The original article was published here: http://www.forbes.com/sites/csylt/2014/08/23/formula-ones-billion-dollar-man/
Formula One made history last month when it announced that the Mexican Grand Prix will return to its calendar in 2015. The event in Mexico City returns after a 23-year absence but this isn’t the only reason why the announcement was historic.
It also marked the second time that American auto sport entrepreneur Tavo Hellmund had brought a race to F1 having also been the brainchild behind the United States Grand Prix in Texas which returned in 2012. In F1’s 64-year history no one except for its chief executive Bernie Ecclestone has been responsible for putting more than one Grand Prix on the calendar. It has rich rewards.
According to research by Forbes, the races in Mexico and the US will generate just over $1 billion in revenue for F1’s parent company Delta Topco over the lifetime of their contracts.
The US Grand Prix has a ten year term with a hosting fee which started at an estimated $25 million and has an escalator in its contract which increases the cost by around 10% every year. This means that the revenue from the fee alone comes to a total of $398.6 million but that’s not all.
Delta Topco also collects the revenue from the Paddock Club, a lavish tented corporate hospitality outfit at each Grand Prix. It’s annual revenue comes to $78.7 million which yields an average of $4.1 million at each of the 19 races. A three-day ticket typically comes to around $4,600 and the prices increase by roughly 0.7% every year meaning that by 2021 it is expected that the US Grand Prix Paddock Club will be making around $4.4 million giving a total of $42.3 million across the duration of the race contract.
Delta Topco’s third revenue stream from F1 races is fees paid by brands which advertise on billboards around the track. Last year a total of six companies had trackside advertising at the US Grand Prix including luxury watch manufacturer Rolex and the investment bank UBS. Together the six sponsors paid an estimated $7.5 million which is slightly lower than average as the race does not have a naming rights partner. This gives a total of $75 million over the ten years of the contract bringing F1’s haul from the US Grand Prix to $509.6 million.
Mexico is not much different to the US as it has a five-year contract to host the Grand Prix with an option of a five year extension. The annual hosting fee comes to around $23 million and it also escalates by 10% every year which brings the fee income to a total of $392.3 million.
It is believed that the Mexican Grand Prix contract gives the organisers the right to retain a percentage of the income from the trackside advertising and the Paddock Club but an additional fee is paid for this so the total received by Delta Topco is not reduced. Accordingly, as with the US Grand Prix, these revenue streams will together come to around $117.3 million over the duration of the contract giving an overall total of $1 billion in revenue from the two races.
Given that both Grands Prix are in North America it is fitting that the biggest beneficiary of the revenue from them may also be in the region.
F1’s single largest shareholder is the private equity firm CVC which has a 35% stake in Delta Topco. CVC manages several funds which buy stakes in businesses and each has separate investors, known as Limited Partners. According to CVC’s website the investors in its funds comprise 300 institutional, governmental and private individuals. They get a return on their money when CVC sells its investments or takes dividends from them. F1 is one of the best-performers.
The race series was bought for $2 billion in 2006 by CVC’s investment Fund IV and although the identities of its Limited Partners are kept confidential, one name has become public. It is the California Public Employees’ Retirement System (CalPERS) which is the largest pension fund in the United States and is owned by the state of California.
Data from CalPERS shows that it invested $350.1 million in Fund IV and has made a 1.8 times return on its money. F1 alone accounted for a great deal of this as CVC has got $4.4 billion of cash out of the business giving it a return of 350%. According to the memorandum for Fund IV, the Limited Partners get all of the profits until they have got their money back after which time they get 80% whilst CVC itself retains 20%.
It means that the Grands Prix in the US and Mexico will also benefit the state of California through CalPERS and this too is fitting as the architect of the races is very much American.
The Mexican Grand Prix is a homecoming of sorts for the 48 year-old Mr Hellmund. His late father, Gustavo Hellmund-Rosas, was president of the organising committee for the race when it returned to the F1 calendar in 1986 after a 15 year absence.
Mr Hellmund had an early induction into Grand Prix promotion through his father’s event business which was also involved with running all the IndyCar races in Mexico in the early 1980s and the World Cup in 1986. In his late teens and early twenties Mr Hellmund got involved with all aspects of the company from ticket taking and sweeping to activation and promotion on the operational side.
However, he was distracted by the allure of auto racing and crossed the Atlantic to become a gopher at Mr Ecclestone’s Brabham F1 team. It wasn’t to get further experience in race promotion but was part of a plan to follow in the footsteps of American F1 champions Phil Hill and Mario Andretti.
Mr Hellmund started racing IMCA Modifieds, which are hybrids of open wheel and stock cars, and worked his way up to competing in the Grand National series – the regional division of NASCAR. He then moved to England with the goal of getting into F1. This led him to work part-time at Brabham which was a logical choice since his father and Mr Ecclestone were close friends.
