• Formula Money

Sink or swim: will the Williams flotation succeed?

Caroline Reid
February 7, 2011
Williams is set to enter a brave new world by floating 27.4% of its shares on the Frankfurt Stock Exchange © Sutton Images
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Few F1 teams can match Williams' glittering track record. Over its 34 years in the sport it has notched up seven drivers' titles, courtesy of superstars including Nigel Mansell and Damon Hill, and it has become the second most successful team by number of constructors' titles with nine under its belt. On the face of it Williams seems to be an ideal candidate to become the first F1 team to float on a stock market. However it isn't as simple as that.

When Williams announced on Friday that it will float 27.4% of its shares on the Frankfurt Stock Exchange on 2 March F1 insiders and financial experts were dismissive with one well-connected sports marketeer saying "McLaren probably could do it but if your business is purely a factory, race cars, access to a windtunnel and employees then you don't have much you can build upon." His response is driven by Williams' recent financial record and this is probably its biggest hurdle to floating.

The last time Williams won a race was in 2004 and since then it has had a rocky road off-track. Its fortunes peaked in 2005 when the team posted a £29.5m after-tax profit on £83.7m of revenue which was fuelled by severance payments from BMW and Jenson Button.

Things began to look bleak in 2006 when the team recorded a £27.7m after tax loss as revenue fell 30.3%. The loss of a major sponsorship from computer manufacturer HP was partly to blame for this but the team's position was worsened by the lack of engines from BMW. It spent an estimated £10m buying in replacements from Cosworth leading to its cash in the bank reversing from £20.8m to just £30,000. Williams needed to take desperate measures to continue.

The team's co-founders Sir Frank Williams and Patrick Head took an £800,000 pay cut in 2006 and again the following year when net losses hit £21.4m, an improvement of just £6.3m on its record deficit of 2006. Its chief executive Adam Parr plugged the gap with a loan from Barclays which trebled the team's net debt to £24.7m. It repaid £14.7m of this in 2008 as a boost in sponsorship from Icelandic conglomerate Baugur accelerated Williams' revenue by 87.8% and gave it a £9.2m after-tax profit. But what goes up must come down and by 2009 Williams had lost backing from Baugur as the company had gone bankrupt. It sent the team's after-tax profit tumbling 50% to £4.5m giving it a total net loss of £5.9m over the previous five years.

This kind of background is unlikely to spur investors into buying shares in the team. In a flotation the public is allowed to buy shares in a company and they do this in the hope that their value will increase so they can ultimately be sold for a profit.

However, one of the key reasons that there have been so few flotations of motorsport teams is that winning races is usually their primary aim with making profits a bonus at best. As shown by Williams' accounts over the past five years, the quest for victory on track can often lead to heavy losses. In turn this reduces the company's value which is the last thing that shareholders want.

Sir Frank Williams intends to hold onto a majority stake © Getty Images
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It is not the best recipe for convincing people to invest in a business and it is hard to see how Williams could explain its way out of the problem. Investors certainly do not want to hear that its aim is to win races, they want to hear that all efforts are focussed on turning a profit. However, if this focus means that Williams' on-track performance falters then that too isn't music to investors' ears since the team needs to win races to make it more attractive to sponsors and thereby increase revenues and profits. Williams may believe that it can do both, however, if its recent financial history is anything to go by, it could be a struggle.

Regardless of Williams' aim, some die-hard fans may nevertheless be attracted by the allure of buying a piece of such a storied team. However, the value of this kind of interest is far from certain.

Following Friday's news of the flotation a user on one F1-related bulletin board posted a question asking how shares could be acquired. The reaction from other users was far from positive. "This is far too risky to approach unless you have a wad of cash you're prepared to lose," said one with another adding "don't waste your money." The impact of Williams' poor track record was not lost on them either with another user saying "should Williams manage to get into a top three position in 2011 or 2012 you may see a chance that you will make money in five years time but that is unlikely." There is some precedent of how these kind of views translate into share buying activity.

