Why John Malone Wants to Buy Into Formula One

John Malone has been looking at acquiring a stake in the Formula One racing circuit via his Liberty Media or Liberty Global, the latter likely in partnership with Discovery Communications, in which the mogul also owns a big stake.

While recent news of Malone’s interest seemed to surprise some in the U.S., he actually had his eye on a possible multibillion-dollar deal for the racing circuit at least once before, in 2014, but no deal materialized back then.

Some on Wall Street and in the industry have wondered what’s behind his appetite for Formula One, with analysts arguing that he sees an opportunity to buy into a racing brand that is popular in many international markets and likely has more upside in the U.S. and on digital platforms.

FBN Securities analyst Robert Routh said Formula One in turn could see improved financials and growth if owned by a media company. “In the hands of either [Liberty] Global/Discovery or [Liberty] Media, F1’s growth potential should be far greater than [what] it is currently due to what those entities could bring to the table to leverage F1 content in ways others couldn’t,” he tells THR.

Discovery and Liberty Global previously bought a stake in the company behind the Formula E electric racing circuit, and a Formula One deal could further strengthen its racing credentials. Plus, a deal could make it easier for Discovery and Liberty Global to get Formula One rights in certain markets over time, analysts say. Discovery’s growing pan-European sports channel Eurosport already shows Formula One races in Portugal.

Wunderlich Securities analyst Matthew Harrigan in a report predicted that Liberty Global would be “disciplined” in any dealmaking. Discovery has also said its Eurosport sports deals, some for Europe-wide rights like in the case of the Olympics and some focused on popular sports in single countries, have been profitable. “We would expect Liberty [Global] to be a sidecar to Discovery with a modest cash equity contribution given Discovery’s aggressive investments in European sports, including Olympic coverage,” Harrigan concluded.

“Strategically, it makes more sense for Liberty Global to own [Formula One than Liberty Media] given their pan-European presence,” Macquarie Securities analyst Amy Yong tells THR. “They can leverage the sports content to fuel subscriber growth and perhaps partner with Discovery’s Eurosport.” Pan-European pay TV giant Sky has Formula One rights in its markets, including the U.K., Germany and Italy, for at least the coming years.

Meanwhile, Liberty Media, which recently reclassified into three tracking stocks for the Atlanta Braves baseball team, Sirius XM Radio and the company’s minority stakes, seems to be in the pole position to win the Formula One stake. The Financial Times reported on Sunday that it was closing in on a deal to buy a 10-15 percent stake in the holding company for Formula One for $1.33-$2.67 billion (1-2 billion pounds) with an option to take full control down the line.

Wall Street observers say such a deal would add to Liberty Media’s sports holdings to expand beyond the Braves.

Explained Yong: “Liberty Media though, has a lot more financial flexibility right now and is a wider portfolio of consumer assets. They finished spinning out Atlanta Braves and this could complement a small subset of trophy assets where the value goes up over time.”

Currently, private equity firm CVC Capital Partners is Formula One’s controlling shareholder. Malone and others have looked at buying its 35 percent economic stake, which — thanks to super-voting shares — amounts to a controlling voting stake. CVC bought its controlling stake in Formula One in 2006 for around $1.7 billion but has since reduced it and has repeatedly looked at offloading the rest.

Formula One holding company Delta Topco doesn’t report its financials regularly. Financials previously disclosed for 2014 showed an operating profit of $519.8 million on record revenue of $1.8 billion. The company gets revenue from race hosting fees, TV rights, corporate hospitality and advertising/sponsorship, with more than $1.2 billion of the total coming from the first two revenue streams. The Telegraph earlier this year cited a Ferrari estimate that Formula One has an enterprise value of $8.6 billion.

“Owning the rights to a unique and globally popular live event content where TV rights, advertising and sponsorship revenue all have material future growth potential tends to be a good idea, especially if the purchasing entity owns or has interests in distributors that carry and pay for such content,” says Routh.

“Both Liberty Global and Liberty Media control or have meaningful interests in sizeable distribution platforms that could leverage F1’s content as well as in other assets that could work with F1 were they to buy it,” he added. “In the case of [Liberty] Global, this distribution is comprised primarily of cable distribution in Europe and in Latin America and the Caribbean. In the case of Liberty Media, this distribution is primarily satellite operator SiriusXM, although Liberty Media’s sister company Liberty Broadband owns a bunch of U.S. cable operator Charter. Liberty Media also owns a sizeable position in Live Nation, which could be leveraged with F1 in many ways.”

Whether Malone will prevail and be willing to shell out enough to seal a deal remains to be seen.

But Wall Street folks say they see the rationale behind his interest in the racing franchise, especially “assuming F1 has the balance sheet, revenue and [earnings before interest, taxes, depreciation and amortization] etc. press reports indicate,” says Routh. “It seems yes, it could make sense for either Liberty Global/Discovery or Liberty Media to purchase Formula One, or for all three together to do so, but only at the right price and in the right structure.”