Through Formula 1’s off-season the fate of over 400 Force India employees, a team which had raced in F1 for 27 years, and two of the 20 cars on the grid, hung in the balance.
How did it come to this? How close did the team come to going under before being pulled back from the brink? And did a hasty deal to keep them racing leave unresolved contradictions which could cost F1 millions?
New documents from the administrators and behind-the-scenes developments in the F1 paddock yield some answers.
The report released by administrators FRP Advisory, appointed to restructure Force India and prepare the team for sale, makes for fascinating reading, not only for its wrap of the process, upon which we reported extensively – from revealing Sergio Perez’s key role in the process, through the granting of a mid-season FIA licence, to the latest legal challenge by Uralkali – but for the peeks behind the scenes it provides.
Saliently, FRP’s report details that Force India, incorporated in 1989 as Totas Euroservices Limited by Eddie Jordan, ultimately changed its name five times – each time after a financial crisis. This seems to be the way in F1: of the current 10 teams, just two are still majority owned by their founders: Williams and Haas, with the former now being a listed entity, and last-named only in its third season.
However, in contrast to public comments made by then-team principal (and 42.5 per cent shareholder) Vijay Mallya, the report reveals that Force India knew it was in deep trouble well before it entered administration on 27 July. On 30 May the company approached FRP to provide advice on short-term funding, the team’s relationship with primary sponsor BWT, and the practicalities of running the team while in administration.
As part of the process, a potential sale of the underlying business and assets as “a going concern” was discussed – crucial given the eventually outcome – with three potential purchasers identified and deemed sufficiently credible and able to support the team going forward. The catalyst for the meeting was a looming winding-up order from Her Majesty’s Revenue Collection for non-payment of Pay As You Earn tax and of employee deductions.
Although the potential buyers are not identified, it is thought the trio consisted of the (ultimately successful) Stroll consortium, the Uralkali/Mazepin syndicate, and a group of investors assembled by Michael Andretti, son of 1978 F1 world champion Mario, and a successful IndyCar racer and team owner.
Following completion of the administration process, the company known as Force India Formula One Team Limited will eventually be liquidated. “It is currently estimated there will be sufficient funds available to pay all creditors in full,” FRP reported. While that is reassuring for many within the F1 community, the list reveals that the company’s management had clearly prioritised certain suppliers.
For example, Toyota Motorsport is owed £2,200, while two photographers are due around £20,000 each, some of it extending back 90-plus days. One provides crucial wind tunnel services coming in at £100,000/hour, and crucial to the team’s performance; the other clearly rank lower down the food chain. It follows that Toyota were kept sweeter than snappers, as was Pirelli, which does not even appear on said creditors list…
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Liberty subsidiary Formula One World Travel’s debt of £22,000 for supply of travel and accommodation is listed as current, while the Montreal Intercontinental (£5,000) has been outstanding for over 90 days, probably on account of the fact that F1 is not due back in Canada until June next year, which is the earliest the bailiffs could make a grab. Ditto Granollers Hotel, owed a paltry £2,000 since March testing.
The largest debt by some margin is £13.5m owed to Daimler AG and various Mercedes subsidiaries – for engine and ancillary supplies – yet ‘just’ £2,5m stretches beyond 30 days, with the bulk being current at time of administration, This, incidentally, chimes with comments made by Mercedes Motorsport CEO Toto Wolff in Hungary, who said the main debt was semi-current, with outstanding sums being manageable.
Clearly, though, alarm bells had begun to peal loudly in Stuttgart by that stage, for Daimler robustly supported the administration application brought by Brockstone Limited, Perez’s management company. However, in mid-June, well prior to this intervention, HRMC had applied for a winding up order – supported by German composites contractor Formtech, owed over £2m.
Although the HMRC claim was settled, Formtech remained unpaid, so the winding-up petition was not withdrawn. Thereafter it was a matter of time before it all unravelled: on 1 July primary sponsor BWT terminated its contract, while Brockstone, owed £4m for over a year, lodged its application on 20 July.
At that point in time the team had just £240,000 in cash reserves, and once Santander got wind of the court action, the bank froze all team accounts – highly inconvenient in the run-up to the Hungarian Grand Prix, at which considerable costs would be incurred, and a week before the (pre-summer break) end-July payroll run. It was time for action, and hence Brockstone’s (successful) application on 27 July.
Perusing the creditors list, though, raises interesting questions. Given the number of paddock folk and companies owed anywhere between a few thousand and upwards of half a million quid, why weren’t the team’s financial issues flagged, particularly after Mallya said all was well? The likes of Red Bull Technology, Travel Places and Riedel Communications are all owed amounts stretching back to April, yet kept shtum.
What happened after administration was granted is highly illuminating, for clearly the team faced immediate closure unless sufficient funding was raised to meet its July/August payrolls, the ongoing car preparation costs for Spa and Monza, operating costs at both events and ensuring that crucial factory shut-down maintenance could be completed.
The amount required? A not-inconsiderable £9.6m. Given the team’s annual budget of around £100m, a figure equally a tenth, or roughly equal to a month’s racing in a 20-race season, seems about right. But where to source such funding urgently given the team’s history and the fact that no meaningful revenues were due during August, particularly given that BWT had triggered its exit clause a month earlier?
