TIP814: Formula One Group (FWONA): The Only Sports Franchise Worth Owning w/ Kyle Grieve & Shawn O'Malley

20:27And so there are rumors that it can really only afford to operate for another year. And I don't know. I mean, that's speculation. But the takeaway for me is, first off, to challenge a business like the PGA or F1, you need an obscenely well-funded entity that's probably motivated by factors beyond simply economic returns on capital. And that's what it takes to threaten these kinds of agreements and pull talent away. It's a very specific risk to have to worry about, but obviously we did see that happen, at least with professional golf. But when that competitor comes along, it's still very hard to succeed, even with nearly infinite money.

21:05If oil money was not enough to disrupt the PGA long-term, then I can't really fathom who could afford to do so. And that's probably a decent comp in a way for thinking about how entrenched F1 is. But on another note, F1 Group is interesting to me because while it doesn't own the teams in F1, which I imagine are very valuable, for some reason it carries a decent amount of debt, about$5 billion worth for context. So that's just something I'm trying to wrap my head around. How do you think about F1 Group's financial health and maybe their capital allocation behind that debt? Yeah.

21:39Preston Pysh:So F1 most definitely is a costly sport, especially for the team. So an F1 team on average is worth about$3.5 billion and generates$700 million in revenue. Now the teams have a spending cap of approximately$170 million and could easily actually outspend that, but they have these intentional caps to prevent teams from having too big of a technology lead over other competitors. But the F1 group does carry quite a bit of debt, like you just mentioned. So we have to keep in mind that the F1 group is also composed of another entity, MotoGP, which I haven't discussed very much today and won't just because I don't find it as interesting as the F1 group.

22:13Preston Pysh:But let's get into that in a little more detail. So Formula One's share of debt is about$3.4 billion. And currently they're generating about$946 million in their KPI called operating income before depreciation and amortization, or OIBDA, or just OIBDA, which to me seems very, very similar to EBITDA. So they're adding back the usual suspects to operating income, stock-based compensation, depreciation and amortization, and impairment and acquisition costs. Then they have a specific item for their business in the Concord incentive payments. Now, I'm going to say here, I'm not a huge fan of these adjustments because as an owner, A lot of these seem like real costs to me, similar to EBITDA.

22:52Preston Pysh:In order to run this business, you still have to compensate talented people. You still need to have to spend money on CapEx to build things out, which obviously is going to add meaningfully to depreciated amortization, which is likely to continue to grow. And then the incentives for the Concord incentive payment, I mean, these are payments that you have to pay out to the individual teams on an annual basis. You're not going to be able to run the business without doing that. So to me, adding that back in just doesn't really seem like it makes a lot of sense. But as long as banks see this as a proxy for cashflow, and again, given the numbers that are offered, it's unfortunately just kind of the easiest thing that we can use to look at a proxy for cashflow.

23:29Preston Pysh:The F1 group is probably just going to continue using it because obviously if banks are willing to give them money based on it, then there's no reason to really switch things up. Now, for listeners that are unfamiliar with John Malone, he essentially invented EBITDA. So he knows how to train investors and bankers to think like him when it comes to cashflow generation. So I assume this is probably a big reason that they focus so much on this KPI. Now, interest expense is currently$249 million annually. So if we use OIBDA, they have a coverage ratio of about 3.8. And if we use the classic EBIT to interest expense, that drops to three times.

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27:38The guide is free to you at netsuite.com slash tip. That's netsuite.com slash tip. All right, back to the show. I got to admit, I've heard a lot of ad back jargon. Oibda is a new one for me. But just looking at the ad backs that management includes for metrics like EBITDA or even just reporting EBITDA in the first place, since it's a non-gap figure, I think that can be pretty revealing of how a company thinks about things and their shareholder friendliness, right? There are definitely instances of this maybe being done less egregiously, but then there are other times where you're thinking like, does management think I'm stupid?

28:16It's almost insulting at the extremes that they believe they can convince investors the business is so much more profitable than it actually is by excluding all these legitimate costs. And you just outlined maybe a few of those, Kyle. And I don't know to the extent that that is the case here, but it's really never a great look, right? If you're a fast growing tech company, maybe I can sympathize with the argument as to why certain ad backs need to be made because those costs are disproportionately affecting the company when it's at an earlier stage, but won't be as much of an issue at scale. And you're trying to think about some sort of normalized valuation down the road, but that is not really the case here with Formula One Group.

28:53And anyways, just to get back to my previous question, since F1 Group does not own the teams, I'm still wondering, it's not clear to me, why does it have such a large debt load?

29:03Preston Pysh:Yeah. So I think this is a multifaceted answer. So I see kind of these five different areas. So the first area is through financial engineering. So Liberty Live Nation was spun off at the end of 2025 and placed about a billion dollars of debt onto F1 Group's balance sheet. And the next one up is into the core operations of F1. So think of things like logistics, media production, and IT infrastructure. Then you have team payments, like I said, and the prize fund distributions. Third is the Las Vegas Grand Prix. So this is the only race that F1 promotes internally, and therefore they should have higher costs.

29:35Preston Pysh:Now they have to develop and maintain the circuit and paddock facilities, which are basically their hospitality offering, as well as ongoing operational costs. Now on top of this are organic growth in digital streaming and academy operations. And then finally, and this is probably most important, is simply the MotoGP acquisition. So this was funded with cash, stock, and loans. And the total acquisition cost was about$3.7 billion. Now, Sean, I know you're a massive Netflix supporter. So am I. And not only that, but it's one of the larger positions in the intrinsic value portfolio. So you know how much money can be spent in streaming content and infrastructure.

30:11Preston Pysh:Now, while F1 TV is nowhere near the same scale as Netflix, they've actually seen quite a bit of success in this area of their business. And since content needs to be consistently added to the library, that continues just driving the value of it, adding new subscribers, and it helps keep existing subscribers interested in the content. But as you know, they're going to have to keep investing in that area of the business to allow it to generate incremental revenue growth over time. I'm definitely a longtime Netflix user and unfortunately only a recent investor because the business was right in front of my eyes, literally for many years before I appreciated its advantages and potential.

