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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP815: Lyn Alden on Why Fiscal Dominance Changes Everything
01:08:27
Stig Brodersen and Lyn Alden discuss fiscal dominance, gold, energy, the U.S. dollar, inflation, and what it means for investors.
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- [00:01]
Sean O'Malley
You're listening to tip.
- [00:03]
Kyle Grieve
Imagine a company that owns the exclusive commercial rights to a sport with 800 million fans globally. Not the teams, not the athletes. Just the right to broadcast, promote and monetize every single race for the next 86 years.
- [00:16]
Daniel
That company is Formula One Group, a subsidiary of Liberty Media. And here's what's wild. They only host 24 events per year, fewer races than most sports hold games in a single season. And yet they're generating billions of dollars in revenue with over 24% free cash flow margins.
- [00:35]
Kyle Grieve
But what really caught my attention is just how durable this business actually is. While most investors were sleeping on it, F1 has compounded revenue at 70% annually since Liberty acquired it in 2017, while being a relatively capital, light business.
- [00:49]
Daniel
And today, we'll find out whether a 75 year old sport that most North American investors completely ignored until Netflix's Drive to Survive series came out can actually deliver the kind of returns that justify owning it at current prices. Or whether you need to wait for Mr. Market to panic again for the math to work.
- [01:12]
Sean O'Malley
Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean o' Malley and Kyle Grieve.
- [01:58]
Daniel
Hey, folks. Today we continue our quest of hunting for intrinsic value by looking at one of the most popular sports in the world. No, we are not talking about soccer, cricket, or tennis. We are going to look in depth at F1 racing, which is a sport with over 800 million fans worldwide, which is just absolutely mind boggling.
- [02:21]
Kyle Grieve
That's right, Sean. I mean, that stat just blew my mind as well. But there's other things that also blew my mind. So first is that this is a sport that hosts an absurdly low 24 events a year while generating billions of dollars in revenue not only for its owner in Liberty Media Formula One, but also for the individual teams that are involved in the races. Number two, the events are ginormous. You can think of each of them as basically being their own super bowl, but instead of it being just once a year, you get it two dozen times. And some of these events have also massive draws of over 450,000 in their live audiences. And the next you Know, the sport has this extremely deep and rich history going all the way back to 1950, which really makes it a sport that has these incredibly loyal friends that stick around for a lifetime. And then lastly, you know, although this isn't a new sport, it just continues to expand incredibly rapidly. So this was an interesting fact. Its fan base has grown by over 63% cumulatively since it was acquired by Liberty Media in 2017. Now, another stat that caught my attention was just simply the value that F1 has delivered under Liberty's ownership. The numbers simply don't lie, and they've exceeded the index returns by a nice margin here since the end of 2020.
- [03:25]
Daniel
I'm honestly not sure I'd ever heard of F1 until a few years ago. And I don't know if that's embarrassing to admit, but it really came on my radar when that Netflix series about it came out. And then suddenly it was like everybody was a fan of F1. It felt like. And then you had the Brad Pitt movie on F1, and that probably taught me at least some of the basics of how it works. And then I guess in another way, it's something I've kept an eye on from a distance as a Ferrari shareholder, since F1 Racing is such an important part of their identity as a company. But the thing is, after having studied, really, a number of publicly traded sports companies in the last few years, from the New York Knicks and Rangers to Manchester United, what does stand out to me about F1 is that unlike many other sports leagues and franchises, it generates a ton of free cash flow. I mean, over 24% cash flow margins.
- [04:14]
Kyle Grieve
That's right. So, Sean, I will admit to our audience as well, I'm not a huge F1 fan. I think my first really big introduction to it also was from the F1 movie with Brad Pitt, which was fantastic. But, you know, getting back to kind of sports teams here, you know, I've always had a low opinion of sports teams as an investment, simply because the sad fact is many of the sports franchises, they're just simply poor business decisions, at least in North America. You know, here owning a sports team is basically just a status symbol. It doesn't really. You're not really going to derive cash flow out of that asset. So I remember briefly looking at the sale price of the Boston Celtics and the National Basketball association as a big fan of basketball, as I know Sean is as well. So it ended up selling for $6.1 billion. Now, according to Forbes, in 2024, they did just 450 million in sales with 116 million in operating income. So this means the purchase price was over 13 times revenue and 52 times operating income. Now, I don't know about you, Sean, but this doesn't really exactly scream out to me that it was a great price. Especially when you consider that this isn't going to grow like some sort of early stage SaaS business that you can still buy for cheaper multiples than it went for.
