Why Ineos stake in Mercedes is a ‘turning point’ for F1

December 19th, 2020
Dominic Tobin

The sale of a stake in the Mercedes F1 team is more than just a new role for its sponsor Ineos: it’s a new future for Formula 1, says Toto Wolff.

As Formula 1 deals go, the one-third stake that Ineos has taken in Mercedes might seem underwhelming.

There’s no change to the team name; Toto Wolff will remain in charge; even the livery should remain similar because the chemicals company is already a sponsor.

But the deal represents a sea-change in grand prix racing, insists Wolff. And he has a point.

Mercedes is a convenient example of how F1 has evolved so far. Its tale begins in 1968, when Ken Tyrrell set up a team to bring Jackie Stewart to Formula 1, heralding the glory days as an independent team in the ‘70s.

That success was long gone by 1997 when it was bought by British American Tobacco, during a period where cigarette money bankrolled the sport. For the renamed British American Racing team, the cars were a billboard. Success was a way of getting more eyeballs on its brands.

“Chassis teams will turn into profitability. And that’s why it becomes interesting.”

Then came the European ban on cigarette advertising and Honda ownership. The car industry was one of the few that could fund and justify the huge budgets of F1 teams in the 2000s.

But the precarious nature of the setup became evident when Honda pulled out and the team came close to collapse — only saved at the last moment by a Ross Brawn-led consortium.

Brawn GP went on to win the title in 2009 but this was no revival of the independent; its winning streak ended in the latter stages of the season as rivals outspent it in development. The end of the year brought a Mercedes takeover and a return to the wealthy owner model that has endured to this day.

But not for much longer. “We are at a turning point,” said Wolff.

There’s a new strata appearing in the sediment of F1’s 70-year history, and the change is being driven by two key factors that came into play this year.

The first was F1’s new commercial rights deal, the Concorde Agreement. Signing it immediately made every team on the grid more valuable.

It gives each of the teams a license to race in Formula 1 for the next five years and imposes a $200m entry fee on any new entrant. The effect is that the cost of buying a team — and bypassing the entry fee — has gone up.

At the same time, getting involved in F1 has suddenly become more appealing. A budget cap, set at $145m for next year, will end outlandish spending. There’s also a more equal revenue distribution through the Concorde Agreement.

To make a small fortune in F1, you no longer need to start with a large one. In fact, Wolff believes that teams will become profitable rather than sucking millions from their beleaguered owners.

“Teams have always fought for resources in order to perform on track,” said Wolff. “And now it turns to real sports franchises.

“We are capped with a financial limit that means chassis teams will turn into profitability. And that’s why it becomes interesting.”

It hasn’t taken long for the effects to emerge. Within days of the Concorde agreement being signed, Williams had sold itself to investment firm Dorilton Capital, which bills itself as “creating value”.

Last week McLaren raised £185m by selling a stake of up to 33 percent in its racing team to MSP Sport Capital, a sports investment group, which spoke of the team’s “growth potential”

Wolff compares the situation in F1 with the US franchise model, where teams are given geographical exclusivity and guaranteed entry to series, offering the stability that makes them an investment opportunity, and a target for companies that look to increase profitability and improve performance.

“The US sports have already led this transformation 10 years ago and are valuable franchises today,” said Wolff.

Wolff added that the transition will be “accelerated” by the partnership with Ineos and Sir Jim Ratcliffe, its founder and CEO.

It’s a sentiment shared by Sir Jim. “Our plan to build a sports franchise where we believe to a degree we can add some value,” he said.

If this sounds familiar, then it should: it has already happened to Formula 1 itself. Bernie Ecclestone sold F1’s commercial rights to private equity firm CVC in 2006, which oversaw steep rises in grand prix hosting fees and an accelerated move to pay-TV.

Those rights have now been sold to Liberty Media, which is looking to make even more money through improved marketing of the sport.

The strategy seems to be working, particularly in the area of social media, where the series is attracting larger numbers of younger fans. In turn, this is making teams more attractive to investors.

“What we have particularly seen in the latest year through social media is an explosion in the reach and the best news is that the younger fans are coming, the 15-30-year-olds through esports through social media, through a great show,” said Ola Källenius, chairman of Daimler and Mercedes-Benz.

“Turning the team into something that can produce cashflows rather than consuming cashflows is very tangible.”

Forget for a moment that these are F1 teams we’re talking about and you have ten businesses with a steady income stream, ready-made fanbase, and global audience, offering countless commercial, marketing, and merchandising deals that can offer a profit.

Whether F1 can avoid the pitfalls of private equity buyouts that saddle teams with debt remains to be seen.

The new lower-cost, higher-return model means that the budget of a global carmaker should no longer be needed to succeed in grand prix racing, and Mercedes has chosen to cash in on some of its investment in the team, retaining all of the much-vaunted promotional benefits, at lower cost — although its engine division will continue to make a loss.

The Ineos deal has been sold as a partnership that strengthens all parties, through collaborations including hydrogen production vehicles and sharing knowledge across Ineos’ sports teams, which include the Tour de France-winning cycling outfit previously known as Team Sky, as well as two football teams and the British America’s Cup entry.

It also offers promotional benefits for Ineos now the chemicals company is moving into car production with the Grenadier, a rugged 4×4 that doesn’t appear to compete with any of Mercedes’ offerings.

With F1 no longer resembling a money-pit, there are likely to be many more investments and partnerships throughout the grid.

It’s a long, long way from the time when racers and brilliant engineers shaped Formula 1, but looks to be a more stable, more lucrative future for those involved.

One thing may well remain familiar, though: the German anthem at the end of grands prix. “Combining the three of us today is going to make us more successful into the future,” said Wolff.

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