The revelation that Sergio Perez was involved in putting his own Force India team into administration, which RaceFans exclusively revealed on Friday, shocked the Formula 1 paddock.
Force India co-owner Vijay Mallya faces losing control of his own team following the actions of, among others, the driver he signed five years ago, who has since delivered five of the team’s six podium finishes.
But what – and more importantly who – was really behind this extraordinary turn of events? @DieterRencken has the inside story.
Vijay Mallya knew it was over when he took a call on Thursday evening: Force India’s final lifeline, a loan from Lawrence Stroll, the Canadian billionaire (and father of Williams F1 driver Lance), against 51 per cent of the team’s asset base had been withdrawn after the fashion mogul had been advised that any such dealings could be in breach of Indian government restrictions on Mallya’s assets.
For the rest, the embattled Mallya ran out of options, and knew it: apart from an internal debt pile of an estimated £150m (mathematically split 42.5/42.5/15 amongst Mallya, the equally beleaguered Sahara Group and Dutch Mol family, all shareholders in the holding company Orange India Holdings), the team was variously indebted in the amount of around £25m, and recently survived on FOM advances.
The approximate debt pile comprised the following: Mercedes (£10m for power unit hardware), sponsor BWT (£5.6m), £4.1m to a company linked to driver Sergio Perez, and around £2m to Formtech, a Bavarian composites components supplier to the motorsport industry. Besides, there are sundry creditors, including HMRC, the British revenue service, which started winding up proceedings over unpaid employee contributions.
BWT’s alleged debt is difficult to quantify: Apparently, the sponsorship is in the form of a “loan” paid upfront, reducing pro rate with each passing race. Thus, according to a witness statement presented to the court by BWT’s lawyer, Stevie Loughrey, £5.6m is owing – but logically, Force India could discharge its obligations were it to continue racing.
The Austrian company has long been linked to equity in the team and has close ties to Mercedes Motorsport, so the plot thickens…
While all this flies in the face of Mallya’s comments that Force India was not disastrously burdened by debt – companies regularly owe shareholders monies, and, in F1, internal sponsorship is oft dressed up as loans or vice versa, while debt of 30 per cent of annual budget is no big shake in F1 – Force India’s problem was not so much the amount if debt, but that Mallya and Co were unable to (or refused) to inject fresh funds.
Formtech is believed to have initiated winding-up proceedings last Wednesday (Matter: CR-2018-004624 Force India Formula One Team Limited), but this was (allegedly) delayed to 22 August, basically providing breathing space for Mallya to rustle up £2m, or agree on a repayment schedule with creditors. Winding-up orders are, on the face of it, absolutely final – and thus handed down only as a last resort by courts.
Here the fate of the operation formerly racing as Lotus F1 Team is illuminating: between July 2015 and the team’s acquisition by Renault almost six months later, the Witney-based operation faced a string of winding-up petitions brought by various parties, all of which were staved off until the sale was finalised. Mallya hoped for similar, and the Stroll loan was fundamental to the team’s ongoing survival under Orange India.
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As outlined during the interview, Mallya’s goal was to see the team through the next two years, when budgets caps and a more equitable, purely performance-based revenue structure would not only make the team more attractive to a buyer, investor or sponsor, but perfectly play to the team’s strengths and structure. As he put it, “The team faces another two years of pain…”
Still, Force India’s performance was compromised by Mallya’s inability to attract sponsorship: no major brands would touch a team controlled by a high profile entrepreneur subject to protracted extradition proceedings to face billion-dollar fraud charges – whether these eventually stick (or not).
Equally, Sahara’s various legal tussles meant owner Subrata Roy was unable to step into the breach, while the Mols are minority and silent shareholders, and thus not directly responsible for the vast portion of Force India’s debts. Hence survival on FOM advances – and the pressing need to build a new 2019 car, with all its related aero challenges…
Seemingly things were proceeding too slowly for Stroll Snr: having built Tommy Hilfiger, Ralph Lauren, Michael Kors and others into global brands, he has concentrated on Lance’s career. As is the way in F1 today, any driver with funding is likely to find a more competitive seat, and Lance has plenty of backing due to shrewd deals by Lawrence to off-set the cost of a drive. Think Bombardier, think JCB, think Canada Life.
The problem is Williams hit a downer it’s unlikely to recover from soon, and time is of the essence in F1 – not only on-track. Stroll ran his finger down F1’s entry list: Mercedes, Ferrari, Red Bull Racing, Toro Rosso and Renault are currently out of reach to Lance, while Haas does its own thing at its own pace – leaving Williams (see above), McLaren (who wishes to go up against Fernando Alonso, though?), and Force India.
On paper Force India provided the ideal next step for Lance: fourth in the last two seasons and thus ahead of Williams (powered by the same Mercedes power unit) both times. Regularly F1’s best ‘bang for buck’ team, Force India’s only impediments this year have been financial and Mallya’s dogged refusal to sell the team for less than the value of shareholder receivable.
Force India’s predicament also presents Mercedes with issues: It holds long-term contracts for the supply of complete “back-ends” – engines, associated hybrid components, transmissions, and electronics/hydraulics – yet gets tarnished by association, all while both its customer teams are slipping down the grid. Where once six of the top ten cars were invariably Mercedes powered, only the team’s own entries made Q3.
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Worse, apart from the financial implications, a wound-up Force India holds adverse political implications for Mercedes: with their negotiations with Liberty over F1’s post-2020 landscape currently at a delicate stage, Mercedes and Ferrari each need a full hand of cards, namely three teams each to present a force of six (of ten) teams under their combined “control”. Force India’s closure would reduce that to 50/50.