30:50I was able to actually build a position while the stock sold off over concerns about the proposed Warner Brothers deal, because I just liked the business with or without Warner Brothers. And I guess I got lucky because then the stock jumped because the deal fell through and apparently the market was relieved. But ironically, I would have loved to see Netflix own the IP to Game of Thrones, Superman, Harry Potter, Lord of the Rings, The Matrix, Looney Tunes, Scooby-Doo, and the list goes on. I think there's a ton that they could have done with that IP for decades and decades to come. But alas, all of that is going to Paramount.

31:26I do like though that Netflix has had success making its own IP, Stranger Things, Squid Games, House of Cards come to mind. Those are all Netflix exclusives, but I'm taking us off topic again, aren't I?

31:41Preston Pysh:You are, Sean. And I will also say that I'm a huge fan of Netflix as well. It's by far my favorite streaming service. That's the one that I would be the last one to cut if I had to make a choice. But let's get back to F1 TV here. So I personally, I'm not a subscriber to F1 TV, but I do have a couple of different sports subscriptions that I am subscribed to that would apply to my own user experience. So the first one is one called Flow Grappling, which probably no one's going to be familiar with, which I'm no longer a subscriber to. This is basically one that I subscribed to that had professional jujitsu matches, which is something I have a big affinity for.

32:13Preston Pysh:And they aired them live or they had replays Now for this product, I felt like it was a little overpriced at$250 a year. And I just didn't think the product was good enough for me to keep buying. And I also had some insider information on the business and I just didn't want to continue supporting them. And the next one that I really like, I love is DAZN. So DAZN is actually a customer of F1. Now, while I've never watched a second of F1 on DAZN, I've been an active subscriber during the NFL season for many, many years now. And I have no plans on stopping into the future. Since I'm such a big NFL fan, and since in Canada, there are very limited ways to get access to every single game in a legal way, DAZN is basically the best option you have.

32:49Preston Pysh:I also like DAZN as they have really good customer service and the streams they offer are all very, very high quality. I get access to literally every single game I want during the regular season and the playoffs. So as a fan of the NFL in Canada, it's a simple decision to use DAZN to continue watching the NFL. If I was as avid a fan of F1 as I am of NFL, there'd be a very, very good chance that I'd also pay for F1 TV as well. Now, during my research for this episode, it appears that Apple TV subscribers only in the US, unfortunately, will actually get access to a number of F1's offerings. Well, it sounds pretty promising all around.

33:23And the company has been able to grow consistently for the last few years. You might say it's in some sort of growth mode, but also it's probably fair to say that we prefer businesses generally that can grow with internally generated cash flows rather than relying on external financing and debt. And so will it be feasible in the near future for them to rely less on debt or are they going to have to keep rolling over debt or issuing new debt to fund the business?

33:49Preston Pysh:Yeah, I couldn't agree more with you on that debt aspect, Sean. But for listeners that follow businesses that I really like, they probably know that I like serial acquirers. And one of the hallmarks of serial acquirers is that intelligent use of debt, provided they have more ideas and internally generated cashflow. Now, the thing about F1 group is that aside from F1 and MotoGP acquisitions, they're not a serial acquirer. If you look at the historical numbers, they're quite ugly. Before the Liberty Live Nation spinoff, the business was highly, highly leveraged. For instance, in 2017, their leverage ratio was 7.4 times.

34:20Preston Pysh:And as I mentioned earlier, it's now below four times. But looking forward, provided they aren't planning on buying some other massive racing organization, which I guess you probably can't rule that out, I think there's actually a pretty clear path to them continuing to significantly pay down debt. So in full year 2025, the business generated over$900 million in operating cash flow, up from$567 in 2024. So they're clearly doing a really, really good job of generating cash. Now, we already covered their OIBDA and their debt situation, but if F1 wants to continue growing, will they need to finance?

34:51Preston Pysh:And that was your question, and I think it's a great one. So current annual interest expenses are running around$260 million. So as of now, they're very, very safe. But over the long-term, they have a few different instruments running, but it feels like it's pretty easy for them to pay it off given the long-term nature and the forecast of their future cash flows. So in 2027, they have a 475 million convertible note that will likely convert to equity. Currently, the cash position is about 1.1 billion down from over 3 billion before the MotoGP acquisition. So provided the MotoGP acquisition works out well, I think they're in a pretty good spot.

35:25Preston Pysh:But given how much leverage the business has, my guess is they're going to continue to extend maturities and probably play around with favorable interest rates whenever that's possible. That seems manageable and it should come down as they continue to grow their cash flows. But there's this quote I can't help but share from Buffett that you've probably heard. He goes, I've seen more people fail because of liquor and leverage, leverage being borrowed money. And I like that metaphor because liquor does remind me of debt in many ways. A little bit of liquor can make a good night into a great night.

35:57Too much liquor, and you're going to have some problems. And leverage is exactly the same way. So the business looks reasonably safe for now, but there are these headwinds for the business in 2026 that it's facing. And that's namely around the conflicts we've seen in the Middle East, right?

36:13Preston Pysh:That's correct, Sean. So F1 announced on March 13th that they would actually cancel two events in Bahrain and in Saudi Arabia. So that's actually going to cut their races from the normal 24 down to 22. So had there been enough time, they probably would have been able to actually replace those events with a different geography. For instance, I know from what I read, F1 was looking at places like Portugal and Italy as potential replacements, but unfortunately, they just didn't have time to replace these races as they were happening in April. Now, I want to get to the economics of this development.

36:43Preston Pysh:So in 2025, race promotion generated over a billion dollars, but the races aren't all built the exact same. So you simply can't divide a billion by 24 to get the revenue generated from each race. So from what I was able to find, Bahrain and Saudi Arabia are especially large F1 events. It's hard to know exactly how much they generate, but I've seen estimates ranging from 115 million all the way to 200 million in revenue and about 40 to 80 million in EBITDA. So losing those two races means that basically just gets completely wiped off the mat. So my assumption is that these estimates include the hits on sponsorship and media rights as well.

