THE BREAKDOWN: Chelsea’s Record Financial Loss, Aston Martin In Big Trouble, PREM Rugby’s Franchise Move (E09)

27:59It's going to be a great stadium. So we started looking for a site for the new stadium in 2012. we happened upon a site in 2013 there were a few detours here and there in terms of how to do it and all this type of stuff but the bottom line is is that from conception through to it actually happening and Oxford like central London being a place where it's not that easy to build whereas in some other places you might get planning permission more easily was over a decade Chelsea would not get a new stadium project it would be implausible for it to happen in less than eight years okay so let's put this straight they have now they really needed to have something in the plan day one day one to to realize this is a value in 10 years time when they needed to sell the club they do not have that so but also let's look and see what's happened to the money that they have been spending which in theory would have been needed to be spent on that new stadium now how much was it they said in the first place in the original deal they were going to allocate 175 so they basically got 500 million left of their original business plan to, quote, invest.

29:01They are$3.5 billion in. Current industry estimates say that Chelsea would be worth about$3 billion right now. But don't forget, the aspiration of their investors is not that they will end up, you know, leaving the value static. The expectation is that they will, you know, significantly increase the value of the club. So stadium is one piece. The other piece that is huge is commercial, right? So if you're looking at how to make money from a football club you can say right well let's use two examples one you have the rising tide lifts all boats mentality you're buying an asset in a top league the value of the league is increasing therefore the assets at the top end of that league also increase we've seen it in lots of sports normally in closed systems but the premier league is slightly different and if that works out then great for them you know they become more valuable just because they participate in the premier league second bit would be we make this a profitable business we find a way to show that it can shake off great money.

29:54We recognize that it was only making 500 million a year. We think we can get that to eight, 900 million, maybe. And then when we sell that, we can use the revenue multiple piece of a football club and then put that little bit of a premium on because it's Chelsea. When, you know, we go through all of this and we're looking at numbers and then you're going back and you're thinking, well, what Americans do generally do very well in sport is they do commercialize things well. And so the one thing I would have confidence in, they may mess up on some of the players trading side. They may have got some of that stadium side wrong, but they'll be nailing that commercial optimization.

30:22They can't even sell the one asset that pretty much any sports asset in this country has been able to sell, their front of shirt. Now, can't sell is the wrong phrase. They choose not to because they have this incredibly high valuation of, let's say, 65 million, which they believe their front of shirt is worth. They've supposedly had offers in and around 40 million, which was what the old multi-year deal, the last multi-year deal they had with three was worth. To not sign a deal at 40 million, Charlie. We're now looking at, you know, let's just say, I don't know, 120 million. So is this the second season without?

30:53Because, well, no, sorry, Infinite Athlete. They had, I forget, Infinite Athlete, the one-year deal, right? Again, brokered supposedly through the ownership in a company that looked like it invested more money in that deal than they actually had anywhere near the company. Leaving that to one side. Yeah, leaving that to one side. Two years. So it'll be two years without. And then these kind of very, like, they've just done a deal with IFS, AI platform and they had Damatch, which was the, I think it was the Dubai property company for the last few games. You've seen a couple of these deals crop up for the last part of a season, but nothing long term.

31:26So basically by turning down the 40 million pound per year, which is the market value, they've dropped 80 million quid in the last couple of years. Now, if I'm, just to understand the chain of command when it comes to investors and the reason why things are going to be getting very, very squeaky around Stamford Bridge. So when bad news becomes apparent and it appears in the media, and then it moves from the football media into the international business media, like for instance, from The Athletic into The New York Times would be a classic as their own by the same business, etc. would be a classic route.

31:58And it lands up in the media pack, which is put in front of the investors from the big pension funds in New York, and in the various other big cities in America who have put money with Clear Lake. But gradually it seeps through into their own individual investors. So if you are running a large pension fund, you are doing that on behalf of pensioners. And those pensioners start to see that their money, which they know has been invested in Clear Lake, which has then been invested in Chelsea, is being pissed up against the wall in this way. And then you start to get pressure on the money manager saying, what on earth have you made this investment for?

32:37It's a fundamental failure of judgment. These guys, this guy here who's running the whole thing says he was stuck being interim sporting director even though he didn't have any idea what was being a good footballer. So the whole thing just starts to get quite anxious and you're just starting to hear rumours behind the scenes that these conversations are starting to become very difficult. Yeah, but I'm also looking at it and I'm also seeing it that you're turning down opportunities to generate revenue with existing inventory. So I understand a long-term play of building value. You don't sell something, you want to maintain the price and hopefully in the few years that you don't sell it for, you'll make it up for when you eventually get that sale.

33:09Now, the problem with that, with Chelsea is, is that this year, this year would have been the year with which you go, we have qualified for the Champions League and we have won the Club World Cup. If we're ever going to get a deal based on the development of the club over the last few years, this would have been the year to be able to realize that value. Now, the minute a 60 to 65 million deal wasn't done, they had to find a way to get a deal done at 50 million or whatever. But do the deal because now what you've got is you've got a situation where they look like they very easily could miss out on the Champions League.

33:40So you're not going to get exposure to that revenue stream, which is a lot of, well, not the revenue stream. You're not going to get exposure to the Champions League brand and the eyeballs, which is what a lot of brands buy. And you're most likely not to have another cup competition or trophy in the cabinet, which they could play off with the Club World Cup no matter what people think. So that value is not, if they couldn't sell it this season for 60 billion, I see absolutely no reason why they could for next. So then, Charlie, we're looking at, well, if we stick to this strategy, let's just add another two years onto that.