- [05:19]
Daniel
No, it's not a screamingly good price. And that was like the same thing I found when I looked at Madison Square Garden sports company ticker msgs. Really, the only investment narrative to be had is based on this hope that as a trophy asset, you can sell sports teams for higher and higher prices. And if you can then get access to the ownership rights at maybe a discount to what somebody like Forbes would estimate the valuation to be, you know, for the next billionaire who wants to come and buy it, well, maybe there's some upside there, but that is not how you and I think about intrinsic value, at least in the sense of intrinsic value being derived from future cash flows. There's a pretty big disparity between the valuation implied by the prices paid for trophy assets and the actual intrinsic value based on cash flows. And so, yeah, I think these sports teams, at least in North America, carry very hefty premiums, often, as you kind of alluded to, and they're usually valued on revenue multiples that would just make any investment completely unattractive for cash flow purposes. But not to get off track, because F1 looks like a business with a very good franchise behind it. It does, however, have somewhat of a complicated capital structure. So why don't we start there?
- [06:31]
Kyle Grieve
That's right, Sean. It definitely does. And for any listeners who followed my episodes on John Malone, you're probably not surprised at all by this that it has a complicated capital structure. So John Malone, who was outlined in Thorndike's exceptional book the Outsiders, is just simply one of the best executives walking the earth. But he also understands these complex deals probably better than anybody. So it's really just not that much of a surprise that F1 started simply as a tracking stock. So this means that it used to be impossible to own F1 outright. So basically, its parent company, Liberty Media, owned it outright along with several other assets. Now, the reason they use this tracking stock is basically to allow investors to view the performance of individual assets under the Liberty Media name. So up to the end of 2025, if you bought F1's tracking stock, you were still A shareholder in Liberty Media. Now to further complicate things, the tracking stock actually had three symbols. So it had Fiona, very weirdly spelled F W O N A which has some voting rights. It had Fuan B which were basically shares that were just held by insiders, which had large amount of voting rights. And then you had fwonk, which had no voting rights. Now I'm going to say right off the bat that I'm not really a fan of tracking stocks. Well, I really do think it's an interesting idea to do them for conglomerates, maybe just to better illustrate its assets on an individual basis. My problem is simply that there's a really good chance that I'm going to like the tracking stock a lot more than the parent company. And therefore, even if I like the tracking stock, there's essentially no world where I'm going to actually invest in it, as it would require me to understand the rest of the assets under the parent stock as well. But in this case I appreciate it very much because Liberty basically cleaned up the share structure in December of 2025. And now if you own Formula One Group via Liberty Media, you just own two primary entities in F1 Group and MotoGP.
- [08:20]
Daniel
So I think we should linger on this idea of tracking stocks because it's not something that I was otherwise familiar with. But after reading up on it a little more, my understanding is basically just to put it again that these are shares issued by a parent company to mirror the financial performance of a subsidiary and then the parent company retains ownership and control. But the tracking shares give direct exposure to investors to that high growth segment. And so anyways, that's what we saw with Formula One Group and this is something you used to see much more often in the 1990s and today I think it's much more common to just do spinoffs where a segment is free to trade publicly as an independent company. So Ferrari, for example, was actually a spinoff from Fiat Chrysler. But before I get lost in another Ferrari tangent, I want to focus on the business behind Formula one sports franchises. Intuitively I think is obvious to people have a number of different ways of making money. But let's go through, you know, what are those primary factors? Is it ticketing, is it merchandising, is it TV rights, is it all of the above? What really moves the needle?
