, a channel giving real-time lap and general statistics, or, and tipped as the biggest attraction of all, on-board cameras enabling the fan to switch from cockpit to cockpit. At the 1996 German Grand Prix at Hockenheim he predicted that all Grand Prix races would eventually be pay-per-view, although he declined to forecast the year. The early signs certainly looked encouraging.
In April 1996, at the European Grand Prix at the Nurburgring, he announced a £50-million deal with the KirchGruppe, a major German television company owned by media magnate Leo Kirch, who in 2001 was co-ranked the sixth richest man in Europe, with an estimated personal fortune of £7.6 billion, to broadcast pay-TV coverage of Formula One through one of his channels, DF1, in a pilot scheme scheduled to be aired in Germany, Austria and Switzerland that July. Four months later Ecclestone announced a similar deal with Paris-based Canal+ to broadcast in France and Italy. It would be available in Britain, he forecast, by 2002. He also had contracts with RTL Plus in Germany and public-service broadcaster RAI in Italy.
FOCA TV, which became F1 Communications, was based at Biggin Hill, Kent, the former RAF wartime airfield, which Ecclestone would buy in 1997 and where he hangar’d his two Learjets. It would soon, and rapidly, expand to become a 300-tonne mobile television production facility spread over 1400 square metres, complete with its own electricity generators and satellite communications equipment. Manned by a staff of 280 – three-quarters of the people in Ecclestone’s employ – it would require three 747 jumbo jets to transport the equipment to races outside Europe and 28 purpose-built articulated lorries within Europe. Key production staff would be flown to every race in an Ecclestone-owned BAE 146 jet, decked out in Formula One livery, air hostesses and napkins included. It was, it should be noted, against the backcloth of this degree of investment and potential returns that Ecclestone wanted to make sure that his plans could in no way be threatened by non-Formula One motor sport, which the FIA’s General Assembly guaranteed when Mosley awarded their television rights to Ecclestone’s International Sportsworld Communicators.
By the middle of 1996 Ecclestone, at a personal cost of many tens of millions of pounds, had developed and established a company at the forefront of digital broadcasting technology. He believed he was now in a position to capitalise his huge investment and make himself fabulously rich by pursuing a suggestion from his close friend Marco Piccinini, a former boss of the Ferrari team and a member of the influential Formula One Commission and who two years later would become the FIA’s deputy president of motor sport. Piccinini suggested to Ecclestone that he should float Formula One Administration (FOA) on the stock market. While Ecclestone was attracted by the capital he confidently expected it to raise, there was another, more pragmatic, reason that persuaded him to investigate the suggestion further, and it marked an awareness of his mortality: how would his wife, Slavica, in whose name his shares in FOA were held, cope with the running of Formula One’s complex commercial interests on his death? A successful flotation would ensure an experienced management structure to safeguard its future.
By September 1996 Ecclestone was having secret talks with American investment bankers Salomon Brothers to discuss the flotation of Formula One Administration, whose principal assets could be stored in a briefcase – a portfolio of 66 contracts with free-to-air and pay-TV companies. The length of the free-to-air contracts ranged from five to ten years while the pay-TV contracts, which covered 94 countries, were for up to 11 years. The television contracts included a five-year agreement with ITV signed ten months earlier and worth £60 million, nearly ten times the figure the BBC had been paying. The offer had been on a take-it-or-leave-it basis, without the BBC having the chance to bid. Ecclestone decided to take it. Senior BBC executives, who claimed the BBC had nurtured and promoted Formula One for 20 years, were furious when the news was suddenly announced by ITV. But its manner was in keeping with Ecclestone’s business code. He will, he insists, always accept a ‘sensible’ offer and never go to another party and play one off against the other to raise the bid.