34:06So suddenly we're going, this is 200 million in lost revenue and inventory. I mean, I don't know about you, I'd be pretty pissed. Now, the other commercial numbers are also very, very bad. But I guess one question I'd be asking is, is this total failure on the commercial side the result of being significantly under-resourced in their commercial department? Over to you, Charlie. I had a little bit of fun. I highly recommend this to anyone who, like me, has too much time on their hands. I decided to answer that question by going into LinkedIn and trying to find out whether just the commercial department was horribly under-resourced.

34:41I was proved incorrect. It is incredibly well-resourced. So just going through it, and this is literally on the homepage of Chelsea, some of the first people that pop up, I found president of commercial, director of partnerships, head of partnerships, partnerships lead, partnership sales director, partnerships manager, senior partnerships manager, commercial strategy director, partnerships development, head of sales, partnership sales manager, head of commercial operations, brand partnerships. I got to number 13 and I genuinely got bored. Where are the deals? And that's just 13 different titles.

35:14So some of those had two or three people working in the titles. So you have this team in place to go and sell. And that's also a cost, right? Your president of commercial is going to be on a hell of a wage. So your commercial team is not just not generating money, it's costing you money. Then you look at going, even the IFS deal, and I don't know, but what I've heard, the IFS deal was again, similar to Infinite Athlete, done through relationships held at the ownership level because of the companies that they're associated with from an investment perspective. So I'm not even sure you can attribute some of these short-term deals to that.

35:53Anyway, I think making the point, the commercial piece is becoming increasingly damaging to that overall business value. Because as you said, not just is it money, but it's also an image thing. It's how people are viewing this whole project. And it just is another example of it seeming completely incapable of delivering on the objectives the investment was made on. And of course, matchday revenue continues to be a massive problem with Chelsea because their stadium is so much smaller than everybody else's, which is why that part of this investment strategy needed to be a change their stadium circumstances so charlie do you think so so looking then just finally at the next bit do you think that and just say they're not supposedly going to be in breach of either uefa or premier league in this year they agreed to deal with uefa for a 31 million fine for breaches that have just been made and come out last year they had to um they had to declare what they expected their loss to be.

36:45So as long as it's not worse than the 660 million over three years, 10 times what it's allowed to be, they won't be punished further than the 31 million. We discussed how PSR has worked with the Premier League this year, and they actually seem to miraculously have the most headroom of all Premier League clubs in doing that. So they're not going to be punished immediately now. So with that in mind, if we're looking forward from the ownership perspective, from the football perspective, and for fans watching this, you know, it does upset you, it does worry you if you're seeing that kind of thing and looking at the longevity of your club being compromised.

37:15what do you think the next year or couple of years looks like for this so let's talk about the debt because whilst the acquisition may have been funded all or mostly by private equity money what then happened was is effectively to fund the investment the so-called the splurge let's say of everything that's been put in since then they went out into the debt markets and raised money at very high interest rates. And those loans, one of which is a very large one, is a pick note, which means that basically every year you don't pay the interest, it rolls up and then you pay interest on even more and even more and even more until eventually, if you've borrowed, let's say, you know, was it 400 million, 500 million?

37:59Yeah, 500 million. So those loans come due for repayment between about 2029 and 2031, which clearly was intended to be effectively the end of the hold, right, as we call it in private equity. So the end of the hold for the project would be effectively that you would sell the club. With the proceeds from selling the club, you would pay off your debt to your lenders and then also have a nice juicy profit to return to your shareholders, in this case, investors, institutional investors in LPs, as we might call it, in the fund. So those debt repayments are looking, you know, really, really tough for me.

38:35So what happens if actually the club can't sell for more than two and a half to three billion, but those loans do have to be repaid. That effectively then means that the shareholders, the Boley and the Clear Lakes and all these have to step in and effectively fund those losses. So I'm just not clear at all on how this is going to pan out over the next few years. We are talking literally about the next four years. Now there's just one thing they can do, which is a last resort thing that private equity funds can do, which is effectively, ironically, given what they've done with the hotels and the women's team, etc.

39:08Effectively, you sell the club to what we call a continuation vehicle. So you set up a new fund or a new fund vehicle and you sell the club at a half reason, hopefully a very good valuation to that vehicle and then get other people to come in, other institutions to come in and be part of that fund, that vehicle, which then takes you for another seven years. And it feels to me like that's what they're going to need to have to do. The problem is, is what appetite is there going to be in the institutional market to back this management? You know, and particularly if they've had to sell it to the continuation vehicle of quite a punchy price, when we're saying at the moment the market's worth about 3 billion, let's say that they managed to say, OK, let's try and shuffle it to continuation vehicle to 4 billion, because that's what will enable us to get the debt off our balance sheet.