37:17Preston Pysh:Now, luckily, F1 is well diversified on a global scale. So So they have events in Canada, Japan, the US, Europe, Asia, South America, and of course, the Middle East. Now, it's also worth noting here that they do have events in Qatar and Abu Dhabi in November and December of 2026. So if the conflict were to expand or worsen, I think there's actually a real chance that these two races could theoretically be cancelled as well. But my guess is that given what has already happened, hopefully they're already looking for potential alternative host locations for those events to decrease any future risk.

37:49Preston Pysh:Now, unlike Bahrain and Saudi Arabia, they have a lot more time to prepare. Well, it's good to have that global diversification, but the best case scenario would be that you don't have these races being disrupted at all. And obviously that's beyond their control. But let's look at the potential of the business here in the future. It's grown incredibly well with a revenue category of over 24%. And it's an impressive number given how long the sport has been around. So that begs the question, what kind of growth does this business offer to investors looking forward? Yeah, I think this is where the business gets really, really interesting because I think it's really clear that F1 as a sport has done very well over the years and maybe even better while part of the Liberty ecosystem.

38:31Preston Pysh:Now, there really are multiple growth areas, but first I want to focus on just how big they currently are. So as of their 2025 presentation, F1 has by far the largest average attendance at 271 ,000 people. In second place is their other racing promotion, MotoGP, at only 152 ,000. So where they can probably grow is in their social media footprint. As I've shown here, MotoGP is currently fourth and F1 in sixth. But even more exciting than this is probably the multiple growth levers that they have access to. These are things such as the creation of additional races. So like I mentioned, they average about 24.

39:05Preston Pysh:But there's growth opportunities going around all over the place. Ones I've seen touted are Africa and expansion in Asia. So that means, could they get to 26? That doesn't really seem like a target that's out of this realm of possibility. Next up, you have the renegotiation of media rights. Sean, you did a really good job of basically breaking down how you actually thought that the fact that they kept those longer fixed rates was actually a competitive advantage because it allows them to take advantage of keeping these partners invested even when things go bad. So I think that's one really, really good growth lever that they have.

39:35Preston Pysh:Next is scaling their Las Vegas F1 event, which is quite new. It just started in 2023. And they're going to probably be able to continue scaling F1 TV and their subscribers as well as growing their content library. And then lastly, you have just sponsorship pricing growth. So I'm really a fan of businesses that have multiple growth levers simply because if one of them doesn't pan out, then there's just other ones that you can double down on. The hard part about F1 is that they don't really share individual revenue for each of these groups. So we kind of have to extrapolate from what they do offer to determine what's working best.

40:06Preston Pysh:And I would say what they have made really, really obvious to potential investors is that their fan count is growing at a very, very high rate. And they're engaging with F1 in a very meaningful and value-accredive way. So the total season attendance has actually increased from 4 million in 2015 to 7 million in 2024. Unique web and app users have increased from 35 million to 109 million over the same time period. I want to double click on that fan attendance. How sticky are the events that F1 puts on? Yeah, Sean, they're very sticky. So 18 out of the 24 races are actually contracted to 2030 and beyond.

40:41Preston Pysh:And this means that race promotion revenue segment is unlikely to really move down much until that time. And even though races have ranged between 22 to 24 over the past years, they continue to eke out more and more revenue per event. So the visibility is quite good here. I also want to mention that for the majority of businesses, growing into other geographies is kind of a risky proposition. One of the bigger holdings in the intrinsic value portfolio is Uber. And while I agree the business is great, they actually had one pretty large failure, which was trying to expand in China. So Uber, which has an exceptional business model, simply just couldn't stay in China and compete with Didi.

41:15Preston Pysh:And they ended up selling its business in China in return for a stake in Didi. But in F1, global expansion is actually a defining feature of the business. It's truly a global sport. And since they target this kind of more affluent fan base, they're simply not restricted by geographical barriers to attract new fans. For this reason, I think they can find geographies in nearly every corner of the earth to continue hosting live events and maybe even a couple of extras. So I mentioned that the renegotiations of media rights was also a growth lever, but let me break that down a little bit. So up until 2026, ESPN had been F1's broadcasting partner in the US.

41:52Preston Pysh:They ended up paying about 85 million a year to the F1 group for that ability. But given the success of F1 with the movie that they had with Apple, they're actually moving to using Apple streaming services to broadcast to both US and international listeners. And they aren't even keeping that same$85 million a year deal that they had with ESPN. They've actually raised that up to 140 million a year. I think this is an excellent example of the pricing power in their media rights segment. Well, they should have some pricing power, but I guess my worry is we don't want to extrapolate too much from what might have been some temporary boosts with the Netflix documentaries and with the F1 movie.

42:28I mean, it was a great movie, but unfortunately you don't have hit movies with Brad Pitt promoting F1 dropping every single year. So you will probably see some moderation in that pricing power as we move further and further away from some of these pop culture moments. But let's discuss the industry that F1 Group competes in. Even though there isn't really anything exactly like F1, as we've talked about, there is no shortage of other popular racing promotions out there, right? There's NASCAR, you've got IndyCar racing, and then you have the less popular ones that still draw crowds like drag racing, the World Endurance Championship.

43:04You can maybe even argue that sailing is a form of racing competition. So there's a lot of these sports out there that in different ways rival F1 Group. Yeah.

43:14Preston Pysh:So this actually reminds me of a business that I used to hold, which was Evolution Gaming. So I remember one of the executives discussing how he didn't actually consider other gambling companies to be his only competitors, but he also considered streaming businesses like Netflix and even other social media apps like Instagram and TikTok to really be the big competitors. So the point here is that if you look at F1 through an extremely narrow lens, it appears like, yes, of course, there's no competition. There's not two F1 leagues out there. But I think when you expand it, there's many, many sports out there that probably cater even to an affluent fan base, just like F1 does.

43:49Preston Pysh:And that's their competition. Even if it's, like you said, not even racing, maybe it's sailing. But let's look at the industry in a little more detail here just to give you a sense of how it works. So the first thing that I like to look at is demand and the degree of variability that it offers in the business. So on this, I think the live sports industry has pretty low variability. It's largely recession resistant. Its racing events have multi-year wait lists, which obviously mean that if there were a recession to happen, at least they have this wait list to rely on, which can hopefully at least try to maintain their high audience counts.