Mr Hellmund found success driving in Formula Ford, Formula Vauxhall Junior and Formula Three but couldn’t get the event promotion bug out of his system. So, whenever he got a chance he arranged large-scale parties such as concerts and hot air balloon festivals. An unexpected turn of events took him deeper down this road.
In the early 1990s the untimely death of one of Mr Hellmund’s friends at the hands of a drunk driver led him to found a campaign called ‘safe and sober’ which involved racing drivers attending schools to educate pupils about wearing a seat belt and not drinking and driving.
He founded the programme with help from General Motors and a group of Chevrolet dealers in Texas. The aim was to drive awareness of the importance of a seatbelt and not drinking and driving. Mr Hellmund ended up doing 350 presentations for 400 high schools around the south west of the US and the initiative soon grew into a year-round after-school programme called Racing For Education. It expanded to being a state-wide campaign and was so successful that Mr Hellmund was commended for it by the then-US president George Bush.
Promoting an auto race was the natural next step and in 2004 Mr Hellmund’s company Full Throttle promoted its first: the ‘Texas Racefest’ in Austin. This was a sell-out due to it being the only event combining a Grand National NASCAR race with a meeting of the USAC Midget Car series which has spawned such renowned drivers as Jeff Gordon and Tony Stewart.
Whilst driving in F1 was out of Mr Hellmund’s reach, promoting a Grand Prix was becoming ever closer as the race series was in the middle of a turbulent eight years at Indianapolis. In 2007 Indianapolis finally severed its ties with F1 and this was the catalyst for Mr Hellmund’s bid to bring the US Grand Prix to Texas.
During the same year he designed the Circuit of the Americas in Austin, the capital of Texas, on a barbeque napkin and in 2008 he hired German track architects Tilke to carry out the engineering for it. The track would have remained but a dream had Mr Hellmund not also managed to secure state funding for it.
In 2004 the government in Texas had passed a bill to create a fund for attracting major events to the state, such as the Superbowl, World Cup and Olympics. Mr Hellmund noticed that although F1 wasn’t on the state’s list, it was the only global auto sport which would fit into this category. He applied for F1 to be included and got what he wanted as the state now pays the US Grand Prix organizers up to $25 million every year. Cleverly, the payment comes from increased sales tax revenue generated by the event so the state doesn’t lose out.
It was a spectacular feat as it gives the US Grand Prix more state funding than even the British Grand Prix which hosted the first F1 race in 1950 yet is not supported by the government. The state support helped the US Grand Prix get the green light and in 2010 Mr Hellmund took his place in F1 history when he finalized and executed the F1 contract.
Over the past five years alone there have been multiple attempts to launch new F1 races in the US but only Mr Hellmund has succeeded. Leo Hindery junior, the managing partner of private equity fund InterMedia Partners, has repeatedly tried to get a Grand Prix off the ground in New Jersey. Likewise, over on the west coast, Chris Pook, an auto sport manager who founded the Long Beach Grand Prix in 1975, has been trying to start an F1 race. Both events have failed to rev up.
The journey to the first US Grand Prix in 2012 had many twists and turns but they don’t change the fact that in just three years leading up to its announcement in 2010 Mr Hellmund had come up with the F1 deal, the state funding, the design of the track and even its name.
He said it was named the Circuit of the Americas after a horse track owned by his Mexican partners who are backing the country’s new Grand Prix and were originally due to provide the funding for the race in Austin. In the early stages of the project it attracted new funding and the Mexican investors instead turned their attention to a race in their home country. It has an all-star management team which is driven by two key figures.
The first is Mr Hellmund himself and the second is his counterpart in Mexico, Alejandro Soberon, chief executive of the world’s third largest live entertainment company Corporacion Interamericana de Entretenimiento (CIE). They are supported by three team members including Carlos Slim Domit who is the son of the world’s richest man Carlos Slim and has a great deal of auto sport experience through sitting on the Senate, the decision-making body of auto racing’s governing body the Fédération Internationale de l’Automobile (FIA). The remaining team members are George Gonzalez, the chief executive of CIE subsidiary Ocesa, and Federico Alaman, president of motorsports for Ocesa. They aren’t the only driving forces behind the race.
There are two talented Mexican drivers on the F1 grid at the moment: Esteban Gutierrez at Sauber and Force India’s Sergio Perez who have both been bankrolled by Mr Slim as they moved through the ranks of motorsport. There has also been recent change in Mexico as the country got a dynamic new president in December 2012 when 48 year-old Enrique Pena Nieto took office.
The Mexican Grand Prix will put his country on the global sporting map alongside nations such as Singapore and Monaco and will be seen by a global television audience of 450 million so F1 is far from the only beneficiary. The race will make a lasting impression in Mexico and it has Mr Hellmund to thank for that.
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