One of the few motorsport flotations was that of the American single-seater series Cart. Although Cart is now part of the privately-owned IndyCar series, it floated on the New York Stock Exchange in 1998 and its then-chief executive Andrew Craig says "we insisted on a significant portion of the stock going to the public side of the offering. We wanted to get these shares in the hands of our fans who would be holders rather than sellers but absolutely the opposite was the case. We found that when the stock went up quite a lot the private investors flipped it whilst the institutional investors were the ones who held on."

Craig says that the allure of owning a part of a motorsport team would soon fade off as the public "quickly realise that they are not really a team owner at all, they are still watching the race on TV and they don't have accreditation." This is not the case if a high-net worth investor buys a significant stake in a team himself and it is an avenue which Williams has already explored to raise funds.

In 2009 Austrian former sportscar driver Christian 'Toto' Wolff bought a 10% stake in the team for an estimated £10m leaving 63% in Sir Frank's hands with 27% owned by Head. Sir Frank revealed that he sold the stake "to take care of some other needs and pay a few bills - my mortgage, for example." However, the new ownership structure hasn't stemmed the haemorrhage of sponsors. At the end of 2010 Williams lost an estimated £28m in sponsorship due to the departure of four brands including government-owned bank RBS which was alone paying the team £13m according to F1's industry monitor Formula Money.

This year the team has dropped highly-regarded German driver Nico Hulkenberg in favour of Venezuelan Pastor Maldonado who is bringing with him an estimated £9m of sponsorship from local businesses. Although this will give a slight boost to Williams' budget there was more empty space than sponsors on the livery of its car at its launch on 1 February. Admittedly it is being referred to as an interim livery but the team only has five weeks before the first race to sell more sponsorship.

Many of the team's 2010 sponsors have left, although Pastor Maldonado has brought a fresh injection of cash from Venezuela © Getty Images
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According to Parr, the flotation "is the best way to secure the future of the team," but when asked whether it would involve raising funds for the company he said no. Clearly the flotation would raise funds so he must surely mean that the company does not need the funds to continue trading. However, if this is the case then how will a flotation secure the future of the team?

According to one of the bankers involved with the float preparations, the majority of the shares will come from 64 year-old Head who wants to retire at the end of this year. In 2009 Head sold 3% of his shares to Wolff and a float could give him a well-timed payout before retirement. However, it would leave the team without Head as its engineering director which could have a significant effect on its race performance. This doesn't sound like it would secure the future of the team. It also raises the question of why Head wouldn't prefer to keep the shares and live off his share of the profit from them.

Adding to the mystery, the 68 year-old Sir Frank says he hopes that the flotation will ensure "that the team is in good shape to go on racing long after I am gone," but he adds that he will remain the majority shareholder. So even if the team does float it will still lose its majority shareholder once Sir Frank is gone. It is anyone's guess how this translates into ensuring that the team is in good shape to go on racing.

The ideal scenario may be that proceeds from the flotation are invested into the business so that its value, and that of its shares, increase. The worst case could be that the team needs the money to continue since this would indicate that investors are not buying into a solid business.

"In any public offering, the first question that any portfolio manager will ask you is what are you going to do with the money," says Craig adding that "you need to be able to demonstrate that you are going to take that capital and increase its value. If Williams said we are going to raise some capital and build a windtunnel, which we will be able to rent out, that begins to have some credibility. But I was seeing some mixed messages coming out of the team. To me it looks more like a potential exit strategy that hasn't been thought through." Craig isn't alone in this view.

"I think some of it might be to gauge response or it might elicit a bid," says one F1 financial expert. Selling a stake to a high net worth individual would most probably command a premium because, unlike the public, the buyer could be given paddock access and would have an asset with a high barrier to entry which could be used to promote his interests through, for example, on-car sponsorship.

However, it is likely that a buyer would want a majority stake and this isn't something which Sir Frank is prepared to offer. Indeed, the driving force behind the float seems to be that it brings new investors to the team but keeps him at the wheel. It remains to be seen how much the public would be prepared to pay to fund this.

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