Bernie Ecclestone

by Terry Lovell

  All the same, Ecclestone might have saved his money. Although on 3 June 1998 Peter formally withdrew his complaints, after agreeing a financial settlement with Ecclestone, the Commission decided to continue to investigate his allegations because of the ‘strong evidence’ they offered of ‘a very serious infringement’ of competition rules.

  Over the following months Ecclestone continued his efforts to make peace with Brussels. He agreed to modify certain clauses within contracts to bring them into line with European competition rules. They were contained in an amended Concorde Agreement sent to Karel van Miert’s office on 27 August 1998. Ecclestone agreed to end the practice of offering massive discounts to television companies to broadcast only Formula One, and to withdraw the undertaking demanded of promoters that they held only Formula One and Formula 3000 races at their circuits. However, in characteristic style, he insisted that his agreement was conditional on other undisclosed breaches being resolved in a manner satisfactory to him. He defended the exclusivity of contracts with television companies by claiming it related to certain rights only and did not preclude other broadcasters from broadcasting in that country, a claim that was somewhat misleading. It certainly covered the all-important important Formula One series to the exclusion of all other races, and, in respect of other motor sports, they could only be sold through Ecclestone’s much-criticised company, International Sportsworld Communicators.

  His desire for a speedy accommodation with Brussels was given fresh impetus by a new device to capitalise on Formula One’s assets, an alternative route to a stock-market flotation which had been proposed to Ecclestone during the early summer of 1998. It was a $2-billion issue of Eurobonds, which are debt securities issued by companies and governments worldwide and marketed internationally, mainly to institutional investors. They guarantee a fixed rate of return over a set period of time against future cashflows – in this case revenue from television contracts – and are considered, as a short-term investment, to be less risky than equity, whose return is dependent on the economic fluctuations of the market. Ecclestone’s financial advisers – not Salomon Brothers – believed fund managers, merchant banks and potential investors would find the asset-backed bond bankable on the strength of the predicted gross television revenues of the television contracts in Ecclestone’s briefcase.

  To Ecclestone, there were to be two distinct advantages to this route: a Eurobonds issue does not require the same degree of financial disclosure as a flotation, and its anticipated success was seen as a means of generating market confidence in the financial accountability of Formula One Administration, which would hopefully create investor awareness of Formula One and its economic potential in advance of a future flotation bid. Ecclestone’s advisers for this venture were Morgan Stanley Dean Witter, a US investment bank which had been part of the original 18-strong syndicate in the failed flotation. The FIA was once again in full support by modifying its commercial rights contract with Ecclestone, this time in return for $60 million – Mosley had tried to get £100 million – which was increased from $50 million after Mosley explained to Ecclestone that he needed the extra $10 million to purchase number 4 Place de la Concorde, an imposing building on the corner of Rue Royale, near the FIA’s headquarters at number 8, which he wanted to leave as his ‘legacy’ to the FIA, but which was thwarted by another interested party. Instead, the money went on purchasing an office building in Trafalgar Square for the offices of the FIA Foundation, founded to promote road safety improvements and legislation.

  At 3 pm on 28 September 1998, before 200 hand-picked investors in the ritzy surroundings of London’s Grosvenor Hotel, Morgan Stanley managing director Karl Essig announced the launch of the $2-billion Eurobond offering by Formula One Finance, which was anticipated to be rated single-A with an expected term of five years. Essig gave a 15-minute delivery on its details before introducing Ecclestone, who was flanked by one of his former arch-opponents to the Concorde Agreement, Ron Dennis, the boss of McLaren, the World Championship team, and Luca di Montezemolo, the president of Ferrari, the World Championship runners-up team. Representing Formula One Holdings, apart from Ecclestone and legal adviser Stephen Mullens, was Marco Piccinini, its deputy chief executive and a former boss of the Ferrari team.