Leading the Salomon Brothers team was 32-year-old Cambridge and Harvard graduate, Christian Purslow, the company’s high-flying director of media investment banking, who was formerly with Crédit Suisse First Boston, where he made his name handling Virgin’s bid for MGM cinemas. Purslow also had meetings with Mosley to confirm that a flotation would have the full support of the FIA. Mosley assured him that it would – he had negotiated with Ecclestone a ten per cent stake for the FIA in the flotation, optimistically estimated at the time to be worth $300 million, in return for agreeing a ten-year extension to the 15-year contract due to expire in 2010, but which, as its length fell foul of European Union anti-trust rules, would not take effect.
As an indication of the FIA’s support, that September, at the Italian Grand Prix at Monza, Mosley enthusiastically flagged the prospect of a flotation ‘within the next five years’. Ecclestone, he said, had done a ‘brilliant’ job in turning the sport into a multi-million-dollar business, adding that ‘the entrepreneurial phase is now almost finished. The final stage is the development of pay-TV and digital transmission. There will then be a phase where the business needs to be managed, at which point Bernie may decide to go public. The FIA would welcome that because it would mean that every detail of F1 finances would be out in the open.’
The date agreed for the launch of one of the biggest share flotations in sporting history was 13 July 1997, to coincide with the British Grand Prix, a date selected by Purslow, whose team was hired by Ecclestone as his exclusive financial advisers for the next ten months. The company to be floated was to be called Formula One Holdings (FOH), which was incorporated in December 1996, and, promoted as ‘sexy’ media stock to hype up its market appeal, was expected to be valued as high as £2–2.5 billion.
FOH became a wholly owned subsidiary of SLEC Holdings, a family trust registered in Jersey in the name of Ecclestone’s wife, Slavica, in May 1997. In October 1997 SLEC Holdings, as part of an elaborate tax-avoidance scheme, became a subsidiary of Bambino Holdings Ltd, which is owned by Orion, the trust set up in Switzerland to protect the family wealth. Ecclestone’s decision to sign away his fortune to his wife was met with universal scepticism. What was his angle? There wasn’t one, says Ecclestone. ‘No one in the world believes that I would have given all that I had to my wife, but that is actually what I did. I wanted to make sure that she and the children were well looked after if anything happened to me.’ The money went into a trust to avoid Slavica, a non-domicile, paying 40 per cent in inherita
nce tax to the UK government in the event of Ecclestone’s death. The decision to move the shares into a trust proved all the more percipient when, in June 1999, at the age of 68, Ecclestone underwent a triple-bypass heart operation, the success of which was by no means assured.
The two principal companies within FOH were Formula One Administration Ltd and Formula One Management Ltd, a subsidiary of Petara Ltd, a trust set up in Jersey in July 1994. Two other companies, Formula One Productions Ltd and Formula One World Travel Ltd, were respectively subsidiaries of Formula One Management Ltd and Petara Ltd. It was this complex cat’s-cradle of companies that the bankers had to sell to potential investors wary of Formula One’s highly individualistic boss. If all went to plan, it was estimated that the Ecclestones would be at least £700 million the richer, with a 40 per cent shareholding being retained in Slavica’s name. With an estimated wealth at that time of about £750 million, the family fortune would soar to almost £1.5 billion.
Salomon Brothers lined up an impressive 18-strong syndicate of blue-chip investment banks to take the flotation to the market, including Deutsche Morgan Grenfell, Merrill Lynch, SBC Warburg, BZW, Morgan Stanley Dean Witter, Nikko and NatWest Markets. Ecclestone, as chief executive, had assembled his board-in-waiting: Marco Piccinini was appointed deputy chief executive; Helmut Werner, former chief executive of Mercedes, was appointed non-executive chairman; and David Wilson, a former Ladbroke Group financial executive, finance director. Everything seemed in place. But if everyone appeared in unison on the surface, there existed considerable acrimony behind the scenes between Ecclestone and three leading team bosses, McLaren’s Ron Dennis, Frank Williams and Ken Tyrrell, which seriously threatened a smooth, trouble-free launch. The three team bosses were ready to exploit that threat to the full.