Liberty Formula 1: Where Luxury Meets Streaming (Issue #12)
Liberty Media Formula One
FWON.K: $61.86
Market Cap: $14.37 billion
Enterprise Value: $16.06 billion
Company Overview
Liberty Media spun-off from TCI in 1991. The spin-off was orchestrated by John Malone (now Chairman of Liberty), at a valuation of $600 million. Liberty assets are now worth $44.3 billion (Liberty Media, Cable/Broadband, SiriusXM, Formula One, Drone Racing, and many more) and Malone now has set his sights on the streaming industry. Malone is heavily involved in streaming (the mastermind behind Discovery Network’s global push and then the Warner Brothers Discovery merger). Malone has a few key attributes he looks for in a successful media company. His playbook was built through his “Cable Cowboy” years pioneering the cable business and it applies equally in streaming: strong customer “stickiness” meaning low churn rate, direct customer relationships (already having customers' payment information from previous transactions), global growth potential, and existing scale. Formula One checks all these boxes.
Liberty Media acquired Formula One in 2016 for $8 billion. Formula One is very capital-light and the company is structured more like a tech company or franchiser (two very attractive company structures) than a media or sporting company. From 2019-21, they have only had to invest around $80 million in capital spending and from this, they have generated about $5.3 billion in revenue.
Formula One makes money in 4 different ways:
TV Rights accounted for 38% of revenue last year.
Sponsorships can come from companies like Aramco, Rolex, Heineken, and more and account for 15% of all revenue.
Track Fees where each Formula One track pays a fee to be included on the calendar – often multiyear contracts that get renegotiated regularly.
The fastest-growing revenue stream is Streaming through their F1TV app and website. I used the past tense referring to the percentages of each of the revenue streams because there are multiple new TV rights deals that are not reflected in current numbers as well as a growing streaming base that also affects the balance.
Formula One has created a blue ocean in a lot of senses. It has an over 70-year history with iconic races across the globe and is shown in 127 countries in 6 different languages. The races pull in an estimated 500 million fans who for the most part are very avid consumers of the content.
Formula One owns a unique niche in that it operates at the confluence of luxury brands and streaming. These are two very compelling investment niches. Luxury is one area of consumer markets that has demonstrated it can achieve and maintain pricing power and streaming is a focus for every media company. Formula One has built up strong relationships with many luxury brands as sponsors (Richard Mille, Ray-Bans, Rolex, etc) and teams competing do so in large part to emphasize the quality of their brands. Who would not want their watch or fashion brand to be seen on the winning driver at Monaco?
For car manufacturers, Formula One is a prestige play, either to maintain status (Ferrari, Mercedes, Aston Martin) or to aspire to it (Renault/Alpine, Alfa Romeo). While other teams pay to compete, Ferrari is an exception. Due to its shared F1 racing history (Ferrari has competed in every Formula One season), they are paid tens of millions annually to continue to compete.
Company Outlook
Looking forward, Formula One has multiple ways to grow and create shareholder value. The company has been paying off debt since the Formula One acquisition in 2016. Long-term debt had been knocking on the door of $6 billion for a few years since 2016 but has been significantly reduced in recent years to now under $3 billion. Net debt has also been cut down from $3 billion to now $1.4 billion. The target leverage ratio is to operate F1 under 5x cash and Liberty ended 2021 at 3.7x cash.
Formula One has $832 million in variable-rate debt at an average interest rate of 3.5%. Also $2.5 billion in fixed-rate debt at an average interest rate of 4.9%. This means the majority of the debt won’t be negatively affected by increased interest rates. Also with FCF increasing in the future or at least staying strong where it is then the variable rate shouldn’t be too large of a hurdle.
Total debt outstanding principal for the whole Formula One Group portion of Liberty Media is $3.3 billion. This contributes to Liberty’s total debt to equity of 0.47x.
The classic John Malone playbook involves 1) acquiring unique assets that generate long-run cash flows - Liberty has almost doubled Free Cash Flow (FCF) since 2019, from $250 million to $460 million in 2021 2) long-term debt financing and 3) buybacks. Liberty paused buybacks during the pandemic, but now large buybacks are coming into action. In Q1 2022 Liberty bought back 472,000 A shares (FWONA) and 1.7 million C shares (FWONK). This is a ~2% buyback for A shares and ~1% buyback for C shares. These buybacks should only increase. Liberty has increased its cash over the LTM by $482 million with $400 million of that being FCF. This means they have the resources to power more buybacks.
Beyond the Malone playbook, for Formula One business, there is a capacity for reinvestment in multiple growth opportunities within it and four different income streams:
Broadcast TV Rights - 40% of 2021 revenue
Recently TV rights have been renegotiated for both the US and Europe. The US re-upped with Disney/ESPN for the US TV rights in a deal at a reported $75-90 million annual fee. This is a massive increase from the previous agreement of a $5 million annual fee. The raised fee has yet to appear in earnings for Liberty because the effects of the deal don’t kick in until next year. The increase is a product of the increasing popularity of the sport in the US that has come along with the creation of the Netflix show Drive To Survive (over 28 million watch hours of the show) which goes behind the sport and into each of the drivers and teams backgrounds beyond what happens on the track. The US popularity should only continue to grow with the new race in Miami this season and a new race in Las Vegas next year. When Formula One was acquired there was only one race in the US and it was not that popular. Now the US Grand Prix are some of the most exciting races of the season.