39:54And then you're going out into the market trying to make the case, well, I know we sort of have screwed up a bit last time but we think we can now take it from four billion to six billion what's your case what what are you what are you going to say well the revenue i mean they've sold 300 millions worth of players last summer supposedly the revenues that we discussed are far below 490 odd million it was last season and if they're not in the champions league next season that's going to be seriously hampered by that if you can't get those revenues well they go down to they go down to a villa level of revenue well and that and look at the and villa are actually one of the teams in in serious threat of breaching even psr so you don't want to be in that position and what that will end up causing the club to do is look at the thing the one thing maybe that they've managed to do where you know you could say okay there's been a few successes is pick out the players like the Cole Palmers the Estevals the Moises Caicedos in a recruitment strategy built around trying to find the best talents and accepting that you may make a few mistakes along the way you don't want to have to sell those talents too early you want to sell them at an absolute just wait a second Charlie so I just want to challenge you on that right so Caicedo has been in quotation marks and I understand why you think that has been a quote successful signing yeah how much would he sign for 100 million 110 million what do you think Caicedo would go for now they wouldn't sell him for less than 150 who's going to pay 150 million for him yeah it's a fair point let's say let's say Cole Palmer and Esteban so Cole Palmer was signed for 40 50 40 mil they're not selling him for less than 150 there's just no way he gets 150 then they don't sell him and then there's a bigger problem so I just think all these things about oh this player's 150 so this entire Again, there has to be a buying market, right?

41:27Right, and the buying market outside of the Premier League has collapsed. And even within the Premier League, clearly the only clubs who are going to be able to buy those players are other members of the big six and not Spurs. So we're talking about actually Arsenal, Man United, Man City and Liverpool are the only clubs who are going to be able to pay very significant transfer fees. Do they pay 150 million quid for Cole Palmer? No, because they can go into Germany, they can go into Italy and they can literally take the very best young player from that league for 70 or 80 so why I mean you know unless it is somebody of messy level why are you spending 150 it's not going to happen so I think the entire model was based on the idea there would be this massive thriving transfer market but that's just not really the case right now and even if there was let's say to make any money you'd basically be selling your best talent which isn't good for your performance so that model isn't going to drive the club forward But if you could repeat that model and if you could cut down on the number of mistakes so that then became your way of proving that you can actually make a profit, then possibly so.

42:33You probably want to sell your 10 to 50 million players, right? You don't necessarily want to sell your 50 to 150 because your 150 ones are going to be the ones that are helping you win Champions Leagues, which is going to help the overall price of Chelsea increase. Yeah. We could go on about this for a very long time. We could discuss Chelsea together for a very, very long time. Suffice it to say that as we get out of the Alice in Wonderland world of what Chelsea themselves say and of what the Premier League's rather strange rules allow you to see. As we enter into this environment where UEFA released the hard truth, it's looking like the emperor has no clothes.

43:06And that is a big problem for both fans and the owners. Do you feel better now, Charlie? Do you feel better having got it off your chest? I feel worse. Or do you feel worse? I feel worse. I'm sorry about that. Anyway, number two, should we do Prem? Rugby. Yeah. Rugby. Rugby Premiership. Let's tuck in. And I think we've said, like, from when we started this podcast, it's very easy only to look at the things that don't work and to become that perpetual critic, always carping at things that don't work. So we've always tried to maintain a balance and try and point out when organizations or bodies, people, clubs, whatever it might be, do stuff that we really think works.

43:44Yeah. And I think we've come up with one here. And it might be a bit controversial with some because I know that not everyone loves it. but I think what came out this week about the future of club rugby in this country I think this works. I completely agree if you haven't seen the Prem has made the big move Prem Rugby Gallagher Prem Rugby the club system in England has has made the announcement that they will be moving to a franchise system so in theory a closed league it will start with the 10 teams that it has now it will improve the existing IP of English rugby and Charlie when we've discussed this previously we have looked at emerging ips and said where we or explained where we feel there are big challenges for it you can't just create these things and expect fandom to follow because so much of sports fandom is is tied into heritage and culture and is habitual to to those fans and the the bigger question is can you find the opportunities in should we say more legacy products to invest money and build that value i look at this and i and i i feel like this is one of those situations.

44:45I feel like what this franchising does is create an opportunity for the league to be investable, to sign better commercial deals and media deals. And also, weirdly enough, I do actually look at it as a real opportunity to benefit the system that even sits outside of this franchise system. Could do, could do. I think, let's be clear on what a closed league means. Closed league means no promotion, well, means no relegation in this case okay so you've got 10 teams who now or 10 clubs who now know that they cannot be relegated now in actual fact there hasn't been any relegation for the last three or four years because they lost a whole bunch of clubs in quick succession london wasps london irish worcester warriors except they all went very very quickly saracens was the last team to be relegated and promoted right so that's four years ago 2020 for four years ago right so basically pretty much since covid there hasn't been any any promotion relegation but there's always been this sort of expectation that it would come back and they've decided it's not going to come back and for those who are addicted to the pyramid bits of sport which is promotion relegation such as we have in men's professional football and unfortunately women's professional football as well but that's a story of another day um this is this is absolutely sacrosanct it's something you can never leave alone but the history of rugby is very different from the history of football i want to just go back in time a little bit because this is an example of a situation where you know the expression the horse has bolted.

46:08Somebody has gone up onto Newmarket Heath. They've collared the horse. They've managed to get it back to the stable and they've put a bloody big bolt on the stable because they recognize this is not working and we got it wrong. Let's go back to what rugby was like before you were even a twinkle in your parents' eye, Charlie S. Until the late 1980s, would you believe rugby union did not even have leagues didn't have a league at all so what the clubs did is they arranged their own friendly matches against each other and then they played an annual cup competition cup knockout competition called the pilkington cup originally called the courage cup um and so you might very well think well we're bath we're the best team in the country but unless you win the cup competition you've actually got no way of proving that there was no league so towards the end of the 1980s, they start a league.