  Dennis and di Montezemolo were there to field any questions about the relationship between Ecclestone and the teams. Ecclestone opined that having the two men there was ‘a bit of risk … because they are very much their own men [and] I am never sure of what they might say’. It was pure marketing spiel. They were there, with well-rehearsed scripts – Dennis, who not long before was ready to see Ecclestone in court, described the bond issue as ‘supersound’ – to demonstrate that the disunity between the teams and Ecclestone which had caused so much damage to the failed flotation was a thing of the best-forgotten past. Predictably, the public noises from Ecclestone and his associates exuded supreme confidence. But Ecclestone’s financial advisers may even then have been having their doubts.

  Just four days before the launch was announced at the Grosvenor Hotel, two Morgan Stanley bankers went to Brussels in an attempt to obtain information on the likely outcome, negative or positive, of the Commission’s investigation into the activities of Formula One Management, International Sportsworld Communicators and the FIA. They met with John Temple Lang who informed them that, due to the complexity of the case, which involved not only an analysis of Formula One but also an analysis of international motor sport and the role of the FIA, it would be several more weeks before an indication of the Commission’s stand could be given. It was impossible to communicate in writing, even provisionally, what that stand might be. This information was also given to Alison Finlaye-Browne, who headed Ecclestone’s legal department. The next day Ecclestone himself contacted Temple Lang to find out for himself what he had told Morgan Stanley. He was now in no doubt about the Commission’s position.

  Nevertheless, he was sufficiently confident in his belief that all would turn out well to state in a press release issued on the day of the Eurobond launch that ‘all the concerns raised by the Commission have now been, or can be, dealt with’. Stephen Mullens, legal adviser to Formula One Holdings and Ecclestone’s family, was also quoted in the Financial Times the next day as saying that there were ‘just a few minor issues to resolve’ with the European Commission. The press release was faxed to van Miert’s office on the day of the launch by Marriot Harrison, solicitors acting on Ecclestone’s behalf. Van Miert responded swiftly: such statements, he insisted, did not accord with the facts. It was followed by a letter from van Miert to Ecclestone stating that he was unwilling to confirm the claims made in the press release and those by Mullens in the Financial Times.

  Charges in the media that the press release was guilty of misleading the market were quite wrong, insists Ecclestone. He knew the objections the Commission ‘had at that time and we knew they could be resolved and we did resolve them. All we were commenting on was what they did say, not what they might say. Now things maybe subsequent to that might have come out that we didn’t know about, so we couldn’t know whether they could be solved. How would we know?’ For the FIA, Mosley saw the press release as a statement of opinion sincerely and truthfully expressed, and therefore it could not be said to have been issued with the intention to mislead.

  On 8 October, ten days after the launch, Ecclestone, at the request of Morgan Stanley, wrote to Temple Lang asking him to confirm that what he had told his financial advisers of his dealings with Brussels was ‘a truthful representation’. The detailed response was a four-page letter dated 19 October which did not confirm the accuracy of all of Ecclestone’s assertions. Temple Lang’s letter repeated that the European Commission’s investigation was far from complete and was looking at the overall way in which international motor sport, including Formula One, was organised and at the commercialisation of television rights to these races. Despite the points made in this letter, it failed to dissuade Ecclestone from issuing an open circular
to prospective investors on 17 November in which he continued to insist that all the EC’s ‘concerns … have been, or can be, dealt with’.

  The presentation at the Grosvenor Hotel was the first of a series of roadshows to be held in Europe and, importantly, Asia, where Ecclestone had dedicated considerable time and effort to developing a major Formula One arena in the twenty-first century. But the timing of the launch, when markets were suffering a worldwide backwash from a dramatic downturn in the Asian economy, was considered by City bankers to be not the most helpful. Only the most highly rated bond issue, it was believed, had a favourable chance of success. The market was described as ‘a tough one’, particularly for a bond rated single-A. Many issues had been postponed because of poor market conditions. Morgan Stanley claimed to be unconcerned. It agreed that a ‘plain vanilla’ bond tapping generalist investors would have been too risky, but the bond was aimed at the more sophisticated investor, who, it was believed, would see through the volatility of the market and recognise the opportunity of a unique investment. The nature of the bond would not be affected by the state of the global markets. That, at least, was the theory. In practice, it turned out somewhat differently.