- [09:25]
Kyle Grieve
That's right, son. So they definitely have a multitude of different ways of generating cash. So Formula One Group basically holds the exclusive commercial rights to the Federation International de la Automobile FIA and the F1 championship. So this gives them access to revenue from three primary sources. So the first one's race promotion, which makes up about 27% of revenue. Second is media rights, which makes up 31% of revenue. And then you got sponsorship, which makes up 22% of revenue. The remainder comes from other revenue segments, which I'll detail here shortly. Now, F1 Group has the exclusive rights on a 100 year contract which ends in 2110. So this is a business that is just basically very hard to disrupt. As long as you think that F1 is going to exist going forward, we've
- [10:09]
Daniel
got another 84 years before we have to worry about the contract rolling over. And I think even in the most academic equity research papers about intrinsic value and internal value assumptions, I don't think I've ever heard anyone seriously underwriting risks that are eight decades away from the current stock price. So yeah, equity duration is usually something more like three decades. With the point being, I think it is safe to say we don't need to worry too much about this hundred year contract. And yeah, that's a pretty valuable asset for them to control. But it is an important thing to understand. So let's go through these revenue items for F1 in more detail.
- [10:44]
Kyle Grieve
Yeah, so let's start with the race promotion segment first here. So F1 grants the right to host, stage and promote F1 events. Now these are contract based generally on three to seven year contracts. Now, to the benefit of the F1 group, these contracts also have an annual fee escalator to track the consumer pricing index, which basically means that they can increase prices by up to 5% per year, which is excellent as an inflation hedge, especially in times like we're having right now. Now the customers in this segment are usually owners of racing circuits, local and national automobile clubs, special event coordinators, or even governmental bodies. The race promoters generate revenue from ticket sales, concessions, secondary hospitality and sponsorships. Now this is really nice for the F1 group as they actually end up outsourcing a lot of the hard work that's involved in selling tickets to these events to other people. Then they just take their cut of profits. Next up is media rights. So basically, anytime F1 is broadcasted on TV or some other content platform, they're simply just getting a cut. This includes literally everything, not just races, but also practices, qualifying sessions, interactive TV and digital services, repeat broadcasts, and even highlight reels. So similar to the race promotions, these deals are also on multi year contracts, generally lasting a little bit shorter at three to five years. Now, to put it simply, basically anytime Anyone watches anything regarding F1, F1 just collects a toll fee. So there are three distribution methods that someone would take to do this. So the first is through broadcast tv, which is kind of traditional. So if you have a cable package, F1 content may be available to you. Second is premium and pay per view broadcasts. And third are through F1TV, which is their subscription based service that includes things like races, documentaries, TV shows, and even archived footage. Now lastly, here are sponsorships. Since F1 has such a large customer base, you can probably imagine just how powerful it is for potential Advertisers. So for F1 Events, F1 Group sells sponsorships for trackside advertising and race title. Sponsorship. Sponsors can even achieve status as global partners and or official suppliers of F1. And contracts for this business segment range from about three to five years and they're on a fixed term agreement.
- [12:49]
Daniel
The great thing about ad revenue is that it usually comes at a very high margin. Right? You need some salespeople to nail down the deals, but a good enough product sells itself and Efflon absolutely falls into that category. But you also don't want to be too dependent on advertising. Ad budgets are one of the first things that get cut during economic downturns. Right? You'd rather cut your ad budget than have to lay off 10% of your staff. And so in pretty short order sometimes the rates that advertisers are willing to pay can fall dramatically. So it can be a very cyclical business. Which is why I actually think it's very nice that F1 has these multi year fixed contracts in place. And so maybe they're giving up some upside in terms of the maximum possible price that they could charge for sponsorship rights in the good times. But they're also importantly hedging their downside. So I really like how the F1 group has set itself up for success here. And each of its revenue segments are recurring in some way. With contracts spanning multi year periods like I mentioned. And then with F1 having been around since 1950 and you have this expanding customer base, it's hard to see how the business won't continue to trend toward growth. Right. It certainly doesn't seem to be at risk of decline. Different forms of racing have been popular since the Romans and earlier, I'm sure. So there's not a lot of terminal value risk here where I would be worried about the long term popularity of the sport. At this point, it's pretty safe to say F1 is not a fad. But as we're thinking about long term risk, let's Just talk about moats. How does F1 defend itself against potential competitors? And are there any potential competitors?