47:05But it's a pretty ramshackle league. So the club still arrange their own fixtures. There's no home and away. So you play each other once. Where are we going to play next week? I don't know. Is your place under a bit of water? Yeah, a bit boggy here. Okay, we'll play at your place. It was that level. In the meantime, international rugby is becoming commercially successful, leading up to the 1995 World Cup in South Africa, which was mega because it coincided with the end of apartheid and with nelson mandela and francois pinard and all this type of stuff and there was this big build-up going on saying rugby needs to turn professional it's a bit of a joke we've got all of these international athletes who are appearing in front of tens of millions of people but actually then when they go back home they're a solicitor like i remember so brian moore the legendary english hooker was a solicitor um if i thought I remember from my childhood when I started drinking in pubs.

47:58So this would have been in the 1920s. So this would be in the early 1990s. And there was a guy, a local builder, who drank in our pub. His name was Gary Pearce. And he was England's reserve prop. And in those days, there weren't many substitutions. You only had one or two players on the bench in case of severe injury. and he was the understudy prop to a legendary figure called Jeff Probin and Jeff Probin basically never got injured and played every match. So Gary Pearce, despite the second best prop, I can't remember it was tight, not a loose head, but he basically didn't often play. Anyway, I remember being in the pub one Friday and he was in there and a call came into the pub pre-mobile phones, Charlie, and the landlord says, Gary, it's twicken them on.

48:50They need you up there. Jeff Probin's pulled a hamstring. the builder in the pub on the Friday gets into his car up to Twickers and there he is the next day right that is where we were even in the in the early 1990s so they decide we're going to professionalize this we're going to make this this ramshackle league that we have we're going to make it um sort of more serious and we're going to call it the premiership and this is 1995-96 around that time we're going to play home and away and it's going to be just like football we're going to have promotion and relegation we're going to have all these other divisions and the whole thing is going to be rah, rah, rah, the whole thing is going to be absolutely fantastic.

49:25So that's 30 years ago. The history of that period has not really been especially happy when it comes to club rugby. It hasn't really worked because the depth of clubs that you need in a pyramid and the revenues that you need in the second and third tier of the pyramid to sustain that whole thing just haven't really been there. So in other words, when you drop out of the premiership and you go from playing against Harlequins and these types of clubs, big clubs, Bristol, and then you drop down a level and you are then playing in a very small club in a sort of field with one stand and no revenues, no TV revenues, etc.

50:05So if you're then an owner of a club in the premiership, you have to be thinking, if we were to get relegated, that would be carnage. I mean, that would be absolute carnage. And even very, very early on in this whole journey, a whole bunch of famous old clubs, including Richmond, just went bust really quickly. London Scottish as well went bust really quickly. London Welsh subsequently went bust. So even before the ones that went bust more recently, there were quite a few who went properly bust before. Because managing the movement of being, you could afford to be professional in the top flights, but you definitely could not afford to be professional out of the top flight.

50:38So you built your professional cost base, you got relegated, you went bust. And therefore a promotion and relegation system doesn't work. Promotion and relegation systems only work in men's professional football. it's the only sport that's big enough to sustain it and even then causes big problems by the way which we're trying to sort out in the industry right now but for other sports it's a it's a fool's goal so it's emotional but really what it means is bankrupt but it's emotional to football and that's why do you think rugby fans act though as if they think oh we just should have it because football has it and we're used to it's the same as women's football women's football saying well if the men's football have it then we should have it as if it's some sort of great benefit but it's not it's something we've inherited from 100 and 120 years ago and even in the prem i was having a look at why I actually had that immediate feeling of, wow, this is a great thing.

51:19Because the challenges the clubs have faced in the past few years have been significant to the extent where you were genuinely concerned for the longevity of the Prem as a business. Owners were pouring so much money in, there wasn't any real money coming into the league to offset any of that. So, I mean, clubs consistently lost 5-10 million a year. I think it was about 30-50 million collectively without any real growth opportunities. The Prem's central distribution per club is only roughly three to four million per year. So central distribution would be like media rights. Exactly. Let's just use media rights as a good example.

51:48Now, if you're looking at that, the NFL gets about$400 million per club, per franchise, the president of that 100 plus million per club. So to get three to four million centrally means you're then reliant on your own ability to do good commercial deals, strong gate receipts. So you're basically, even if you're a really big club, you're still basically going after your local builders merchants and this type of stuff so it's basically a small professional sport which had ideas beyond its station and which has finally and i doff my hat to um your friend simon simon the head of prem rugby for being able to persuade the council of the rfu which is a famously like 60 guys representing all the various different counties and all this type of stuff and not all of them necessarily great business geniuses for the head of prem rugby to convince the RFU council that this needs to be done actually is a significant achievement.

52:40I just want to give a little bit of quick context to that because when he came on the show last year, it was just after Red Bull. So Red Bull have last year brought into Newcastle Falcons, the team that was underperforming massively. They were propping up the Prem. They would have been relegated every year. Would have been relegated, but Ealing Trailfinders who kept winning the champ couldn't get promoted because they didn't meet stadium criteria. And so Newcastle keep maintaining their position. Red Bull came in and realized an opportunity and Simon highlighted that as a major moment. And that's a major moment in this actually becoming now a collective movement.

