Deal focus: Yao Capital backs new motor-racing formula

CVC Capital Partners paid $2 billion, including $1.1 billion in debt, for Formula One in 2006. Six years later it made a partial exit worth a reported $2.1 billion, reducing its holding to 35.5%, and then last year agreed to sell the balance to Liberty Media Group in a cash-and-share deal that translates into an equity valuation of $4.4 billion and an enterprise value of $8 billion. It has proved to be highly lucrative investment, without factoring in undisclosed dividend recaps during the ownership period.

Formula One is a classic sporting cash cow. Its calendar of 19 races generated annual revenue of $1.6-1.7 billion, rising to $1.83 billion last year following an expansion to 21 races. Fees from host racing circuits and broadcasters each account for 35% of the total, with sponsorship and trackside advertising making up the rest.

Formula E, which was created in 2012 as a racing series for electric cars, is a newcomer to international motorsport but wants to replicate Formula One’s success. It has won support from International Automobile Federation (FIA), auto manufacturers such as Jaguar, Audi and BMW, and Liberty Global, a sister company of Liberty Media. Sport-focused Chinese GP Yao Capital recently joined them, acquiring a significant stake in Formula E for an undisclosed sum, and it plans to make follow-on investments through various tranches alongside Chinese co-investors.

“Electric car racing is welcomed by the Chinese government as it promotes innovation, a cleaner environment and sustainable energy. Formula E wants to penetrate further into China, but it needs a local partner,” says a person close to the deal.

The inaugural season of the Formula E Championship began in Beijing in 2014 and finished in London 10 races later. The second season comprised 10 races and the third, which launched in Hong Kong last October will feature 14. Each race features 10 teams, including two from China and two from the US.

Yao Capital believes Formula E can achieve the same scale as Formula One over the next 10 years, but by leveraging different strengths, the source says. While Formula One circuits are usually on the outskirts of cities, Formula E holds its races in the downtown areas of iconic locations, offering access to a huge potential fan base. There are also various initiatives aimed at engaging younger fans who might not follow motorsport, such favorite driver polls on social media at the end of races with highest-ranking drivers getting battery boosts in the next event.

Revenue from parent company Formula E Holdings rose about 40% year-on-year in 2015; the total has not been disclosed but it is likely to be a tiny fraction of Formula One’s turnover. Most of the money comes from race sponsorship and the auto manufacturers that control the racing teams. Julius Baer is currently Formula E’s sole global partner. Other sponsors include Michelin, DHL, Qualcom, TAG Heuer, Visa and Hong Kong Telecom. 

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