Red Bull F1 Racing star and powerful driver who was declared not for sale has finally been sold for unresisting currency worth billions of…
Red Bull F1 Racing star and formidable driver, who was first listed as not for sale, was eventually sold for an incredible sum of money—billions of dollars.
According to a new study, energy drink juggernaut Red Bull has invested over $1.2 billion in its premier Formula One racing team in the last ten years.
But with the controversy over new engine restrictions that is enveloping the race series, its investment may be in peril.
Red Bull has been a part of Formula One for almost 20 years. It first supported and owned a portion of the Sauber team before switching to support its faltering rival Jaguar. When Red Bull purchased the UK-based Jaguar team from Ford in November 2004 for just $1, its relationship with Formula One (F1) really got going. There were worries at the time that it wasn’t doing this to win races but rather to advertise its wares. It was the furthest thing from the truth possible.
Red Bull has hired almost 300 more employees since acquiring the team from Jaguar, for a total of 658 in 2012—the most recent year for which financial filings are available. There were three hires that held greater significance than the rest.
One of the most accomplished designers in Formula One, Adrian Newey, was recruited by Mr. Horner and drawn to Red Bull Racing by the prospect of an estimated $10.2 million in yearly compensation. The trio was completed in 2009 when German driver Sebastian Vettel, then 21 years old, joined him.
Mr. Vettel won four races for Red Bull Racing in his debut season with the team, and the following year he became the youngest-ever F1 champion. Since then, he has taken home the crown annually and gone on to shatter record after record. With 18 pole positions under its belt, Red Bull Racing had the most of any team in a season in 2011. Mr. Vettel became the youngest-ever triple champion in Formula One history in 2012, and he won the championship three races before the season ended last year.
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For example, one notable increase is quite sharp. When Mr. Vettel arrived in 2009, Red Bull’s budget increased by 29.5% to $170 million at that same time. Since then, as the team has improved upon its winning formula for races, it has marginally diminished. But that doesn’t convert into explosive revenues.
Three primary sources of income are available to Formula One teams: prize money, team owners, and sponsorship. Red Bull Racing was compensated for winning the 2011 championship with an estimated $94.2 million in prize money the next year and $30 million for agreeing to a new Formula One racing deal. It also received $91 million from its 34 partners, with luxury car maker Infiniti thought to be the largest payer. This resulted in a $374.6 million total income for the club, but because of its $367.1 million expenses, its profit margin was barely positive. It ended up with a $7.5 million net profit, which is actually pretty good for an F1 team.
Research and development is one of the single largest costs for a Formula One team, and at Red Bull Racing, it has skyrocketed in tandem with owner investment. The group invested $21.4 million in R&D in 2005; by 2012, that amount had nearly doubled to $122.3 million. Success did the same.
A team’s value is increased by on-track success, which benefits the owners financially when it comes time to sell. Because brands are willing to pay more to be associated with a champion, it also improves a team’s potential revenue from sponsorship.
Red Bull gains from increased brand awareness. The most noticeable emblems are found on the vehicles of Red Bull Racing and its Italian sibling F1 team, Toro Rosso, which is also owned by the beverage business. Red Bull’s anticipated cost to purchase a comparable level of on-screen exposure, or its advertising value equivalent (AVE), was $283.2 million in the previous year. This accounted for 11.9% of the total gain made by all the teams and was the biggest of any brand in Formula One.
Red Bull has made an estimated $1.6 billion in AVE from Formula One in the last five years alone, more than making up for the $1.2 billion it has invested in Toro Rosso and spent on Red Bull Racing. The exact amount that Red Bull has invested in Toro Rosso since purchasing the team in 2005 is not disclosed in the team’s financial statements; however, it is estimated to be in the neighborhood of $484 million.
Red Bull giving up may seem unlikely given this amount of return. Nevertheless, since the AVE does not reflect cash earnings and team expenses are actual costs, it is technically losing money on Formula One. But for Red Bull, which sold 5.2 billion cans in 2012 and set a record revenue of $6.7 billion, up 15.9% from the year before, it’s a drop in the ocean.
Dietrich Mateschitz, the CEO of Red Bull, claims that the company has ten times more money invested in marketing than Formula One racing. But it wouldn’t make sense for Red Bull to stay in the series if F1 couldn’t continue to satisfy its demands. The end of its winning run could be the trigger for this.
The 2.4-liter V8 engines that had been used in Formula One since 2006 have been replaced with 1.6-liter turbocharged V6 engines this year. The abrupt discontinuation of the trademark high-pitched screaming sound that made Formula One famous has infuriated a number of fans and industry insiders. Nonetheless, because the new engines are smaller and subject to rules limiting the fuel flow to 100 kg per hour, they are more environmentally friendly.
The new rules have proven difficult for Red Bull Racing’s engine provider Renault, and Mr. Vettel’s best finish in the two races held thus far was a third-place finish in the Malaysian Grand Prix. Daniel Ricciardo, his teammate, was disqualified from the Australian Grand Prix when the Fédération Internationale de l’Automobile (FIA), the sport’s governing body, stated that his engine’s fuel flow rate exceeded the limit. On April 14, the team will file an appeal, which has Mr. Mateschitz fuming.
When asked if it would have an impact on his long-term commitment to Formula One, Mr. Mateschitz responded, “From our perspective, there is a clear limit to what we can accept,” to the Austrian newspaper Kurier. “The reality is that since the start of the winter tests, the federation’s sensor has provided erroneous values,” he continued. We have evidence that we stayed within the bounds.
According to Mr. Mateschitz, the engine modifications had damaged the series, and something needed to be done to fix it. He declared, “Formula One should once again be the pinnacle of discipline.” “It’s not meant to break fuel consumption records or allow whispering during a race.”
Bernie Ecclestone, the CEO of Formula One, has expressed his agreement and stated that he is pushing for the engines to be louder. A lot could be on the line.
Mr. Ecclestone stated, “I wouldn’t bet my money he won’t leave the sport,” in response to the question of whether he thinks Mr. Mateschitz was sincere about his threat to resign. He has the wealth and authority to decide for himself. Although giving up Formula One would be one of the hardest decisions he has ever had to make, Red Bull would undoubtedly save a significant amount of money if he did so.
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