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Inexplicably, though, BWT provided an unsecured (note) £5m loan. This being the same BWT that cancelled its sponsorship deal in July and subsequently advised the administrators of a material claim; the same BWT that supported Brockstone’s application; the same BWT that previously lent the team £1.25m to assist with cash flow; the same BWT whose pink livery remains on two Force India cars lent the team five million…
You couldn’t make that up, yet it happened…
With £5m in the bank, the administrators could commence the restructure and sales process. In total, 20 expressions of interest were received, eventually whittled down to five credible parties. Of these, one – by implication, the Stroll consortium – made an offer for the team as a “going concern”, whereas Uralkali confirmed to RaceFans (in Russia) it had considered this to be unfeasible, so bid on an “asset sale” basis.
Then Lawrence Stroll, a billionaire by virtue of building and listing brands such as Tommy Hilfiger and Michael Kors, played a trump card: His consortium provided a key loan of £15m to enable FRP to square with BWT, and settle urgent debts. Forget not the August payroll, roughly £2.2m gross (£1.3m net), was due three weeks hence, and there were fears key personnel would (understandably) seek alternate employment.
Thus the Canadian fashion billionaire, who had assembled an impressive team of co-investors, jostled his way into pole position, effectively being granted first refusal on the team, an option he duly exercised on a “going concern” basis.
As detailed here, that option could not be completed due to the intransigence of, amongst others, 13 Indian banks, so the sale was hastily switched to an asset-based purchase – a process currently being disputed by the Uralkali syndicate, and said to be challenging FRP’s decision in the courts.
However, Force India’s payroll provides an interesting insight into the costs of running an F1 operation: We know, for example, that the company employed around 400 full-time staff at time of administration; hence an average monthly salary of £5,500, or £66,000 per annum (excluding bonuses).
We can safely assume that Force India could not afford top dollar wages, whereas Mercedes F1, situated just 10 miles up the road, has a flush parent company, receives massive F1 bonuses and is sponsor-rich – so the average wage is likely to be 10 per cent up, so around £72,000 per annum (£6,000/month), before win bonuses. We also know from company filings that Mercedes F1 employs 800 heads, so simple mathematics point to a monthly payroll of £4.8m or £57.6m before bonuses. That pans out at nearly £60m in wages, to race two cars for two hours on 20 Sundays, or £1.2m per hour. Expressed differently, That equals a wage bill of £3m per grand prix, or £50,000 per lap completed, assuming both cars finish…
How Force India found itself in this predicament is easily explained: When billionaire industrialist Mallya acquired control (85%) of the former Spyker team, his intention was to use the team as platform for his various brands, including Kingfisher Airline, a lager going by the same name, and various spirit labels. Funding shortfalls were met by internal transactions: loans dressed as sponsorship.
He sold half his holding (42.5%) in the team to compatriot Subrata Roy, with the Dutch Mol family holding the balance. No sooner had the transaction been completed than Roy was arrested to answer allegations of suspicious money transactions. Concurrently, the airline went under.
With banks and other creditors circling on Mallya to recover their loans, no brands to punt, his partner in jail, and the Mols unwilling (or unable) to chip in, the team increasingly slipped into the red, despite finishing fourth in the championship two years on the bounce. To remain competitive Mallya put expenditure ahead of funding, with the shortfall for 2017 alone being £31m, and accumulated losses to the end of 2017 being £270m.
Mallya had not grasped F1’s golden rule: stay within budget; put pounds before points.
Thus Lawrence Sheldon Strulovitch (Stroll) and partners – trading as Racing Point Limited via Racing Point Holdings Limited, both registered on 2 August – acquired the team for £90m on an asset sale. In addition, the syndicate was required to deposit £20m in an escrow account to meet future claims, a number of which are pending, including commission on the BWT deal, and another believed to be linked to NEC sponsorship.
Where to now? The team, competing as Racing Point Force India, continues to punch above its weight, and is on target to claim sixth in the championship despite its points having been reset when Force India Formula One Team Limited officially withdrew from the championship, with RPFI taking its place.
This caused dissent in the ranks of team owners over RPFI’s eligibility for F1’s so-called Column One money.
However, RaceFans understands that during the Suzuka weekend all teams were advised by Liberty that Force India would be receiving its dues from the end of September onwards, having forfeited August monies on account of being in administration during that month. The decision was allegedly taken after all teams allegedly signed “going concern” waiver despite the team being sold on an “asset sale” basis as per FRP’s report…
So when is a new team not a new team? When it inherits the former operation’s engine count, or when a suspended penalty doesn’t get handed down for a repeat offence on account of it being a new entity, or when it suits F1’s commercial managers to keep a team on the grid?
Although Guenther Steiner of Haas, which did not qualify for Column 1 monies for two years on account of being a new entity, refuses to comment, the odds in the paddock are that he will push for at least £45 million in back payments, being two years of Column 1 monies. Imagine what that would do for the US-entered outfit’s competitiveness.
All in FRP’s report, illuminating as it is parts, raises more questions than it answers – which is about par for F1.
Follow Dieter on Twitter: @RacingLines
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