Young pretender revs its engine

Late last month, several Boeing 747s landed in Beijing with an unusual cargo: an entire motor racing championship, comprising 30 racing cars, a portable pits complex, administrative offices and a two-storey hospitality suite big enough for 500 people. A1 Grand Prix had come to town. 

A1 is the self-styled “World Cup” of motor racing, pitting nation against nation rather than manufacturer’s teams. The eclectic roster of owners and drivers who pay the championship for the right to fly their respective country’s flag includes a Brazilian football star, a Chinese oil magnate and an African National Congress freedom fighter.

Launched with fanfare two years ago, the venture had a troubled start, prompting big changes to how the championship is run and funded.

Recently the loss-making business saw the departure of Hasher al-Maktoum, one of its founders and a members of Dubai’s ruling family. His exit followed a big financial restructuring pushed through by Tony Teixeira, the South African mining magnate who co-founded the project. The refinancing will support the company as it prepares to float in London early next year.

Yet, for all the teething problems, there are unmistakable signs that A1 is gaining traction. Indeed, the venture’s advances illustrate how a new entrant – in this case conceived to complement rather than challenge the incumbent, Formula 1 – can soon begin to tread on its big brother’s toes and threaten to take business from it.

Bernie Ecclestone for one seems unfazed. If his finances and standing are in jeopardy, the F1 promoter shows no signs of concern. Seeing A1GP as one of many pretenders in motor racing that have tried and failed to match the success of F1, he has wished it good luck and offered his support. For its part, A1GP stresses that it poses no threat, not least because it is staged almost entirely during the winter, during F1’s “closed” season.

Yet some stakeholders have noted that relations with Mr Ecclestone are increasingly strained. “Bernie’s been blowing hot and cold. You think he’s friendly then he slams the door shut,” says Tony Clements, head of the City-based financial services group ODL Securities and the UK’s joint “seatholder” – effectively the franchisee – of A1GP.

“The truth is that Bernie has steered us towards circuits that we later found out didn’t work for F1 – so how could they work for us,” adds Mr Clements. “To be honest, I don’t think there can be an accommodation with Bernie now.”

Mr Teixeira agrees. “We were like lambs to the slaughter,” he says of some early races staged at European circuits.

One consequence is that A1GP is organising more city street races like Beijing’s, to bring racing to the people. The formula has already been shown to have worked, with a 75,000-ticket sell-out at the South African event in Durban.

Potential conflict with F1 exists on several fronts. A1GP’s geographical reach, for instance, is starting to resemble that of the Grand Prix circuit. This season’s 13 races embrace countries ranging from emerging markets such as Indonesia and Malaysia, through to South Africa, Australia and the US.

More important, A1GP was a spectacular success in China, drawing a crowd of 100,000 and attracting a large television audience. The race has the enthusiastic backing of Beijing’s municipal government and General Administration of Sports China, which have authorised a 3km semi-permanent circuit running through the city’s streets. Shanghai, in turn, is due to host the penultimate round of the championship.

This vast market is, of course, a prime target for the very multinationals that have been using F1 as an effective but expensive marketing platform. As a relative newcomer, with just three Chinese Grands Prix to date, F1 is by no means destined to dominate, as sponsors are beginning to realise.

This is part of the reason for a change in the A1GP business model. At first, it believed it could devise a championship for sponsors that did not have the resources to pay for exposure in F1. Its lower cost base, estimated to be one-tenth of F1’s, meant A1GP could theoretically be sustained by sponsorship deals with medium-sized companies.

But the bigger sponsors are now showing an interest. “It looks like it’s turning out to be easier to raise $35m-$40m (£17.7m-£20.2m) from global sponsors than $2m-$3m on individual cars,” says Mr Teixeira.

Discussions for the 2007-8 season are understood to include both HSBC and Credit Suisse, banks with previous F1 commitments, as well as at least one large North American consumer goods group anxious to expand its presence in China and other Asian markets.

Even the biggest multinationals, however, have finite sponsorship budgets. A1GP’s shareholders and executives now acknowledge the risks of a clash with Mr Ecclestone and F1.

Sponsors are not abandoning F1 but moving some of what they would have spent to buy relatively cheap global exposure with A1GP. In spite of its claims to have only one-tenth of F1’scosts, Mr Teixeira has set a controversial target of achieving about one-third of its revenues.

In terms of all-important global television coverage A1GP trails by some distance. But the number of contracts is growing. They include Sky Sports, ESPN and Asia’s Star Sports. This year, coverage will reach more than 120 countries with an average audience that organisers claim is at least 8.5m viewers per race.

The big advantage of A1GP, its executives say, is that the racing is more exciting, with more overtaking than F1. The cars are much simpler and cheaper than F1 machines but look and sound almost as spectacular. They are supplied by British racing carmaker Lola International under a single contract with A1 GP Holdings, which owns the cars and maintains them at a permanent base at Silverstone.

In placing the biggest order for motor racing cars, Mr al-Maktoum insisted that the rear wing design must allow close slipstreaming. This avoids the problem of turbulent air that turns many F1 races into a long procession. Because of this and other tweaks to the ways the cars race, A1GP has built a reputation for riveting races.

Yet for all the track excitement, the national franchisees are finding profitability remains a long way off. None of the teams will reveal payments for the five-year contract, but filings by the holding company show a net loss of $212m, although that includes large one-off start-up costs.

Tensions between the teams and the holding company have also been simmering below the surface. It is hoped that changes to the ownership and financing structure made in preparation for the flotation will make a difference. Mr Teixeira says the group is likely to be valued at $600m-$700m if the listing goes ahead in February or March. The size of the free-float remains undecided but is certain to be a minority share. “We have no intention of losing control,” says Mr Teixeira.

The teams and holding companies are expecting to move into the black in the 2007-2008 season onwards. It will be a crucial milestone for A1GP to pass if it hopes to loom large in Mr Ecclestone’s rear mirror.

Three beers and a fairy-tale deal

Tony Clements, head of the City-based financial services group ODL Securities, describes his path to becoming the joint UK seatholder in A1 Grand Prix as “essentially the story of three beers”.

When Mr Clements first met Tony Teixeira in the autumn of 2003 the intention was to talk about mining diamonds, not racing cars. Mr Clements agreed that ODL should represent Energen Resources, the South Africa-based resources company that is controlled by Mr Teixeira, and finance some of its operations.

But Mr Teizeira was also looking to attract stakeholders to A1GP. “So Tony and I sat up one night and he described what was planned,” said Mr Clements. “And that was all it was at the time; just a dream.

“But then in January he came back . . . one snowy day we walked from Pall Mall into St James. And over the first beer we just talked about the people we’d met and the possibility of me getting involved. Over the second beer we talked more about the concept. And by beer three I was the UK seatholder.”

Mr Clements, who spent 37 years managing pension funds before setting up ODL, freely admits that he knew little about motor racing and says he was convinced by the business case.

“No real figures were bandied about” in terms of A1’s profit potential during Mr Teixeira’s pitch, he says. “But I looked around at other championships and frankly I’ll be amazed if we don’t make a profit after the third season.”

He acknowledges that there “was a lot of money wasted” in setting up A1GP and that during the restructuring there were severe tensions. “But I never once had any doubts about the future of A1 through all the upheavals.”

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.