44:19Preston Pysh:A few of the other yellow flags that came up for me are on the variable costs. So for instance, team payments make up over 36 % of F1's revenues. In 2025, they paid out$1.4 billion. Now, team payments do have some variability embedded in them. F1 group doesn't share exactly how these are calculated, but they did mention that the team payments are baked on F1 groups' revenue and costs. So if revenue and margins were to change, this would have some effect on the team payments. A few other yellow flags concerned F1's sensitivity to change and key factors. For instance, the presence of a single team dominance can definitely affect the audience.

44:55Preston Pysh:If fans want to watch a product where you want to have a high level of competition and one team is just clearly miles ahead of others, it might be harder to maintain or attract fans. Other factors are the renegotiations of the Concord Agreement. Clearly, those agreements must be agreed upon by literally all the parties involved. If the teams decided that they wanted a larger cut of revenue, it would be very hard for F1 Group to say no, as they actually need these teams to show up to create a viable product. We've talked about how the business has significantly expanded its customer base since Liberty acquired F1.

45:30And if we look at this from an industry standpoint, are you seeing any weaknesses in growth? For instance, is this growth sustainable? Is it going to decline over time? What is the long-term trajectory that you see for this industry as a whole?

45:44Preston Pysh:Yeah, I'm really glad you asked this, Sean. So there's a mental model that I like to use whenever I'm looking at a new business. So I I call it covert cyclicality. Now, it's basically very simple. It's a way that forces me to spend some time thinking about a business and whether there's cyclicality embedded in a business that I or the market might be overlooking. Now, I've unfortunately been bit by this before, so I prefer to not hold businesses that have covert cyclicality. Now, in terms of F1, you're completely right that I think they've grown very, very well under the leadership of Liberty.

46:13Preston Pysh:As I mentioned earlier, they've grown viewership by 63 % since being acquired. Now, I would be very, very surprised if they ever have a 10-year period again where they even come close to this growth rate. Now, to understand that growth, we have to look at some of the drivers that contributed to it. So I think, for instance, the Netflix series Drive to Survive created a ton of new F1 fans, especially in the United States. This series, which came out in 2019, is now in its eighth season. The show just did an exceptional job of opening F1 to the world and to Americans, which was a massive tailwind for attracting new fans to F1, which I think made a big contribution to that 63 % growth.

46:48Preston Pysh:But I also don't think F1 is this kind of commodity type product where demand is going to drastically change. I would say a lot of the fans that they've attracted are probably permanent, but we'll definitely have to monitor that going forward to just see how it plays out. And if we switch from short-term tailwinds to short-term headwinds, there's one particular area that I find really interesting, which is the move towards electric cars and social governance. So there's another league called Formula E, which uses electric cars. And as far as I can tell, F1 Group has no ownership stake in Formula E.

47:19Preston Pysh:So I still don't really see it as a major concern. But part of what makes F1 so interesting is just the raw power of its cars. And switching to electric cars would certainly degrade the performance of the cars, creating a much different product that I don't think they're in a huge rush to try to chase. One other thing I remember here was I was listening to F1's episode on the Acquired podcast, and they brought up that the actual emissions from an F1 race are really nothing compared to the logistics of actually moving around the equipment. So in Europe, they don't need planes. The equipment is simply shipped using 300, that's correct, 300 trucks.

47:53Preston Pysh:They mentioned that if you line these up at a straight line, it would be five kilometers long. Now, Acquire said that in 2019, the logistics operations contributed 64 times the emission as the races do. Now, keep in mind, if they compete internationally, they have to have an armada of large aircraft just to move the equipment around. Gosh, that is a lot of carbon emissions. But let's chat a bit here about customer loyalty, because I know that's an area you like to spend time on when you evaluate a business. And with a business that is growing its audience at such a high clip, the loyalty of its customers is going to be key for them in being able to monetize their business going forward.

48:32So how do you think of this for F1? How strong is the loyalty?

48:36Preston Pysh:That's right. So since F1 has grown its audience so much, it would most definitely be very important for investors to have some more insights into just why their customers stick around. Now to do this, I like to use a framework that I learned from reading Hidden Monopolies, which was a book that I did an episode on back on TIP 744. Now the basic framework is to view customer loyalty through three different areas. The first is through base barriers. Base barriers basically discourage customers from replacing their current products and keeps them loyal to the business. Next, we look at exit barriers.

49:07Preston Pysh:This barrier forces you to answer the question, is it difficult or easy to replace the existing product with an alternative supplier? And third are entry barriers. This is how customers would view entering into a different customer's product or service. If they view the entry barrier from switching as being insurmountable, they're just simply unlikely to switch. Now, before I measured this for F1, my assumption was that it would probably have a pretty high customer loyalty metric, which I'll refer to as the remote score index or MSI. So you can see the numbers right here. Now, this one was a little bit of a harder one to score simply because F1 has multiple customers in my view.

49:41Preston Pysh:You can look at it from the standpoint of number one, their fan base who attend their live events or stream them digitally. You can look at it from the F1 team's point of view. You can look at it from their advertising partner's point of view. And then you can look at it from the media partner's point of view. So I think scoring this for each party is mistaking the trees for the forest. So a score this high is quite good. But again, I had to measure it holistically and not from the standpoint of any single party. For instance, if we look at one criteria, high cost of failure, it's obvious to a fan that if something like the F1 app didn't work and they had some technical difficulties, it's pretty unlikely that they're going to make any difference to a fan.

50:16Preston Pysh:They might choose to complain to F1. They might cancel or keep their subscription. But the cost of failure is incredibly low. But if you looked at it from a media partner such as Apple TV, if they switched from, say, F1 and NASCAR, chances are they wouldn't get the same amount of value from a NASCAR partnership than that they would get from a partnership with F1. So obviously that would mean that their cost of failure is much higher. So as you can see from the scores, the entry barrier received the highest score. And since F1 is really just a good product that can't be replicated, it makes sense that I think this would be very difficult for customers to leave F1 and find something that provides them the exact same value because the product simply is not going to be the exact same.

50:55Preston Pysh:It's not like changing where you buy your groceries from. Let's take a quick break and hear from today's sponsors.

