Williams F1 – The Worst IPO?

Posted on 23/02/2011


BMW-Williams Regent Street

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The Formula One team Williams is currently preparing to IPO on the Frankfurt Stock Exchange in early March, and the prospectus can be downloaded from the company’s website.  While some people might be excited about the prospect of investing in one of the most successful teams in one of the world’s most lucrative sports, I am a little more sceptical, mainly due to the reasons below:
  • The company has an poor financial history, generating net income of only £4.6m in FY09, a 50% decline on the £9.2m earned in FY08.  In FY07 the company lost £21.7m (mainly due to an operating loss of 17.4m).  In the first ten months of FY10 the company earned only £3.9m.
  • The company will not receive any proceeds from the share sale, as this offering is being conducted in order that existing shareholders can sell-down their holdings.  If the company’s insiders think that this is a good time and price at which to sell, why should outsiders believe that this is a good time and price at which to buy?
  • The valuation seems particularly high, as the company is expected to have a market capitalisation of €265m on day one, which compares to net income of £3.9m (in the first ten months of FY10) and is equivalent to a price/earnings ratio in the region of 50x.
  • The IPO is taking place in Germany specifically so the company can avoid informing its investors of material contracts, as reported by Bloomberg.  Adam Parr, the executive chairman of Williams, thinks it is “ludicrous” that the company should have to disclose details of contracts that form more than 10% of group revenues.  As an investor, I feel that it is essential that companies provide disclosure of such material contracts.
  • As risk factors in offering documents go, this is red flag:
    • “Formula One is a competitive and complex sport.  A large proportion of Williams’ revenues, in particular the Team’s share of the commercial rights income and sponsorship, depends directly or indirectly on the Team’s sporting results. This competitiveness and performance is uncertain by nature, and depends on many factors some of which Williams has limited control over.  There is no guarantee that any Formula One Team can remain competitive.  If the Team’s competitiveness and sporting performance were to decline significantly, this could have a material adverse effect on the sources of income of Williams.”
  • Williams is subject to significant key man risk with respect to its drivers and key engineering staff.
  • The company faces a monopoly supplier (with respect to its race entries) in the form of the Formula One Administration Ltd.  Formula One Administration (“FOA”) receives income generated from agreements with race-tracks, television companies, track-side sponsors and the tyre supplier.  FOA distributes the minimum income to teams which is necessary to keep them viable and the grid filled at each race.  Note: FOA is the most lucrative operator in the Formula One business and has been a particularly successful leveraged buy-out for CVC.
  • Revenues are sourced from a very small number of sources, with the Concorde Agreement and just three sponsors expected to provide 80-90% of revenues in FY11.
  • A BBC article on the subject of the IPO quoted team principal Sir Frank Williams as saying: “The sale is being done to help recruit and retain top people and to ensure Williams’ long-term future as an independent company”.  In my opinion, this is code for: “we’re going to dilute shareholders by issuing lots of shares and share options to staff as we can’t afford to pay them in cash because the business doesn’t make a sufficient amount of money.”

In conclusion, rather you than me.

Posted in: Investment Ideas