Bankrupt Lehman Brothers profits from Formula One sale

by Mark Anderson
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The collapsed bank will sell its stake in Nasdaq-listed auto racing empire, making a hefty $1.5bn from a $300m investment

Creditors of Lehman Brothers are on track for a turbocharged windfall after the collapsed bank announced it is selling its stake in Nasdaq-listed Formula One auto racing, giving it a payout of $1.5bn from a $300m investment.

The offering also brings the chequered flag down on former F1 chief executive Bernie Ecclestones time as a shareholder. The billionaire business magnate is offloading his remaining stake for $20m. Ecclestone first took over the wheel of F1 40 years ago and transformed it from being an amateur hobby into a race series which had revenue of $1.8bn last year.

Together, Ecclestone and his Bambino family trust have made an estimated $4.9bn from dividends and the sale of their shares.

For the past decade, F1 has been controlled by the private equity firm CVC but in January it sold up to Colorado-based Liberty Media Corp for $4.6bn.

Liberty paid $3bn in cash and offered $1.2bn of shares in its Nasdaq tracking stock which has the ticker FWONK. The remaining $351m came in the form of a loan that can be converted into stock. F1s former owners got the shares at the pre-takeover price of $21.26 and have made a turbocharged return.

The shares have risen 80% in value since Liberty handed them over and closed at $38.27 on Wednesday. The share sale is expected to close Friday and is being led by Goldman Sachs.

The biggest beneficiary is CVC which has made a total of $6.4bn from F1. It has yielded a 563% return on investment as CVC put in just $965.6m when it acquired F1 in a leveraged buyout in 2006.

A number of American investors later joined its consortium including fund manager Waddell & Reed which has made a total of $1.7bn from the $1.6bn it invested in 2012 for a 20.9% stake.

Lehman, which has been involved with F1 since 2002 when it gave a $300m loan to German media firm Kirch to finance its purchase of shares in the sport. The loan was secured on the shares so when Kirch went into Chapter 11 bankruptcy in the same year it left Lehman with a 14.2% stake in F1.

Four years later, Lehman sold its stake to CVC for $209.3m which was less than the loan it provided to Kirch. However, this was only a loss on paper as Lehman made the smart decision to reinvest the money in F1 giving it a 15.1% stake. In 2008, Lehman itself went into Chapter 11 bankruptcy and moved its F1 stake from its bankrupt arm, Lehman Commercial Paper, into LBI Group, a newly formed holding company containing the valuable assets in its portfolio.

LBIs purpose is to generate cash from its assets which is then used to pay Lehmans creditors. This is an ongoing process and dissolving it completely depends on settling all the claims from creditors.

F1 first contributed to its returns in May 2012 when it paid out an $850m dividend with $130.1m going to Lehman. Five months later, Lehman cashed in again when it sold a 3% stake in F1 to the Teachers Retirement System of Texas (TRS) for an estimated $200m.

Rounding off a bumper year, in December 2012, F1 paid another dividend, which this time came to $1.2bn and was fuelled with income from a recent debt refinancing. Lehmans share of this was $147.6m and it received a further $121.1m in dividends over the next three years. It brought Lehmans payout to $808.1m by the time that Liberty bought F1.

In line with its 12.1% F1 stake, Lehman got $363.6m of the $3bn cash offered by Liberty and it is also due $42.5m from the loan, which can be converted into stock. The sale of Lehmans FWONK shares has netted $325m which gives it a total return of $1.5bn.

Libertys management too have taken advantage of the accelerating stock price. Its chief financial officer, Mark Carleton, has sold all of his FWONK shares and has made $2.5m from this since the acquisition.

However, the road ahead may not be so smooth. In July, the organizers of F1s flagship race, the British Grand Prix, cancelled their contract seven years early due to soaring hosting fees.

Likewise, the organizers of next weekends Malaysian Grand Prix have also put the brakes on their race early as this years will be their last even though their contract runs until the end of 2018.

In the medium term, there is also the threat of an investigation by Britains Serious Fraud Office. In May, it announced that it had begun a pre-investigation into whether there is evidence of corruption in F1s governance contract the Concorde Agreement, a claim which has been denied by F1, CVC and the sports governing body the Fdration Internationale de lAutomobile (Fia).

Further down, the line comes the hurdle that all of Libertys contracts with F1s teams expire at the end of 2020 so, as things stand, it only has three and a half years of guaranteed income. Perhaps ominously the teams have steadfastly resisted opportunities to buy FWONK shares which would give them a long-term interest in F1.


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