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54:44And from a business perspective, that's great. But that can also mean a lot of suffering. Spoken as somebody who is a fan of Washington DC sports teams, I feel a bit tormented my entire life. We've had more than our fair share of bad teams in the last two decades. And yet DC remains a very strong and loyal sports markets for our teams there. So if you can cultivate loyalty to a team or a sport, that is an incredibly, incredibly valuable asset for any sports franchise to sit over, but I think it's true for F1 too. And so when we're looking more at F1 and we're kind of working through the progression of things to think about when we're trying to get to the root of its intrinsic value and how to understand it, we haven't spoken at all about management yet.

55:29Really, other than your mention that Liberty Media was connected to the legendary John Malone. So why don't we shift gears and talk about management here. How aligned are management and shareholders?

55:41Preston Pysh:Yeah. So before I get into management, I will say I share in your pain, Sean, as a Vancouver Canucks fan and Cincinnati Bengals fan, we just can't win the big thing. So I understand the pain there, but I also understand how important it is to have a loyal fan base. So let's get into your question here about management though. So having done a lot of work on John Malone, I can tell you that Malone is simply a master at generating shareholder value. However, unfortunately, John is now 85 years old. And I think his years of being this masterful executive and capital allocator are basically behind him.

56:12Preston Pysh:At this stage of his career, he's actually just the chairman emeritus of Formula One Group. But outside of that, I don't think he's probably super involved in the day-to-day operations of the business. Now, I mentioned at the beginning of today's episode that there are two types of F1 shares. Technically, again, I said there's three, but one of them is not accessible. So the F1B shares carry 10 voting rights per share and trade on the OTC market, but have literally zero trading volume. So these are shares that were created to maintain control of F1 Group in the hands of a few insiders while reducing the likelihood of an activist taking a role and trying to shake things up inside of the business.

56:47Preston Pysh:Now, according to F1 Group's proxy, John Malone's owns 97 % of the F1B shares, and these shares give them a 49 % voting rights. But outside of that, the insider ownership for F1 shares is actually quite low. Their cap table shows percentage ownerships of the F1A and K shares all to be less than 1%, and in a few cases, less than 1 ,000 shares held by insiders. So we have to keep in mind that F1 Group is not a family organization. So all the executives and board members got their ownership stakes fairly late in the game. Now, this would normally be a big yellow flag for me, but given the size of the business and the fact that it's really only been under Liberty since 2017, I'm not quite as concerned.

57:28Preston Pysh:Of note, there haven't been any open market buys according to NASDAQ data over the last two years. And all the buys that have been listed have all been execution of options. I'm not sure I disqualify F1 Group as an investment based on what you described alone, but it's certainly not the most inspiring setup I've ever seen for a company, right? I mean, it sounds like there are maybe some plausible explanations for the lack of insider ownership. But yeah, I mean, it's hard for me to get excited about any business where the people running it don't have really significant skin in the game. And so maybe things will be better if we look at the compensation program or is management incentivized with the right KPIs to create shareholder value in your opinion?

58:12Preston Pysh:Yeah. So before getting to incentives, let's just start with the base salary. So on this end, I think base salaries are all actually quite decent. So their CEO, Derek Chang made about 2.2 million in base salary for 2025. their CFO was making about$850 ,000 in 2025, and their chief administrative officer made about$1.5 million in 2025. They've gradually increased their salaries over the years, but in terms of base salaries, nothing really sounds the alarm. However, we have to look at Derek Chang, their CEO's stock awards and option awards. So in 2025, these amounted to$21.5 million and$14.3 million for a total compensation of 39.3 million, which is very, very high.

58:52Preston Pysh:My assumption on the large option package is simply to get him, as you said, to get some skin in the game. So next, let's just get back to your point on incentives and see how he's going to earn this. So F1 Group has a performance bonus base that's based on adjusted OIBDA, revenue, and free cash flow. The bonuses are paid based on forecasts that I guess the board of directors makes. So simply put, if you hit those forecasted numbers, you can make up to 200 % of your base salary. Now, these are okay numbers. I've already discussed to Oivda, so I'm not going to beat the drum on that one anymore.

59:25Preston Pysh:I definitely like the incentives based on free cash flow, so I'll give them some bonus points there. The other parts of the performance bonus are more subjective and evaluate factors such as M &A activity, investments, and management of the split-off. Now, as I mentioned kind of a little bit earlier, at the end of 2025, Liberty Media split off Liberty Live Nation. Now, Liberty Live Nation owns assets like Live Nation Concerts, Ticketmasters, and Quint. They have a very strong position in live event ticketing and hospitality. But now that that deal is complete, I assume they're obviously probably not going to be incentivized on that anymore.

59:59Preston Pysh:Now, back to Derek Chang. While I'm definitely not a huge fan of huge option packages, there are a few features of this package that I actually think are somewhat decent. So the first thing is that they're actually meant to lock in Derek as a CEO for the very long term. So most of the equity vests until 2029, 2030, meaning he can really make long-term decisions that will hopefully create value for F1 Group over the long term, as well as its shareholders. Now, lastly, I wanted to see what other well-known CEOs of comparable entertainment companies are making. So Tim Cook, who recently stepped down here, he made$58 million annually, I believe in 2025.

1:00:34Preston Pysh:But again, that's a multi-trillion dollar company. You got David Zaslav, who is the CEO of Warner Brothers Discovery. He makes 60 to 70 million annually. But again, that company 10 times larger than F1 Group. You got Ari Emanuel, the CEO, I believe, of TKO Group Holdings. He made$84 million in 2024, but there was a big spike due to a merger of the UFC and WWE. You got Greg Peters, who I believe is the co-CEO of Netflix. He made 40 million in total comp in 2023 when he was elevated to the co-CEO. Then you have the Roku CEO, Anthony Wood making$28 million annually. So it would appear compared to some of these deals, it's not quite as egregious as when you first see it.

1:01:15Preston Pysh:Overall, it's not my favorite, I'll admit that, but I at least appreciate the long-term investing, which at least keeps him on board for an extended period and hopefully incentivizes him to create shareholder value, which will increase the value of his options at the same time. Gosh, I'm guilty of thinking probably too simplistically or maybe idealistically at times when it comes to management compensation, but I'm just not sure why more companies can't get behind paying bonuses in cash with requirements that management then use the majority of that cash bonus to purchase stock in the company in the open market.