  Normally, before a bond is issued, an application for a listing is submitted to the Stock Exchange which enables buyers to trade it on the stock market. The listing becomes effective once all the bonds have been fully subscribed and delivered to the investors. The time period between the launch of the issue and day of completion varies between three and six weeks. However, three months after the launch date, the application to the Stock Exchange by Morgan Stanley had still to be approved. A delay in such circumstances is invariably caused by an application failing to meet the Stock Exchange’s principal requirements relating to a company’s financial history or trading status. It raised once again questions about the complexity of Ecclestone’s financial dealings. Said a merchant banker: ‘It was a reflection of the fact that, as everybody knew, it hadn’t been that easy to put this thing together, either from the point of view of finding buyers for it, or from the point of view of getting the agreement of the Stock Exchange on what needed to be disclosed in order to get a listing.’

  While Ecclestone’s Eurobond sale in 1998 proved no more successful than his aborted flotation, he might have taken some comfort from the legal difficulties that were besetting the man principally responsible for the European Commission investigation – independent television producer Wolfgang Eisele. On 3 November 1998 Eisele appeared before an oral hearing at the Court of Appeal in Frankfurt, where his lawyer, Dr Wolfgang Deselaers, was attempting to overturn the judgement of Frankfurt District Court in March, which, against all expectations, had decreed that any violation of television rights could only be contested by those parties directly affected. In the court’s opinion, Eisele’s company, AE TV Cooperation, was not so affected, although for several years it had covered and successfully marketed European Truck Racing, European Rally, European Drag Racing and European Rallycross on behalf of the organisers. Deselaers believed that the oral hearing had gone well.

  The comments of the three judges, said Deselaers, had explicitly indicated that their decision would go in the plaintiff’s favour. At the beginning of the hearing the presiding judge explained in detail why the court considered the marketing practices of the FIA and Ecclestone infringed European Commission competition rules. ‘Moreover,’ said Deselaers, ‘the court explicitly said that AE TV would seem to be entitled to challenge these infringements in court. If they had had any intention of rejecting the appeal, there would have been a proper legal procedure asking us to comment on their concerns.’ But, to the astonishment of Deselaers and the FIA’s lawyers, that is precisely what the court did do. Seven weeks later, on 15 December, the same three judges, in announcing their decision, dismissed the appeal by AE TV Cooperation and agreed with the lower court’s judgement of the previous March.

  ‘It was a major shock,’ said Deselaers. ‘It was a complete U-turn. I cannot offer any reasonable explanation. At the oral hearing in November it was clearly stated that Mr Eisele could challenge this unfair competition. To my knowledge, it is almost without precedent in German litigation that a higher court declares explicitly, yes, we intend to give the rights to the plaintiff, without expressing any doubts as to whether AE TV Cooperation would be entitled to challenge the infringement of competition rules, and then render a judgement which is in complete contradiction of that declaration. We couldn’t believe the judgement. Nobody could believe it. Even the FIA lawyers had thought they had lost the case.’

  Eisele proceeded to lodge a final appeal to Germany’s Federal Court of Justice in Karlsruhe. ‘What else can I do?’ he said. ‘I have been fighting this for more than two years. I will continue to fight until the end.’

  Notes

  1. Reuters, 4 February 1998.

  15

  BRUSSELS DELIVERS ITS VERDICT – AND BERNIE MAKES ANOTHER BILLION

  By March 1999 Morgan Stanley had made little headway in the Eurobond sale. They had, in the words of a merchant banker, ‘run into a wall’. The collision was put on course by the ratings agencies concerned over the quality of the bond declining to give it a single-A rating. It led to the issue being scaled down from Morgan Stanley’s valuation of $2 billion to $1.4 billion, a figure which had been offered by Westdeutsche Landesbank (WestLB), a small regional German bank, the previous December. Contrary to the expectations of Morgan Stanley, Ecclestone appointed WestLB as joint lead managers.