53:12Because if Red Bull want to get involved and Red Bull see value here, then we're going to be able to attract other investors. So them buying leads was a key point. And the work that Prem Rugby did with the clubs to do that deal is significant. In the Premier League, you don't have the Premier League working with an individual club to go and sell the club. So you were starting to see the first signs of what we would class as a closed system operations. now that was a big moment for them as well because it was at the same time where r360 conversations were coming around the r360 the franchise league that was being rumored to to be disrupting the global club rugby market now if you're looking at what r360 proposed red bull would be the ideal type of owner to go and own an r360 franchise instead they chose the prem so what you really had and and someone actually at the prem you know i was chatting to that they kind of described it really really effectively they said you know you asked 20 people to to draw a horse and everyone will kind of come back to you with a different drawing it will all look slightly different what this does is it allows us to collectively sell the product collectively package the product prove valuable value is in these clubs for investors so it encourages them to invest because they know they're not going to get relegated they know the likelihood of centralized funding i.e increasing the value of media deals any centralized commercial deals is going to go up i would just put a little question mark about the idea that stopping promotion and relegation means you're suddenly going to start signing much bigger media deals because of course it does remove jeopardy and generally speaking one of the big arguments for promotion and relegation is it means that matches towards the bottom end of the table do matter now the problem you have in a closed league and this happens in u.s sports every year is effectively it means that from sort of february onwards about half of the league is basically playing with no with no jeopardy with nothing going on and that can have a significant impact so i just put a little sort of asterisk against what the impact of that might be but it it has to be done right there was no other way and the big concern was that politically it couldn't be delivered it has been delivered and i think now you know with the cost caps in pay in place with no renegation you can now expect certain types of owners to when we invest and by invest we mean both where the short-term operate what hopefully will be short-term operating losses but also invest in the marketing of the game.

55:26So saying, well, I know I'm going to be the owner of this club for the next 10 years. I need to build my fan base. I need to move from having 8 ,000 or 9 ,000 a week or 10 ,000 a week. I need to get that to 20 ,000 a week. That'll make a massive difference to the viability of this. So now I need to get stuck into the marketing side, whereas previously you're just constantly going to get relegated this year. I've actually got an investment strategy. They are key pillars that include stadia, central ticketing data, star player. So like a kind of media house environment, which is always a massive opportunity for rugby.

55:54how can you make the players more commercially appealing um strategic expansion you know that's going to be another challenge from so it starts with 10 the aim is to take it to 12 at least in the next few years you have to now you know the pressure's on to make this an attractive enough place where more people want to come and get franchises in now the reason i said at the beginning just to to be really clear on it that i think this is actually valuable for the champ because that's the hardest thing with this getting the champ on board and kind of singing from the same hymn sheet when you're actually closing off their teams to the league you'd think was hard the champ has been brought into this because for teams to be able to play in the Prem when they expand they have to do a year in the champ so you're going to prove your value in that league before going up now that could be existing teams in there it could be new teams looking to enter so but you're going to need to prove your value across a number of different metrics it's not just going to be can you win the league it's going to be you need to be either winning the league or won the best team in the league you've also got to have a really good stadium you've also got to be in a position financially to afford to buy your shareholding in Prem Rugby You've also got to have a marketing plan.

56:54You've got to do all of these types of things. And the reality is, by the way, is that Prem Rugby is going to want to expand because at the moment they don't have enough matches. I was speaking to somebody who runs a rugby club the other day. He says, it's bloody disaster. He goes, we've only got 10 teams. That means only nine opposition teams. Only got 18 fixtures. That's no good. He goes, I need 28, 30 fixtures to make sense of this. I've got all these guys being paid, all the players being paid all the time. But unless they're playing international rugby, they actually don't play enough fixtures because also the cup competition is largely sort of, you know, been phased out.

57:25So anyway, I think we need to move on. But I think overall, well done, Prem Rugby. And this is a little lesson, right, to those running professional women's football. Just because you make a massive cock up in the first place, don't keep on down the same route. You can turn around and say, hands up, we got this wrong. Let's now put in place something that's actually going to work. You don't have to keep on doing this. We should probably do that topic soon, shouldn't we? I can see you're just frothing for it. Big week. Topic three. And Formula One's back, Charlie. Formula One. Formula One is back.

58:00The new season is starting. The biggest. Back with a bang, except apparently the engines are so quiet, it's not going to be much of a bang. Huge regulation change this year. Yeah, big regulation change this year. Yeah, well, let's see. Yeah. I mean, that's the interesting, when they make regulation changes in F1, sometimes they lead to more exciting racing, sometimes they need to less exciting racing so let's see what happens it's hard to say the big thing is really the balance between electric power and and kind of traditional fuel driven um that's kind of now gone to a 50 50 so it's really challenged all of the cars all of the manufacturers all the teams to completely well redesign everything and the cars are slightly smaller um supposedly they're going to be a little bit slower but they think that's going to help the competitive side of the racing but basically on a sort of side point i rather i rather wonder what this means in the medium term for Formula E, which is the electric version of Formula One that was basically formed about 10 years ago, wasn't it?

58:57On the premise of Formula One is dirty, it's gas guzzly, it's all these such things, unfashionable, big brands don't want to be associated with that, etc. So let's do something which is clean and green. And they set up a rival motor racing circuit, which raced in cities which did not have Formula One around the world, but still had big audiences. And they actually attracted some pretty prominent drivers to it. I mean, so drivers who had recently been racing at a high level in F1, who hadn't got a seat at the moment in F1, moved into Formula 1. It was always big. I've just noticed in the last two or three years it's gone a bit quieter because I think that that green agenda globally, and particularly in the US, has, let's say, just retreated a little bit.

