Sports Finance Report: Accounting Mechanism Could Impact F1 Share Price

by 3 months ago

SUZUKA, JAPAN - OCTOBER 05: The Ferrari team push the car of Kimi Raikkonen of Finland and Ferrari in the Pitlane during previews ahead of the Formula One Grand Prix of Japan at Suzuka Circuit on October 5, 2017 in Suzuka. (Photo by Mark Thompson/Getty Images)

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Accounting Mechanism Could Impact F1 Share Price

Morgan Stanley is projecting $216.1 million in net losses for Formula One auto racing (FWONK) over the next 3 years. While team payouts (68% of profit) remain F1’s biggest combined expense, the financial services firm projects the racing organization’s single largest line item to be the $394.6 million annual amortization hit anticipated between now and 2020. The company is also on the hook for $515 million in interest payments (related to $5 billion in debt) over the same period. The Morgan Stanley report reflects F1 amortization and interest will exceed EBITDA by $115.2 million in ’18, $78.5 million in ’19 and $22.4 million in 2020. While private companies can massage earnings reports to show adjusted bottom line figures, public entities are required to follow fixed reporting standards; showing significant annual losses could negatively impact investor interest in FWONK.

Howie Long-Short: Formula One auto racing (FWONK) revenue declined (-$18 million, to $1.8 billion) in 2017, for just the second time in a decade, following the loss of (and inability to replace) the German Grand Prix and several key sponsors (see: Allianz, UBS). While F1 “shares are up nearly 20% since YE16”, if you exclude their 34% interest in Live Nation (LYV) “the F1 stub is actually up less than 5%.” As for the Morgan Stanley report, the net losses could actually be worse; their growth forecast has been called into question after a key source issued contradicting statements pertaining to increases in broadcast revenue.

Fan Marino: The Formula 1 U.S. Grand Prix is in Austin in October. Rolling Stone is reporting a Bruno Mars (6 Grammy’s last month) tour stop at the Circuit of the America’s on October 20th; coincidentally the week of the race. Stevie Wonder, Taylor Swift and Elton John have performed at the track the past 3 years, headlining the weekend’s off-track events.

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New Deal Gives Tennis Channel Exclusive Broadcast Rights to 21 ATP Tour Stops

Tennis Channel has agreed to multi-year extensions with the ATP World Tour (tennis’ governing body) and ATP Media (tour’s broadcast arm), ensuring the network of exclusive broadcast rights to 21 ATP Tour stops (Masters 1000 & 500 events) and the season-ending Nitto ATP Finals (non-exclusive). Matches will air on the linear cable network and via authenticated digital stream on Tennis Channels’ affiliated OTT service, Tennis Channel Plus (for the 1st time); combined they’ll carry every round of all but a handful of men’s tournaments (Indian Wells, Miami & Nitto ATP Finals). Under the terms of the new deal, Tennis Channel will be granted expanded video-on-demand rights and increased network access to classic matches. Terms of the deal were not disclosed.

Howie Long-Short: Tennis Channel is owned by Sinclair Broadcast Group, Inc (SBGI). Sinclair is awaiting the Department of Justice’s approval on its $3.9 billion acquisition of Tribune Media (and their 42 television stations). Should the deal be approved (it likely will be, though SBGI may be forced to sell a few stations to comply with FCC rules) SBGI would own channels in 233 networks in over 100 markets (in an unprecedented 72% of the country). Back on November 1st, the company reported Q3 net income fell 39.7% (to $30.6 million); hurricanes Harvey and Irma, a loss of certain technical school advertisers and one-time acquisition related charges (see: Bonten Media) blamed for the negative differential. The company is expected to report Q4 ’17 and full-year ’17 earnings on February 28.

Fan Marino: Fans in NYC will get to see Serena Williams live as she plans to participate in March’s Tie Break Tens tournament, the first of its kind in the U.S. The short-form one-day knockout tournament (each match is a super tie-break to 10 points) will be held at Madison Square Garden. 8 competitors will participate, including Serena’s older sister Venus Williams.

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Two Circles Uses Data to help Rights Holders Grow Revenue Streams

Two Circles was the BT Sport Industry Agency of the Year in 2017 (a big deal in the industry). The data-driven (they analyze billions of fans, customers and audiences across transactional, web, social, mobile and digital campaigns) sports marketing agency is well known in London (they work with Formula 1, a number of EPL clubs, Wimbledon), but just started taking on U.S. rights holders in 2016. I had a chance to speak with SVP Mark Thompson, and ask him a few questions about changing consumer viewing habits, experiential marketing and Amazon/Facebook’s impact on the future of sports sponsorships.

