F1 teams combine scarce-asset appeal with strong profits

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 46:31

   is a resource that we can utilize. F1 teams have become radically more valuable like this transaction valued Mercedes F1 at 4.6 billion pounds. And that's many, many, seven times increase from even just a few years ago. That phenomenon has also happened in other sports like NFL and teams like that. There's two explanations you could have for the increase in value. One is sort of a monetary theory that you have more rich people who want to buy into teams. And so the businesses are the same, but you just have more demand to become a sports team owner and more more dollars chasing fewer assets the other is that you can say and obviously this is somehow true for f1 they've become better businesses i mean the audience has grown so much and you've drive to survive and things like that just as you think about the increase in value in mercedes and

2. 47:19

   f1 teams how much of it is f1 teams have become a more desirable asset and how much is it that they're actually just very good businesses now yeah you know when you buy a car today you justify with sometimes rational decisions like lots of horsepower or good design or it's EV because I want to you know I want to have an efficient car the truth is it's an emotional decision why you buy a car and the emotional decision is how you want to be how you want to be perceived do I want to be perceived progressive do I want to be perceived affluent yes all of this so So...

3. 48:00

   That is going to be a longish answer. Sports team are scarce asset today. You know, in F1, there's just 11 of us. And you could potentially have another 12-1 that's within the regs, but nobody's really keen. And it's the biggest global sport in the world today. The Olympics and the Football World Championship are bigger, but they're only for every four years. So this is the biggest global sport in the world.

4. 48:22

   Then you look at the NFL, very scarce asset too. And for U.S. America, it doesn't go any bigger than the NFL. and I think how much, 32 teams or something around that. So the scarcity of the asset can be a rational decision to own it and hope for a value increase because of that factor. Then there is the trophy asset angle. There's many very wealthy people that love the sport and say, well, I always dreamt owning an NBA or NFL team or Formula 1 team and I enjoy going to the races, giving my input and I can afford it now.

5. 49:03

   Very well, very valuable. It's a win-win. But then there is the people that have so much money and feel in a way maybe not recognized enough because you could have earned 10 billion with a business that doesn't have as much visibility and you're saying, you know, actually, I'd spend a large chunk of money just for the court side seat and be more prominent. Also a decision that you can understand maybe. So that is that aspect of investing. The other part is fundamentals. You look at the landscape and you can say, do I believe that this sport is going to continue to grow what's the demographics of the sport how much income potential has the league how much does the team earn and and that today have had these fundamentals have become reality in formula one before we were all lost making it was a marketing exercise

6. 50:07

   but today few of us are generating very healthy profits you know in our business more than 30 percent EBIT margin. We are distributing dividends. So it's not like the U.S. American teams that or the tax structure where you basically live in a debt environment. And we don't have a lot of capex because we don't own the stadium. Obviously, also miss some of the revenues. But so when you invest in a Formula One team today, you can attribute multiples to your investment decisions. And, you know, when I sold part of the team last year, those multiples it's justified the valuation you just stated.

7. 50:42

   Today, I'll probably be able to generate 30% more, but I got the right partner, so that's okay. And those multiples are also valid for most of the U.S.-American teams. What are the last publicly released financial figures from Mercedes? Well, we're generating around a billion dollar in revenue and 30% profit margin. Okay. So it's a very healthy margin. Sorry, 300 million of EBIT? Yeah. And so the $4.6 billion valuation is a 15 times EBIT multiple.

8. 51:13

   So, I mean, yeah, it's very Warren Buffett could underwrite this business. Exactly. It was back in the day, it wasn't a billion and it wasn't 300 million. It was considerably less because we're growing very strong and the spot is still growing strong. But, you know, we are Europeans. We don't talk so much about valuations and money. But as a matter of fact, like you say, these multiples are actually on the conservative side.

9. 51:36

   And actually, it's very different from, say, an NBA or an NFL team, where I think every time one transacts, it's whack-a-doodle valuations that can only be justified by tax pressuring or courtside seats. But also, you know, when you look at the valuations of the U.S. teams, you have fundamentals for some of the teams. Then there are some which are kind of being dragged along that are having valuations that are not real anymore.

10. 52:06

    And if you look at Mercedes, we are probably generating, other than the Dallas Cowboys, the most profit of any sports team in the world. So we have kind of a USB in this world. When we compare our multiples to the NFL or the NBA in its latest crazy uplift of valuation, I don't know what the multiple is, the revenue multiple, which is crazy. I'm a fundamental guy, fundamental figure, so I would never value a business on revenues.

11. 52:40

    I would value it on return on investment, fundamental cash flow and profits. So that would value us at 10, 12 billion if you look at the Lakers sale, for example, whatever else happened in this frenzy. But that's not the point. My horizon is so long-term that I'm a long-term bullish investor with all the ebb and flow that can happen in this sport that it becomes irrelevant to actually starve for higher valuation because it's just on paper.

12. 53:12

    But we could value the business today much more than it was a year ago. Yeah, it's interesting.