59:38But also Formula 1 has been, you know, doing what it needs to do to make sure it's no longer perceived in quite the same way. Well, in the next couple of weeks, I may or may not be posing those questions to someone very high up in Formula E. So watch this space and we can discuss what it actually means. Interestingly, I will say from a show we actually did with Jaguar last year, the big thing that they're banking on is the complete ownership of the rights to electric racing. I had never heard that before, Charlie. That's really interesting. We'll have to get into that in some detail. We'll dive into that.

1:00:06Anyhow. Anyway, yeah. Onto the business of F1. The business of F1. We could obviously talk about everything. The one thing that's really stood out in this year has made me feel like a bit of an idiot because the last few weeks have not been a very good few weeks for Aston Martin. They are a long way behind a lot of the other teams in the first few testings and going into Melbourne into the first race we should say which is this weekend there is a lot of concern in HQ that this is going to be a truly terrible year for a team that looks like it's been moving in a good direction for the last few.

1:00:40I feel like a bit of an idiot because when we had Claire Williams on the show a few weeks ago, we were sitting down, I was sitting down, kind of almost encouraging her to go, we're looking at Aston Martin this year. We're thinking about it. The dream team's been assembled. I was falling into all the same traps that we fell into with football and the golden generations and how assembling a fantastic team of operators and drivers could lead you to success. What I mean by this is Adrian Newey now is a team principal, the most successful engineer in Formula One history. He is now the team principal.

1:01:09You have Fernando Alonso. is one of the drivers. Lawrence Stroll is the owner, has been very committed, should we say, to the organisation. And so you really felt like this would be the time where the big regulation changed. This would be Adrian's time to create a car from scratch-ish, if we want to say, that would really change. He came in a bit late for that. I mean, I think there's a misconception amongst a lot of people. I mean, obviously, some F1 fans are so well-versed in the sport that I just should be pleading Kirstie's left, right and centre. But having worked in the sport a bit, despite not being a total petrolhead myself, one thing I did notice when I was doing some work for McLaren was that work began on the following year's car much earlier than people thought.

1:01:53Really, really early. And particularly when there are big regulation changes. Quite often like a couple of years. Yeah, like a year and a half. you know so effectively if you're thinking about a car with big regulation changes for march 2026 you're talking about having a full team in place looking at what that car might need to look like in november 2024 yeah right so so he wouldn't have impacted last year's car but i would have expected him now because because i think they announced it in like september 24. We're now March 26. I don't think he arrived until May 25. Did he? I think because of the extensive gardening leave period.

1:02:35Showed Kirstie's. Yeah, sorry. I was going to plead to Kirstie, sack a member of staff, but I think that will be gardening leave because I'm pretty sure I remember him starting there around the start of last season. I'm pretty sure I remember that. So interestingly, moving to team principal though, and I suppose said to Claire, how would that be you know what do you think about it and she said well laurence is a very clever man he'd have to be mad to put him in a position where he wasn't excelling and doing his best so clearly this team principal move has been an important part of his development and journey the bigger question is what does this mean for aston martin as an organization if they are now going to be propping up the bottom of the formula one table and this was where we wanted to have a look charlie wasn't it because it's a really interesting business case around broader formula one where you balance the performance of a team versus the actual value and how you measure that success it is um it is and i had a vast sheaf of notes on this which um i would have brought in but it's been but i'm now borrowing your notes and they seem a bit meager to me charlie well do you know why they were a bit meager because charlie this morning was sending i think i got i think i got 14 screenshots also charlie loves sending a screenshot of an article not a he's an expert at that so i just thought you know what i'm just going to tap in with a few bits here um right so so let's go back to to stroll um who is stroll who is who is this guy lauren stroll lauren stroll and his family made vast amounts of money in the schmutter business so in other words they were taking big brands i think he's canadian and i think their first big fortune was made i think taking ralph lauren from america to canada and then fronting ralph lauren into europe um and so on so for so effectively being sort of distribution people for major clothing brands and it's been a terrific business by all accounts made the family vast amounts of money and his son um lance grew up wanting to be a racing driver and i think lawrence himself was already massively into cars from memory it's a huge car collection so doubtless you know growing up um young lance was surrounded by some of the best motors in the world so probably that might have fired his enthusiasm for it a little bit.

1:04:46Daddy, buy me a race to you. Yeah, so funny enough, you speak about Claire Williams. So, you know, one of the first steps here was basically financing Lance's entry into Formula One, because it's a sort of dirty secret about Formula One, is that there are sort of two ways in which Formula One drivers become Formula One drivers. One way of which is sort of really through hard graft and merit, like you know, Hamilton, coming from nothing but working your way up through go-kart racing and always excelling and always being the best and being taken on and being taken on and taken on. But sometimes you get a situation where a promising kid who is decent has a very wealthy father or has access to very wealthy sponsors and Formula One teams going back a little while, not anymore, going back a little while who were desperate for money and finance would sometimes accept a slightly less experience or slightly less skillful driver in return for a significant clump of money.

1:05:35Claire admitted it on the show. We had to sell race seats. I mean, literally it was. So Williams F1 was struggling at the time, and Claire Williams was probably running Williams F1 at the time, and they needed money. And this is just pre-Liberty as well, so we're not looking too far back. Absolutely. Nikita Mazepin, do you remember Nikita Mazepin with Haas? Absolutely. And then we had the whole Russia-Ukraine conflict, they lost all the financing. I mean, it's a very recent situation. And that practice of funded drivers have been going on for a long time, so there's nothing new in that. So anyway, young Lance comes into Formula One with Williams effectively in a funded seat, paid for seat.