JWS: How are changing consumer viewing habits impacting the sports sponsorship market?

Mark: Sports sponsorship is in a state of flux. The top of the market remains relatively robust but changes in consumption habits have lead brands to Google, Facebook etc. who can offer specific audiences and a more robust evaluation process. Rights-holders must work to sell to one-to-one relationships that are owned versus relying on top line media and social footprint numbers. Demonstrating an understanding of fan demographics will not be enough without the same level of comprehension of attitudinal and behavioral data. We expect to see digital assets will become an increasingly important part of the partnership asset mix and rights-holders and brands will increasingly work together to track their return on investment.

JWS: Experiential marketing is more popular than ever. Why are brands moving in that direction as opposed to traditional sports sponsorship model (i.e. in stadium signage)?

Mark: Sponsorship has always been most frequently employed as a marketing tool to assist at the early stages of the customer life cycle (e.g. awareness) and been largely tracked by media equivalency for signage and surveying sentiment to assess the overall impact. Brands are increasingly investing a higher proportion of spend into experiences designed at the purchase stage for new buyers or upselling existing ones. The opulent sponsored premium areas in the new stadia speak to this. This has been made possible as brands and rights-holders use data better to identify, reach and engage high spending individuals/corporations and assess the impact. If you want to show-off a new high-end car as part of your partnership with a sports team, getting a small number of the right buyers engaged with a unique experience can be a better investment than getting a lot of visibility from people unlikely to actually buy your car.

JWS: You see stories daily about Amazon or Facebook acquiring sports rights. How does their ability to collect data/use data alter the future of sports sponsorships?

Mark: Amazon’s investment in broadcasting is a game-changer for B2C sports sponsors and advertisers.They will be able to slice and dice specific audiences for brands and thus increase the value of each viewer for the rights-holder. Don’t want to advert to anyone over 45, or a specific geography? No problem, as someone else will and will pay good money to. In addition, they will be able to monitor, record and communicate the effect that advert has had on consumption in the short and medium term on a channel taking up an increasingly high proportion of our daily spend. The availability and insight driven from data will transform sport’s ability to compete with other sources of marketing dollars. The ability to track web behavior on Google after viewing a piece of sponsored content on YouTube demonstrates value of the sponsorship not previously quantified.

Howie: Two Circles is a part of Group M, a WPP company (WPP). WPP is a London based multinational advertising and PR firm, traded on the NYSE. In late October, the company cut its 2017 earnings projections down to 0, while reporting a 1.1% drop in Q3 ’17 net sales. The company will report on Q4 and full year ’17, on March 2nd.

Fan Marino: Two Circles has built an impressive client base in the U.K., but I was more interested in hearing the names of some clients they’re working with on this side of the pond (the website, currently under redevelopment, doesn’t identify them). Can you name U.S. rights holders that you’re currently working with?

Mark: Sure, the NFL (and some individual teams), MLS, the Association of Volleyball Professionals Tour and the United States’ 2026 World Cup bid.

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JohnWallStreet, located at the intersection of sports and finance, is a destination for the educated sports fan.

While we won’t be publishing “hot takes” on LeBron’s relative greatness to Jordan, we will be offering up the most relevant sports related business news, in easily digestible bites, with commentary from both the sports money and sports fanatic perspectives.

We’ll cover publicly traded professional teams & stadiums (MSG, RCI, BATRA, MANU), television networks (DIS, FOXA, CMCSA, CBS, TWX, MSGN), apparel & footwear companies (NKE, UAA, ADDYY, FL, LULU), equipment companies (GOLFELY, FIT), ticketing companies (EBAY, LYV) content and facilities providers (CHDN, DVD, ISCA,TRK, LMCA).  If it trades on Wall Street, and has a sports angle, it’s in our wheel house.

Howie Long-Short and Fan Marino will be providing their expert opinions on each story. They have slightly different areas of expertise. Fan Marino is a firm believer that the SEC is the premier football conference. Howie Long-Short knows it as the Securities & Exchange Commission. Fan Marino lives and dies with the college selection of 5 star, blue chip recruits. Howie Long-Short spends his days analyzing blue chip stocks. Howie Long-Short knows that Black Monday occurred on October 19th, 1987. Fan Marino swears it happens every January after Week 17. You get the point.

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