1:01:48And so I love that model. We very much see it with Berkshire Hathaway. And it's just so simple. There's no dilution, but you mandate skin in the game. And assuming the KPIs are tied to per share metrics like earnings per share that better track shareholder value creation than just some kind of revenue KPI, then life would be pretty great. But I digress. It's something I've ranted about before. And so you mentioned earlier that a few of the executives were compensated through investments. And so I think this is a good segue into discussing capital allocation in some more detail, right? Given that the F1 group is really a combination of two entities in F1 and MotoGP, how would you assess their skills and ability to effectively allocate capital?

1:02:34Preston Pysh:Yeah, before I get into that, I will agree with you completely on the options package. If you agree that OIBDA, their metric is a really, really good proxy for cashflow, then theoretically, they have a lot of cash that they could give off to their CEOs and hopefully get them to buy in the open market. But again, like you, I don't want to digress too much. Let's get into the capital efficiency of this business. So F1 Group's returns on invested capital are very, very low, unfortunately, at only 2.5 % now. This is normally a massive red flag for me. But given that it had taken Liberty nearly 10 years to get F1 where it is today, I would expect these numbers would have improved, hopefully, over time.

1:03:10Preston Pysh:But the problem is it's really tough to evaluate the MotoGP acquisition, as it's only been in the books for about a year. So if F1's performance, at least in terms of revenue, is any indication, then MotoGP has the opportunity to be generating significantly more probably revenue as well as cashflow many years from now. So just for reference, in 2025, MotoGP generated$325 million in revenue and$38 million in operating profits with about$117 million in adjusted OIBDA. Now, according to F1 Group's 2025 presentation, MotoGP had been growing revenue at a very, very impressive rate of 159 % kegger since 2022.

1:03:46Preston Pysh:Now for F1, since 2017 acquisition, revenue has nearly doubled along with OIBDA. Now, they haven't been returning capital to shareholders at this time, which I like, given the large amounts of reinvestment opportunities. This is where I'd normally use Buffett's rule of one to evaluate management's capital allocation. But since Derek Chang, he's only been there for a year, and because Liberty Media's balance sheet is very, very convoluted because it used to hold all of these other assets that are now split off or spun off, I think the rule of one is just a pointless exercise at this point. But let's talk again in three to five years when I think this number becomes much more relevant.

1:04:18Preston Pysh:So F1 Group has had permission to repurchase up to 1.5 billion in shares at the end of 2025, but they just didn't buy any of them back. Since F1 Group has been its own entity, it hasn't made sense to really do distributions given their debt and their ability to reinvest, or they could also search for new M &A opportunities. So I'm not expecting them to buy back too many shares or even do a dividend anytime soon either. Yeah, I agree with you. It's hard to really analyze the MotoGP acquisition this early on, but if they can monetize and grow MotoGP's audience, even at a fraction of what they did with F1, then the MotoGP acquisition will likely be very accretive to shareholders.

1:04:57But what exactly did they get with this acquisition? What were they paying for?

1:05:02Preston Pysh:Yeah. So the MotoGP acquisition, if we use a full year 2025 numbers, actually seems quite expensive. So they paid$4.2 billion for an 84 % stake in MotoGP. Regulators actually blocked the full ownership rights for anti-competitive purposes. But if we use the 2025 numbers from above, we would get a post-synergy revenue multiple of about 14 times and 42 times cash flow for their 84 % ownership stake. So this doesn't scream cheap by any means. But given the setup of MotoGP and the growth that I would assume F1 Group thinks it can achieve, I think it could be well worth it over the long term. I think they're probably going to follow a pretty similar playbook to F1 with MotoGP, focusing on expanding its reach into the US markets, which is very, very lucrative.

1:05:45Preston Pysh:And so far has been, as far as I know, very underpenetrated specifically for MotoGP. But we can do a pretty quick comparison with the proposed Warner Brothers Discovery deal, which I know you're going to be very familiar with. So Warner Brothers Discovery was done much cheaper than the F1 deal at only two times revenue and 22 times cashflow. But MotoGP, as I mentioned, has been growing at an insanely fast rate. And Warner Brothers Discovery in 2025 actually had declines in both revenue and cashflow. Well, sir, I alluded to it earlier, but my interest in the Warner Brothers deal for Netflix was more about what Netflix itself could do by leveraging that IP that came with the deal, rather than thinking there was anything particularly attractive about Warner Brothers' existing business and cash flows.

1:06:29And so you're not buying a great existing business with Warner Brothers. And so therefore the deal is speculative, which means you've got to be careful on pricing and media deals historically are notoriously value destructive because too large of a premium is paid for media assets. And so I was somewhat relieved that the Netflix deal fell through, at least on Netflix's end, and that they walked away. And it showed that they weren't desperate and they had some capital allocation discipline. So I think the comparisons between MotoGP and Warner Brothers are limited in some ways. But But one other question I had on F1 Group is, even though it would appear to be a business that spends a lot on CapEx for these races and for infrastructure, it's actually surprisingly low capital intensity.

1:07:19So what explains that? How do you think about that?

1:07:22Preston Pysh:Yeah. So just touching on your point you just made there about the Warner Brothers Discovery acquisition, it's funny because when you're looking at M &A, generally speaking, the winner of that is the person who's willing to accept the lowest return because they're actually spending the most amount of money. So the fact that Netflix actually didn't bother trying to chase a higher price, I view that as kind of a positive. And like you said, it just simplifies things. You just get Netflix as is. But moving on to your question here. So the numbers are a little harder to make sense of because if you go back long enough, the numbers actually include capex from investing into assets that are no longer owned by the F1 group.

1:07:56Preston Pysh:So these numbers for 2025, 2024, and 2023 were 119 million, 75 million, and 461 million, respectively. Now, the numbers from the last two years, I would say, are probably a lot more in line with what I would expect going forward. Now, part of that larger spike in 2023 wasn't just because it was investing in other assets, but part of that was actually due to the build-out of the Las Vegas Grand Prix, which I mentioned earlier is F1 Group's only internal race promotion. Now, just to give you an example of how expensive setting up some of these events are, and granted, this was kind of like a one-time fee, but just to buy the land that they have that race on cost $241 million.