- [14:25]
Kyle Grieve
Yeah, so this is the fascinating part about the business. So, like you, Sean, I'm a huge admirer of Google. But one of the risks with Google, which I know you aren't too concerned about right now, and neither am I, is just how AI is going to disrupt Google's search function, which is directly related to its ability to advertise to such a large audience. Now, where F1 defers from Google is simply that its customer base is very sticky. And given how the customer base is, you know, based on a sport, AI disruption is simply just not really a concern for losing audience members. So let's get started with arguably their biggest moat, which is, I think, corner resources. So, simply put, they're the only entity out there with the rights to F1. Nobody else can touch that. And they hold this right, like I said, until 2110. This contract gives them F1's IP and commercial rights. Now, this is a resource that would be highly sought after by pretty much any competitor, but it's completely unavailable with little to no chance that F1 group, I think, will ever give it up. Unless, you know, they got the right price. And next up is brand. So F1 has a 75 year track record. It's a sport with a long and storied path, with a number of very intriguing characters. It's an interesting sport because not only do the racers make the sport, but because the teams have so many people working behind the scenes, there's just so many people such as engineers or even the team owners themselves, which make for great storytelling that F1 can then monetize. And F1 has engineered a premium feel to its events, which helps attract a lot of high net worth individuals, which is also very, very good for its pricing power. Now, F1 has some degree of network effects as well. So it's no surprise that during the time that F1 group has been in existence, its viewer base has expanded quite quickly. And not only has it expanded its user base quickly, but it's also monetized its fan base at a very high rate, compounding revenue at about 25% per annum since 2020. Now, a big reason for this is that as more people consume the product, the more content can be created, which then attracts even more people. So we've seen this recently with the F1 movie, which Sean and I already discussed, as well as that Netflix docu series called Drive to Survive.
- [16:22]
Daniel
Yeah, I think with sports, the thing is, in Theory, they're competing with all forms of entertainment. Right. Anything that takes eyeballs is a competitor. But also, I don't know how you could directly compete in any kind of meaningful way with F1 given the lengthy contract they have and just the entrenched popularity of the sport. But if I were going to play devil's advocate here, I do know that F1 has a long history of deal making and things have changed a lot in the sport over the years. And there's also a lot of different entities at play here and different agreements between the FIA and team owners. So how about we unpackage that a bit more as we try to understand, you know, what really the competitive picture is and how it all fits together.
- [17:05]
Kyle Grieve
Yeah, so there really are a lot of parties here. So from an outside perspective, I think the deal they have now seems to be in the best interest of everyone involved. So F1 has at times been very, very overly convoluted. For instance, there's been times where certain teams have threatened to just not show up at events. So obviously this would be very harmful to the promoter if, for instance, let's say, you know, Ferrari decided to skip an event as they have this huge and long history even outside of F1. So former used car salesman turned billionaire Bernie Ecclestone was a person who really brought the teams together and brought cohesion to the sport. So someone argued that he made himself rich at the sports expense. But, you know, given how much the sport has grown, I'm not sure that there's many owners that are complaining too loudly about that today. Now, just like many other great businesses that we cover on the show, regulation seems to be a similar concern. And F1 group, unfortunately is no different. So from 1981 until 2012, there were successive Concord Agreements which governed the relationship between F1, the FIA and the teams. Now, after this agreement expired, F1 entered into individual agreements with each team. This guaranteed each team's participation in the F1 championship until the end of 2020. Now, there was a new Concorde Agreement signed in 2020 which extended it until 2025. Now, from what I can tell, these Concorde agreements are negotiated every five years. So the 2026 agreement was just signed last year, and I expect to continue seeing these agreements signed in successive five year periods. The Concorde agreement's function is basically to maintain the participation of the F1 teams at the F1 championship events, as well as providing a prize fund for the teams based on their performance in the Constructors Championship. Now, for anyone wondering what's the difference between the F1 championship and the Constructors Championship because I didn't know this before. So the F1 championship is basically individual based. So the single driver with the most points wins the F1 championship. Now the Constructors Championship is more based on the team. So each team has two drivers and the team with the most points from both drivers wins the Constructors Championship.