1:06:15But around the same time, Daddy Stroll decides, well, actually, I don't want to have, if I'm going to be funding for him to be in Formula One, I might as well own a team. And this is when he made, by luck or design, one of the great investments. Because at the time, I remember it quite well, I was working around the paddock at that time. And Force India, which had been a sort of high-performing but perpetually underfunded team, which was in theory owned by a guy, I think it was Vijay Mallya, and they couldn't pay their bills. And this is pre-cost controls, so they were under huge pressure because the big teams were spending vast amounts of money, but Force India wanted to be competitive but then couldn't quite pay the bills, etc.

1:06:58Anyway, so Daddy Stroll comes along and says effectively, I'm going to, I think Force India would collapse into administration owing lots of money. I'm going to come in, I'm going to buy Force India and I'm going to rename it to Racing Point and my son is going to drive then for my own team. Right, that's absolutely fine. It's about 90 million plus. 90 million quid. 90 million quid, which at the time would have seemed like a very expensive seat for his son in an industry that was loss making and which at the back end of the grid, certainly the teams weren't reckoned to be worth much if anything really you know it was a very tenuous market as i'm sure claire williams would remember from that period just because the losses were so big it was so difficult to keep things under control so there he is he's bought this race team um and he's renamed it uh um and this is five six years ago charlie yeah six so not again not that long ago early days of drive survive i think they documented some of it and this is the time when Liberty's taking over.

1:07:59So it's just in the years pre-COVID. So previously, F1 had been largely majority shareholder by owned by CVC, a private equity house, but still run by Bernie Eccleston. And Bernie ran it in the old way. He himself in his motorhome conducting interviews with the media, drumming up stories, you know, exactly how he'd done for 30 to 40 years. Liberty come in and decide, forget all that. We're going to try and take Formula One into the 21st century in marketing terms. And we're going to have this Netflix series and we're going to have our own TV channel and everything's going to be more centrally controlled and everything's going to be done in a different way.

1:08:34And I remember at the time, there was a lot of skepticism speaking to the F1 media pack. There was a lot of skepticism. Do they know what they're doing? Bunch of yanks don't really get it. Of course, the other plank of it being we need to break America. Very important. Sounds similar to our Chelsea chat. Yes, but as it turned out, they did know what they were doing. As it turned out, it's been just one of the best investments ever. And everyone thought, is there any more juice in this engine? Because effectively, CBC themselves had done extremely well from buying it from Bernie. CBC did a, made a really good turnout of it.

1:09:04And everyone went, well, probably CBC would be the ones who've made the money here. Liberty might be the ones who don't make much money out of it. Far from it. They've ended up making something, creating something which is much more valuable than it ever had been either under CBC or under Bernie. So this is all happening just after when Stroll's getting into the game, all of these moves are being made, more Grand Prix's in the US, Netflix Drive Survived takes off, becomes a big success. All of these things are happening. A cost cap has been implemented. And critically, a cost control was put in place.

1:09:37Now, this is something that Max Mosley had tried to do when he was leading the FIA, which is the world governing body of motorsport. But the teams, particularly the big teams, who I was advising at the time in the Formula One Teams Association, fought back against this. And it was a pretty stringent cost cap. It was a cost cap which looked like it was deliberately designed to screw over the big teams who Max was having problems with at the time. But this cost cap was much more sensible. And it was designed at 100, I think it was 130 odd million, 130, 140 million bucks in the first place to cover the main bit of your operations.

1:10:10And it cut back spending quite significantly, particularly at the top end of the grid, which is something the top end of the grid had been very resistant to. But my goodness, has it worked out? My goodness, has it worked out? You can walk through what valuations are now, Charlie. Well, you've gone from valuations of, let's say, 100 million, like Lawrence bought into it with, to now Aston Martin's valuation, which I think the last time where equity valuation came into it was 2.5 billion. So just when we mentioned Chelsea, we talked about the rising tide and just being a part of the system. This is the perfect example of that.

1:10:43Now, a lot of money has been poured in to get it to them. He's put, there's no doubt he's put a lot of money into the factory, which is up at Silverstone, and into the operations and all this type of stuff. No doubt about that. But unlike Cleary and Boley, what he's seen is a serious increase in the value of his ownership. So let's just say that he spent$500 million overall for something which is now worth$2.5 billion. $2.5 billion. Now, he doesn't own all of it, but leave that to one side. Okay. That's totally relevant. As an investment, it's been an absolute knockout. Now, ironically, during this whole process, he and our other group of investors bought Aston Martin Lagonda, a car manufacturing business, and decided to rename again their Formula One racing team Aston Martin.

1:11:21Now, traditionally, why these things worked was effectively that the Formula One operation would be run as a loss leader to market a car manufacturing organization. so that's obviously the case when it comes to Ferrari and Mercedes but even with McLaren you know the idea was okay the race operation might hopefully break even or whatever it might be but it's a great marketing thing for people then to want to buy McLaren cars and we're going to make the money off McLaren cars that was the whole thought process back in the days when I was working at McLaren or working for McLaren I should say that's been flipped on its head because effectively car manufacturing has become unbelievably difficult so right you walk the numbers well I mean it was the value of Aston Martin Lagonda as in the Aston Martin business away from F1 and the value that we just said at 2.5 billion so 2.5 billion for the Formula 1 racing side and it was 469 million was the value and 500 million or so for the road car business okay and five times the Formula 1 team wow that becomes the key business driver other way around five times the road car the Formula 1 team It was worth five times the road car thing.