  Leading its team was a 37-year-old American, Robin Saunders, the head of its asset securitisation and principal finance group, who had joined WestLB less than 12 months earlier from Deutsche Bank. She was the principal architect of a plan to rescue the sale through the two banks underwriting the issue, with WestLB taking two-thirds and Morgan Stanley the rest. Guaranteeing interest payments was a strategic risk aimed at creating in the market the confidence it lacked in the future of Ecclestone’s television contracts, against whose revenue the bonds were being issued. To safeguard its interests, WestLB wanted a closer involvement with Formula One Administration and, as part of the deal, Ecclestone agreed to the appointment of Saunders, whose drive and shrewdness he had come to respect, to its board, where she took on an increasingly influential role. For someone from the City, his admiration for her was a notable first: ‘She does what she says she’ll do, and that is unique.’ [set as superscript] 1

  Saunders had been chiefly responsible for structuring the terms of the deal, which stipulated Ecclestone put up a total of $400 million as security against television revenues failing to cover interest payments. The figure broke down into two parts. In the first retention, $100 million was secured to cover two years’ interest in the event of a shortfall, and, in the second, $300 million worth of assets was put up as collateral which could be pulled in to pay off the bonds if necessary. This was seen as a safeguard against the possibility of the result of the European Commission’s investigations adversely affecting future television revenues.

  Although it prompted cynical comment from some financial commentators – ‘WestLB’s decision to take up so much of the Formula One bond emphasises that other potential investors see no reason to buy what Ecclestone is so anxious to sell’ – Ecclestone’s advisers believed it would help gain the confidence of investors as a prelude to a fully fledged flotation, which he was rather optimistically forecasting could take place as early as 2000 – a clause in the sale guaranteed increased payments of interest if it did not take place within five years. The timing of the Eurobond rescue was considered significant. Ecclestone and Saunders would have been aware that the publication of the European Commission’s long-awaited report – and any critical comments – was imminent. They wanted a head start on any potentially negative publicity anticipated to flow from the conflict of opinion that might inevitably follow.

  On 30 June 1999, a month after the completion of the bond rescue was announced, the European Commission’s Directorate-G
eneral for Competition issued a 185-page report on its investigation, which had begun two years and one month earlier. Known as a Statement of Objections, this alleged that under Articles 85 and 86 of the EC Treaty, the FIA and Ecclestone’s companies Formula One Administration (FOA) and International Sportsworld Communicators (ISC) had been accused of abusing their ‘dominant position’ to restrict competition. It stated: ‘We have found evidence of serious infringements of EU competition rules, which could result in substantial fines.’ The report listed four areas of competition abuse.

  Firstly, FIA regulations prohibited participation in non-FIA authorised motor sport, which meant that the FIA had the power to block series competing with its own events, as everyone involved in motor sport, from drivers and track-owners to promoters, car manufacturers and organisers, had to be licensed by the FIA. Failure to comply with the prohibition meant the removal of the FIA’s licence or permit. ‘It is therefore unlikely that a participant will choose to enter an event which is not authorised by the FIA. This also makes it extremely improbable that an organiser would agree to organise an event that is not authorised by the FIA.’ Licensees and authorised organisers having to accept the prohibition was an abuse of its dominant position.

  Moreover, added the report, it represented a very substantial obstacle for any organiser wishing to organise international series which could compete with FIA series. This was significant because of the FIA’s commercial interests in the success of FIA series, particularly Formula One. ‘This prohibition is designed to, and has the effect of, increasing the difficulties which already exist for undertakings wishing to organise or promote a motor sport series which would potentially challenge the dominance of the FIA in the organisation and the dominance of FIA/FOA and ISC in the promotion of international series within the EU. This FIA abusive conduct weakens the competition in both markets.’