- [18:59]
Daniel
I don't know, you're starting to sound like an expert on F1 to me, Kyle. But there's lots of layers of agreements here that you have to wrap your head around. It's little head spinning. And I'm not sure I have a ton to really add without being so well versed on F1 history. But it is interesting because in a way it reminds me of what we've seen in professional golf. The PGA Tour had a monopoly for a long, long time. And it just seemed self evident that it was in every golfer's best interest to continue competing on the PGA Tour because you'd be losing out on money if you didn't. And so all the top players played the PGA and it created this flywheel that is self reinforcing. And so that makes it nearly impossible for some sort of upstart league to attract the top talent that creates a flywheel big enough for them to start pulling business from the pga. Unless that upstart league has functionally unlimited capital backing it and is not sensitive to economic returns. And people might know where I'm going with this. Not to spoil anything, but that's exactly what happened when Saudi Arabia came in and poured hundreds of millions of dollars into building the LIV Golf Tour as a competitor to the pga. And you know, they actually had a ton of success for a period of time. You had a number of the world's biggest golfers jump ship to join liv, where at least in the beginning they could make much, much more money. Right? The Saudis were waving mind numbingly big checks over these guys heads. And long story short, the live is now starting to implode. It never really got to a critical mass. And 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 kind of agreements and pull talent away. And 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. Right. If oil money was not enough to disrupt the PGA long term, then I can't really fathom who could afford to do so. Right. 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?
- [21:39]
Kyle Grieve
Yeah, 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. 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, you know, they're adding back the usual suspects to operating income, stock based compensation, depreciation, amortization, and impairment in 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, you know, a lot of these seem like real costs to me, similar to ebitda. 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 depreciation and amortization, which is likely to continue to grow. And then the incentives for the Concorde 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 cash flow, and again, you know, 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 cash flow. The F1 group is probably just going to continue using it because obviously if banks are willing to give the 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 cash flow 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.
- [24:02]
Daniel
I gotta admit, I've heard a lot of ad back jargon. OIBDA is a new one for me. But just looking at the add backs that management includes for metrics like EBITDA, or even just reporting EBITDA in the first place, since it's a non GAAP 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? It'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 add 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. And 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?
- [25:18]
Kyle Grieve
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. 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. Now, while F1TV 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, you know, 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, you know, incremental revenue growth over time.
- [26:51]
Daniel
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. I 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. I 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?
- [27:56]
Kyle Grieve
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 It'd be the last one to cut if I had to make a choice. But let's get back to F1TV here. So I personally I'm not a subscriber to F1TV, but I do have a couple 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 Jiu Jitsu matches, which is something I have a big affinity for, 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. 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 F1TV 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.
- [29:35]
Daniel
Well, it sounds pretty promising all around. And the company's 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?
- [30:03]
Kyle Grieve
Yeah, I couldn't agree more with you on that debt aspect, Sean. But for listeners that follow businesses that I really like, you know, 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 cash flow. 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 and as I mentioned earlier, it's now below 4 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 and you know, 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, pretty easy for them to pay it off given, you know, 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 Moto GP acquisition. So, provided the Moto GP acquisition works out well, I think they're in a pretty good spot. 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.
- [31:49]
Daniel
Debt 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 Buffet that you've probably heard, and 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. Too 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?
- [32:28]
Kyle Grieve
That's correct, Sean. So F1 announced on March 13 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. So, in 2025, race promotion generated over a billion dollars, but the races aren't all built the exact same. So, you know, 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. Now, luckily, F1 is well diversified on a global scale, so, you know, they have events in Canada, Japan, the U.S. 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 canceled 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. Now, unlike Bahrain and Saudi Arabia, they have a lot more time to prepare.
- [34:08]
Daniel
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 CAGR 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?