1:08:33Preston Pysh:And then on top of that, obviously they had to develop it as well. So it's a large expense, but again, hopefully that's a one-time cost and now they just have to maintain it over a long period of time. So if you look at depreciation costs for 2025, they were about $71 million. So I think that's probably a pretty good estimate of maintenance capex going forward. And again, with them expanding and with Las Vegas happening, and maybe that number continues to go up a little bit, but it's obviously not a number that's out of control by any means. So I wouldn't discount F1 taking the same approach that they did with Las Vegas and maybe some other venue.

1:09:06Preston Pysh:Maybe it's in the US, maybe it's somewhere international. So if they were to do that, then yes, you might get the chance that their CapEx is going to spike in a year or two, and then eventually go back to a more reasonable maintenance CapEx number. but I haven't seen any indication of this happening imminently. Now, another potential option for the F1 group is to adopt a similar strategy for MotoGP, you know, purchase land and develop it as new racetracks in the US just to boost its popularity in that specific geography. Again, this is just speculation on my end, but it's not out of this realm of possibility.

1:09:38Preston Pysh:But for now, maintenance capex is only 1.5 % of F1 groups consolidated revenue, making this a pretty capital light business. I think it's that time on the show where we try to figure out exactly how much F1 Group is worth. And so given the wide moat that F1 Group has in some ways, maybe you can just go over your assumptions baked into your different valuation scenarios and how you think about what the company's worth. Yeah. So I'm going to mix in some destination analysis here and look at F1 Group over the next five years. So since the business has these kind of sticky contracts for all three of its revenue streams regarding F1, it offers a lot of visibility into the future.

1:10:15Preston Pysh:For this valuation, I'm going to do this for the entire F1 group as a whole, including MotoGP and not just F1 for the sake of completion. So I want to start here with my bear case. So in this scenario, I assume revenue growth declines to about 8 % kegger. Fan growth stalls in both F1 and MotoGP. I assume a slight compression in EBITDA, which I'm just using as a proxy for their OIBDA margins at about 24 % down from 25%. I'm also assuming a lower exit multiple, again, due to a lower growth rate. And I assume a slightly higher debt load, assuming that they don't make any splashy acquisitions, which could drastically change their enterprise value.

1:10:49Preston Pysh:Now, this yields a 2030 price of about$67, applying a 13 times EV to EBITDA multiple. So valuation is an art and it's really all about the assumptions that go into it. So what are the dynamics that would need to happen inside of F1 group for this bare scenario to play out. Yeah. So this assumes that historical revenue keggers for both F1 and MotoGP compress quite drastically. So this is a result of a few different factors. First is team payments increase as a percent of revenue with a new team coming on board Cadillac. The lower revenue growth causes a weakening of F1 groups bargaining power and they're forced to give up a larger share of revenue back to the teams.

1:11:27Preston Pysh:Second is that media rights renewals just underperform. Broadcast viewers suffer as well as streaming cannibalizes some of their customers. Third is that sponsorship growth just dries up amid, let's say, global economic weakness. Fourth is that the MotoGP integration just simply stumbles. Cross-promotion between F1 and MotoGP fail to materialize, and MotoGP margins suffer, and synergies fail to materialize, resulting in increased expenses. And this potentially results in Liberty Media maybe writing down some of the goodwill on that MotoGP acquisition. And the fifth year, I have continued race disruption.

1:12:02Preston Pysh:So I mentioned earlier that a few of the events in the Middle East were canceled and not rescheduled. So in the bear case, maybe we see continued unrest in Middle East and unfortunately, maybe somewhere else in the world that we're not even thinking about now. And they're not able to reschedule, which brings events maybe back down to that range of about 22 to 23. It's good to be conservative and to think about the risks, but there are multiple sides to valuation, right? And we have to consider the good with the bad too. So when you're trying to paint the picture here, what kind of assumptions do you make in a base and also the bull case for this business?

1:12:35Preston Pysh:You're correct, Sean. I obviously wanted to do the bear first just to get that out of the way and make sure that I place a lot of emphasis on it because as I've learned over time, the bear scenario happens a lot more often than you give it credit for. So let's get to the fun stuff though. So in the base case, I'm assuming that revenue compounds at about 12%. EBITDA margins expand slightly to about 26%, and they're able to pay down some extra debt. So this gives me a 2030 price of about$171 with a 23 times EV to EBITDA multiple. Now, the assumptions here are all tied, again, with similar things to the bear scenario, obviously just in a brighter light.

1:13:09Preston Pysh:So the first one is that team payments stabilize as teams all remain very satisfied with the price fund framework that they currently have. Cadillac ends up being accretive to F1's revenue without a major cost increase, and there's no new renegotiation surprises. Second, media rights experience mid to single digit growth. Broadcast in areas such as India, China, and Southeast Asia continue to strengthen. Third, sponsorship continues to be stable as attendance levels continue to rise. And then fourth, the MotoGP acquisition is successfully integrated and continues to improve margins. Cross promotion drives additional revenue growth in things like merchandising and sponsorships.

1:13:47Preston Pysh:And additionally, we see a baseline of 24 annual races a year going up from their older baseline of 22. We also see additional free cash flow due to deleveraging, which I now assume that the net leverage declines to about two times free cash flow. But now let's get to where things get really, really interesting, which is in the bull case. So for the bull case, I'm assuming that revenue compounds at about 14%. margins continue expanding up to 28 % as a business scales and pays down even more debt with its higher and higher amounts of cashflow. So in this scenario, I get a 2030 price of about$240 on a 27 times EV to EBITDA multiple.

1:14:23Preston Pysh:Now, the assumptions here are first, the Concord renegotiations, which will occur somewhere in 2029, allows F1 to cap or maybe even reduce team payouts as a percentage of revenue. So F1 group gets increased bargaining power with the potential entry of new teams that are bidding to get into the sport. Second is that digital monetization continues to explode. So F1 TV reaches approximately 15 million subscribers, streaming revenue gets into the hundreds of millions of dollars, and media rights growth expands slightly from the historical low double-digit numbers. Third is that the MotoGP continues to increase in value.