1:12:31So now the Formula One team is both the brand front of house, but also the primary holder of value for the Aston Martin brand. Why? Because it's part of a closed ecosystem, which has become enormously profitable and valuable, which effectively, it now owns a seat at the table. It's effectively a shareholder of this enormously valuable business. So now then, can we get to the meat of the conversation? Or you have this amazing work going around it. what happens if performance slumps? How closely linked is Aston Martin's success on the track this year versus the continued growth and development of Aston Martin as a business?

1:13:10I remember being around McLaren. So I think the first time I advised McLaren was about 2008, which was, I think, Lewis Hamilton's first world championship, which is when he was at McLaren. And at the time, the Formula One business was doing really well because the team was really successful and therefore they could and it was basically a commercial business so that they they made their money through advertising basically people putting brands on the car that was basically what it was they got some central distribution as well but this was the key thing over the following years um as ron dennis effectively going to exit the organization the founder he actually wasn't the founder because mclaren was bruce mclaren but nonetheless ron Dennis had been in charge of it an awful long time.

1:13:57As he exited it and performance started to deteriorate, the commercial revenue started to deteriorate. And that caused real stresses inside the business, huge stress inside the business, because they didn't have a massive automotive arm to prop it up like at Ferrari or Mercedes. It had to basically make sense on its own behalf. So what you get for your commercials is significantly linked, historically has been, and I'm sure still is, but surely less so now, because the F1 brand has become so big now that even just to be on an F1 car, even one which is not competing at the front of the grid, is now prime real estate.

1:14:41So I'd have to speak with one of my mates who is in this sort of commercial rights sponsorship market to get a real sort of pin on, if you are really bad for two years, what would that do for your sponsorship revenues? But ultimately, it's not going to make too much of a dent in the 2 billion rise in asset value that Stroll has seen in his time owning that Formula One team. Yeah. Just one final thought on this, Charlie, because it relates also to the premiership. I know I said it at the end of the premiership, the prem discussion. This is what happens when you have cost controls. if there's one thing that drives me bonkers about the English football industry, is it does not seem to understand the impact on capital values that would happen if we made our football clubs break even or profitable.

1:15:35That is the one thing that we could do which would totally transform the value of all football clubs, all of them. And we've got so many examples now of how this happens from US sports to F1. and now Prem Rugby's doing it, etc. And yet you get this ridiculous conversation with people of very limited intelligence around the table going, oh yes, but I'm hoping that if I spend a lot of money this year that I'll be able to out-compete the team just below me. And then, okay, for the next two or three years, maybe you will. And then two or three years after that, you'll then come back down again. Do you not understand you're going up and down a pyramid like this?

1:16:09And actually what we need is to make the entire thing more valuable. So all of those things that you just referenced there have cost controls, but they're now closed systems. so what's the biggest challenge on football having cost controls with as you just said a functioning pyramid those cost controls will obviously be different and that's what the independent football regulator is looking at right now and he'll publish his state of the game report this is an english football in um september october the first draft of it and then the final draft will come out almost exactly this time next year which is addressing exactly this which is okay how can we get to sustainability within the system?

1:16:42So it's not, quote, easy, not saying it's easy, but you need to have the desire and the understanding that it's kind of non-negotiable because ultimately, honestly, right now, a lot of championship clubs are worth, this is championship football clubs, not rugby clubs, championship football clubs are worth 50, 60, 70 million quid under a full cost control system, even if they didn't look like they were getting into the Premier League anytime soon, they would be worth double that. So you need to understand that the store of capital value waiting for you once you have a prestigious sports brand, which also makes a profit, your multiples are going to go through the roof.

1:17:25And that's what's happened in F1. So finally, just on this, when you look at them big regulation changes, you have that closed system and everything's been built around the development of a product working a certain way. When you change so much like they changed this year, it's quite a big risk, isn't because the impact it can have on the product when you change the cars as they have done could be really significant to why I watch it. Until I watch it, you don't know. I can't tell you what my reaction is going to be. I need to watch it in two ways. I need to watch it on TV and then I need to turn up to a race, which I will do at some point.

1:17:57I always go to at least one race a season. Because that noise when you're there is like nothing else. It still thrills me. You don't need the invitation if we get one. Or do you go on your own? Well, I mean, it depends which one. I mean, if you're talking about Budapest, maybe. But if we're talking about Miami, probably more likely. Okay. Good to know. Thank you, Charlie. Brilliant. And anyone, obviously, that has Miami access, Charlie. Formula One is something we'll come back to, I'm sure, plenty of times. It's funny, isn't it, in Formula One, which is only when the season really gets up and running that the stories start to develop.

1:18:32It is so unpredictable as to which way it's going to go. I'm looking forward to it. I think it'll be really interesting to see it. Charlie, another great week. Thank you so much. Thank you, Charlie. Thank you as ever for tuning into another breakdown. I can't say I love doing the first segment, but hey, it's all about balance. No doubt there will be plenty more that unfolds in the future to tap back into here. Plenty to like about the rugby move and I look forward to touching on the first weekend of F1 next week after the much anticipated start to the season this weekend. As always, thank you for tuning in and please keep the comments and engagement coming.

1:19:06We'll see you next week.