Then, Renault, aware of the advantages of strength in numbers – and having lost Toro Rosso and Red Bull Racing to Honda for the foreseeable future, and gained only McLaren – is said to be scouting about for a second customer team. With Sauber committed to Alfa Romeo (and thus Ferrari technology) and Haas having a “listed parts” deal with Maranello, that leaves two prospects: Force India and Williams.
Time for some (pro)action. By Mercedes team boss Toto Wolff’s own admission “(Force India COO) Otmar (Szafnauer) walks the dog and comes for breakfast in Oxford, [at] in my place,” and it is inconceivable that they spoke only about the birds, bees and dog breeds; equally, Wolff, an Austrian steeped in the ways of business in the tight-knit country, is said to have brokered the BWT deal. Draw your own conclusions…
Enter Sergio Perez, or, more precisely, Brockstone Limited, in the sorry saga: In his own words, made in direct response to a straight question from myself, he was asked by “a couple of members of the team to go ahead and save the team and protect the 400 people that was working there”, adding “Therefore I was asked to basically save the team, to pull the trigger and put the team into administration.” Sounds heroic, doesn’t it?2
However, why, though a Certificate of Urgency before the court if the team had a breather to 22nd August? If he really is that concerned about the welfare of team members, will he donate the four million quid to the salary pot?
Then, read that quotation again, then question who “the couple of team members” could be, and why they would urge him to do so; above all, why he would do so. Hint: They’re unlikely to be truckies, cleaners, or gardeners. Then, ask why Perez would put his reputation on the line so publicly without guarantees of racing for the team in 2019; after all, why go through all this only to see his seat go to a competitor?
Once it was clear Rich didn’t have the immediate wherewithal to save Force India, the Silverstone-based team was placed in administration as per the urgent application brought by Brockstone, with FRP Advisory LLP, previously administrators to Marussia and Manor, taking charge of the team’s assets on Friday evening.
On Saturday afternoon Wolff told the media: “Now that process has been kicked off by the administrator there are many potential buyers with great interest, with deep pockets, with an understanding of what kind of spending levels are needed in order to perform in Formula 1.” Ask yourself how he knew that on a Saturday, within 18 hours of the administration order being handed down.
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Yet, on Sunday when I referred to his Oxford breakfasts and asked whether everything was going to plan, he told me: “You are having always this perspective of somebody plotting in the background.” No, Toto, not always – but I do believe something to be a duck when it walks like a duck and quacks like a duck…
Whatever, what happens next? The priority for FRP and F1 is for Force India to be saved as a going concern, by salvaging as much of the team’s value as possible while settling with internal creditors. Thereafter shareholder receivables come into play.
In the interim we await news on the way forward: Will Stroll make a bid, as angel investor, shareholder or outright proprietor; will Szafnauer, Mercedes and BWT be involved directly or peripherally? Will Lance be accommodated in a pink car, faciliatated by loans made by Lawrence?
Or will the team fall into foreign hands, either Russian or American. If the latter, will it be the consortium assembled by Michael Andretti or an investment company keen to invest in F1? In total there are allegedly five interested parties, and only time (and FRP) will tell.
Unlike many of the 50-odd casualties F1 has suffered over the years, Force India is too good to die, and ended in this predicament not though sporting ineptitude or a loss of focus, but through circumstances playing out tens of thousands of miles removed from the team’s Silverstone base, which were then compounded by Mallya’s refusal to sell, even in the face of fair offers. He firmly believed if he held out until 2021 all would be good.
The tragedy is that even without Mallya’s legal battles Force India was doomed to fail, battered and beaten by a structure devised by F1’s previous commercial owners CVC Capital Partners, one designed to give independent teams absolutely no chance of survival, then gradually force them into the hands of the sport’s majors, Ferrari and Mercedes – who between them aim to “control” six teams, with two owned by Red Bull.
Only Renault and McLaren operate outside of what could arguably be deemed to be a cartel, with all others being somehow reliant on one of the three majors, who, crucially, stand to share bonuses of $250m (£190m) between them this year. That amounts to a billion quid paid to the three top teams since the structure was introduced in 2013, and is paid to them simply for turning up, before any performance-related monies!
Any wonder they alone have won races since the payment structure was introduced, and invariably locked out the top six places, barring the unexpected?
Extrapolate those bonuses over the full 2013-20 (inclusive) period, and F1’s total money “pot” – amount disbursed in performance payments – would have benefitted to the tune of £1,6bn. On average over the years Force India qualified for 10 per cent of that pot, or £160m – roughly its current pile of debt, including shareholder receivables.
Consider the fate of independents under CVC’s payment structure, in turn inherited by Liberty, and excluded from fat bonuses paid to the top three are – or were in the case of defunct teams – with their fates in brackets:
McLaren – paid bonus ±40 percent of that paid to top three teams
Caterham – administration, then wound up
Marussia/Manor – administration twice, change of ownership and wound up
Lotus – staved off three winding-up attempts, then sold to Renault
Williams – paid flat bonus of £8m on heritage basis, clearly hit hard times
Force India – in administration
Toro Rosso – owned by Red Bull
Sauber – changed ownership after being unable to meet obligations
Haas – incorporated 2015, operates to unique business model
Painful reading, that, and made all the worse by a comment made by Wolff on Sunday: “We are actually one of the creditors, one of the suppliers that has helped the team over the last god knows how many years in competing.”
Technically true, but of little consolation to 400 employees and their families who now face a summer (break) of discontent.
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Follow Dieter on Twitter: @RacingLines
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