The biggest deal is the SkySports deal for the UK and Ireland. This is a ~$1.4 billion deal that lasts from 2019 to 2024 and provides SkySports with exclusive broadcast rights for the UK and Ireland. This converts to ~$234 million annually.
Canal+ a French media company has a new deal with Formula One for French broadcast rights until 2029. The deal was a $65.6 million annual fee that ran from 2013 to 2021. The new deal until 2029 is said to be significantly higher in fees.
Since Formula One requires little CapEx investment, these increased broadcast rights fees will benefit its bottom line.
Sponsorship - 16% of 2021 revenue
There are two layers of sponsorship in Formula One. First the team sponsors and second the track sponsors. Formula One as a company only directly benefits from the latter. However, both are important to the financial success and continuation of the sport. Also, the track sponsors are just as prestigious (if not more so) than the team sponsors with companies like Rolex being a large sponsor.
This Formula One signed two global sponsorships deals with MSC and Salesforce. MSC has also made plans to make stops onshore for certain Grand Prix. Formula One also makes sponsorship deals where instead of payment they receive the companies’ services these are with companies like Workday, Lenovo, and more.
Track Fees - 31% of 2021 revenue
There is no information on how much Formula One gets paid per track. However, they are in the process of purchasing real estate in Las Vegas for the new Grand Prix there. The deal is a reported $240 million for pits, paddock, and some hospitality. Multiple Grand Prix/tracks have renewed deals like the Emilia Romagna Grand Prix until 2025.
Tracks pay anywhere from $55 million per Grand Prix on the high-end (Saudi Arabia, Azerbaijan, and Qatar) to only $15 million for Monaco. Silverstone (British Grand Prix) is also low at $25 million. Hosting a Grand Prix is estimated to cost about $700 million making this seem less significant when considered in context. Most Grand Prix are being resigned until 2024-2027.
Formula One has also been steadily increasing the number of races it has each year. There were 20 for most of the 2010s, this year there are 23, and the 2023 season is set to have 24. For logistics reasons, there is a limit to the number of races in a season, but there is still room for a few more races.
Streaming
F1TV had a reported 9.6 million subscribers as of Q1 2022. I imagine this number has only increased with the sport becoming continually more popular in the US market.
An important note about the Vegas GP is that the track although it’s a street track is technically owned by Liberty. This means there is no track fee they are receiving, but they receive the ticket sales, track sponsorships, and any other track income streams directly.
Bonus- International Growth
When Liberty bought Formula One, one of the attractive parts was that F1 had over half a billion fans around the world, without a meaningful presence in the US and China. Since taking over F1, Liberty has made a massive uplift in US market share, and the largest F1 event ever was the American Grand Prix in 2021 with an attendance of over 400 thousand people.
Next, Formula One has a large amount of growth potential in the Chinese market. There already is a Chinese Grand Prix, but the market is vastly undercapitalized by the sport. This year is the rookie year of the first-ever Chinese F1 driver, Zhou Guanyu, who races for Alfa Romeo. Fred Vasseur, Team Principal Of Alfa Romeo F1, said that the day they signed Zhou he received more sponsorship calls than in the previous 5 years. Formula One has a unique opportunity in China. Most international streaming companies are not allowed access to the country–even more painful because it is the perfect market with hundreds of millions of potential users who can afford formidable ARPUs.
Formula One is allowed access through Tencent Sports for broadcasting, but the company has yet to re-sign for a longer future and their current contract ends this year. Another Chinese media/telecom company, IPTV (Internet Protocol Televisions), has its eyes on the deal. IPTV already has over 121 million subscribers to its platform, 372 million mobile subscribers, and 170 million subscribers to its broadband business. China also has access to the standard F1TV, but not the upgraded streaming plans like F1TV Pro. This means Chinese subscribers can’t pay up for replays of races and more extended content on the paddock.
The US and Chinese markets are key for Formula One because they are two places with large TAMs for their streaming service that can afford an attractive ARPU. Formula One can gain tens or hundreds of millions of fans from these markets there will be a higher conversion rate of fans to subscribers compared to their existing markets.
Insider Ownership
There aren’t any worrisome insider moves. On top of that Chairman and orchestrator of Liberty, John Malone owns almost $1 billion worth of shares.
On the management side, Chase Carey was the previous CEO of Formula One, but since the acquisition, he was replaced by longtime Ferrari/Exor executive Stefano Domenicali. This is a strong move because it moves from a finance person to someone who is close to the sport itself and has motivation to build long-term value by improving the experience for fans.
Valuation
Liberty trades at 34x Price/Cashflow which is a little high in the grand scheme of things. But the business warrants a premium since it is a one-of-a-kind, global asset, extremely capital light, and a clear growth runway. This is also a media company that isn’t being weighed down by subprime-old content and is associated with luxury brands further justifying a premium multiple.
Speaking of the cable business, John Malone likes to say that sports is the glue that has held the big cable bundle together. Fast forward to today’s world, Formula One is an attractive asset for streaming services trying to create stickier bundles. because of the global presence and luxury focus of its fan base.
Until Next Time,
Soren
Disclaimer: Soren Peterson does have a holding in Liberty Media Formula One. Soren Peterson and The Streaming Jungle are not responsible for any financial results. Always to your own research.