1:14:58Preston Pysh:Cross-promotion synergies kick in and MotoGP EBITDA increases to range of about 200 to 250 million range. Also, MotoGP starts attracting these very, very large sponsors. Fourth, I have F1's calendar continues to improve, getting up to 25 to 26 races annually by 2030, up from 24 today. This growth theoretically is driven by opening into new geographies, maybe thinking Africa or another location in Asia. And then finally, we just get much more aggressive deleveraging. This opens up additional free cashflow generation and margin expansion. I assume net debt leverage drops to approximately one times by 2030.

1:15:33Preston Pysh:Now, this is going to open up additional opportunities maybe for M &A as well. If F1 Group thinks there's another promotion that it could provide really, really good synergies, then perhaps they lever back up and chase different opportunities in that range. The base case seems pretty doable, right? I mean, given the direction the business has headed in over the last year. And then really though, the Concord Agreements, I think are something that investors need to pay close attention to. In the best case scenario, as you mentioned, F1 Group gets bargaining power over the teams and can then reduce their share of revenues, which would improve margins for F1 Group.

1:16:07But it seems hard to see how that will all play out. But let's try to bring the valuation together, all these different possible scenarios that we think are plausible with different likelihoods of occurring. When you think of it through that lens, what is the intrinsic value of F1 Group to you?

1:16:25Preston Pysh:Yeah. So one thing I've been working on lately is to weigh my bear thesis higher than I have historically, as I mentioned earlier. It's important to remember that even though I may use a higher number, this is my default number. Generally over time, once I become more and more comfortable with the business, I'll add up my probabilities once it becomes a little more obvious which direction I think the business is heading. So in the case of F1 group, I use 40 % for my bear thesis, 40 % for my base thesis, and 20 % for my bull thesis. Now putting these together, I get a price of$155. So my base case and bull case use pretty high EV to EBITDA multiples, but you have to remember that this business post-split off is regularly traded between 25 and 30 times.

1:17:02Preston Pysh:So I think my numbers here are pretty reasonable given the short historical numbers. Now, taking the weighted average, we get a price of about$141 by 2030, which represents about a 16 % kegger. But I'll actually really, really like Sean, what you and Daniel have done by shaving off about 20 % to give another margin of safety. So this gets us down to$113, which only offers a 9 % kegger. So I really like this business. I think they have a great business model and strong competitive advantages. But for me, at least the price, it just isn't there. The business, I think, gets really, really interesting when it gets below$70.

1:17:38Preston Pysh:But again, it's currently at$80. Perhaps with the cancellation of these two races, we may see some depressed financials in the coming quarters, which maybe spooks the market a little more and gets the price down. But to me, the intrinsic value portfolio's hurdle rate, the price would need to be closer to$65 if we want that 20 % margin of safety. So I think for now, I know I'll be paying closer attention to the business and track whether a market correction can maybe shave this share price down a little bit to present us with a more reasonable multiple. When I think about F1 Group, I feel like it's one I need to do more homework on, honestly, to feel comfortable with it, even at maybe even a lower price, right?

1:18:12I mean, I probably just need to spend some time actually watching F1, that might actually help with using your consumer insights to be able to relate to a business. I always find that to be valuable. But the thing is the structure here is messy and there's a lot of debt. And even if I think F1 generally has a strong future, I don't have a ton of confidence in saying that the recent boosts and popularity aren't just short-term. Thinking about the Brad Pitt movie and the Netflix docuseries. And it's also great when you can find businesses with lots of reinvestment opportunities. And that's difficult with sports leagues and franchises.

1:18:47It's not a fair comparison, but when I think about all the ways that companies like Amazon, Uber, and Alphabet in our intrinsic value portfolio, all the ways they can organically reinvest into themselves to consistently drive double-digit growth for a long, long time, well, it's just a very different picture. And as a capital allocator, you do have to make those apples to oranges comparisons of thinking about what are the opportunity costs of owning Formula One versus some of these maybe big tech companies that have just incredible, incredible business models. And the other thing too that we talked about is management doesn't have a ton of skin in the game and it's not the best compensation structure in the world.

1:19:25And so to me, whenever I'm sort of on the margins, like quibbling about whether I want to invest in a company or not, that tends to be the thing that either pushes me over into being bullish or pushes me into saying I'm happy to kind of watch it at a distance, which is how I feel for now, I think, with F1 Group.

1:19:42Preston Pysh:Yeah, no, that's fair enough, Sean. I don't disagree with pretty much any of your contention. I guess for me, part of why I would probably get a little more interested, again, if it got down that 65 range, I just think their product is really, really good. And again, it's likely to continue getting a little bit better into the future. But yeah, I agree with you. I mean, the large amount of debt, the low insider ownership, even honestly understanding some of the dynamics between the teams and F1 and the FIA gets a little convoluted. And then like you, I'm not a huge F1 fan. So maybe if I was a fan and really, really started getting interested in a lot more of those areas, I'd be able to understand them at a much deeper level and maybe come up with some sort of insight that would give me a little more competence, I guess, in making some sort of capital allocation decision regarding the business.

1:20:28Preston Pysh:So I'm kind of with you here. I'm fine taking a pass for it, maybe another F1 movie comes out that we both really like and spurs us to become huge F1 fans. So we can't rule that out, but yeah, we'll see how that plays out. All right. Well, it's been fun. And on that note, I think we'll go ahead and wrap up today's episode. And before we do, I'll leave you with another quote from the legend himself, Warren Buffett, relating to F1 Group's business model. So here we go. The key to investing is not assessing how much an industry is going to affect society or how much it will grow, but rather determining the competitive advantage of any given company and above all, the durability of that advantage.

1:21:10The products or services that have wide sustainable modes around them are the ones that deliver rewards to investors. And so I think this captures F1 perfectly. It's not about whether racing is the hottest sport in the world, but rather the durability of its exclusive 100-year contract, its pricing power through multi-year escalators, and its ability to generate solid cash returns with minimal capital reinvestment. So the moat is what makes it investable, not the industry growth rate. So we'll see you all next time.

1:21:53Kyle Grieve:podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice.

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