- [34:36]
Kyle Grieve
Yeah, I think this is where the business gets really, really interesting because, you know, 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. 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 4th and F1 and 6. 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. But, you know, there's growth opportunities going around all over the place. Ones I've seen touted are Africa and expansion in Asia. So that means, you know, 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. Next is scaling their Las Vegas F1 event, which is quite new. It just started in 2023. They're going to probably be able to continue scaling F1TV and their subscribers, as well as growing their content library. And then lastly, you have just sponsorship pricing growth. So, you know, I'm really a fan of businesses that have multiple growth levers simply because, you know, 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. 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 accretive 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.
- [36:43]
Daniel
I want to double click on that fan attendance. How sticky are the events that F1 puts on?
- [36:50]
Kyle Grieve
Yeah, Sean, they're very sticky. So 18 out of the 24 races are actually contracted to 2030 and beyond. 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 grieve 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. 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 U.S. 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 U.S. 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.
- [38:32]
Daniel
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, you know, some temporary boosts with the Netflix documentaries and with the F1 movie. And I 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 Indy car racing, and then you have the less popular ones that still draw crowds, like drag racing, the World Endurance Championship. You 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.
- [39:29]
Kyle Grieve
Yeah, 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, you know, if you look at F1 through an extremely narrow lens, it appears like, yes, of course, there's no competition. There's not, you know, 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. And that's their competition. Even if it's, like you said, not even racing. Maybe it's sailing. But, you know, 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. 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 Group's 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. If fans want to watch a product where, you know, 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 Concorde 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.
- [41:38]
Daniel
We've talked about how the business has significantly expanded its customer base since Liberty acquired F1. And 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? Will it shrink? What is the long term trajectory that you see for this industry as a whole?
- [41:59]
Kyle Grieve
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 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 is 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. 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. But, you know, 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. So, you know, 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. They mentioned that if you line these up in a straight line, it would be 5 km 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.
- [44:25]
Daniel
Gosh, that is. That is a lot of carbon emissions. But, you know, 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 and being able to monetize their business going forward. So how do you think of this for F1? How strong is the loyalty?
- [44:51]
Kyle Grieve
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. 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 Moat 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. You know, 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, you know, 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. 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 then that they would get from a partnership with F1. So, you know, 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. It's not like, you know, changing where you buy your groceries from.
- [47:13]
Daniel
You know, the good and bad thing about sports is that the loyalty can be pretty blind. On the one hand, there are some fans that are going out to watch almost no matter what, and 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 D.C. 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 D.C. remains a very strong and loyal sports markets for our teams there. So, you know, 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 are 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, really, 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?
- [48:19]
Kyle Grieve
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. We 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, you know, this masterful executive and capital allocator are basically behind him. 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. Now, according to F1 Group's proxy, John Malone's own 97 of the F1B shares, and these shares give him 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 a thousand 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. 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.
- [50:18]
Daniel
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?
- [50:50]
Kyle Grieve
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 CEOs, 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. 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 oibda, so I'm not going to beat the drum on that one anymore. 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 and 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. 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, you know, 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, 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 you know, it would appear compared to some of these deals it's not quite as egregious as when you first see it. Overall, you know, it's not my favorite, I'll admit that, but I at least appreciate the long term vesting 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.
- [54:06]
Daniel
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. And 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?
- [55:12]
Kyle Grieve
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 cash flow, 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 1/2 percent. 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. But the problem is it's really tough to evaluate the Moto GP 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 cash flow 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. 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 normally use Buffett's rule of one to evaluate management's capital allocation. But since Derek Chang is, you know, 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 at three to five years when I think this number becomes much more relevant. 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, you know, they could also search for new M and A opportunities. So I'm not expecting them to buy back too many shares or even do a dividend anytime soon either.
- [57:19]
Daniel
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 fraction of what they did with F1, then the MotoGP acquisition will likely be very accretive to shareholders. But what exactly did they get with this acquisition? What were they paying for?
- [57:40]
Kyle Grieve
Yeah, so the MotoGP acquisition, if we use the 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. A further 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. You know, I think they're probably going to follow a pretty similar playbook to F1 with MotoGP, you know, focusing on expanding its reach into the US markets, which is very, very lucrative and so far has been, as far as I know, very underpenetrated specifically for Motog. 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 2 times revenue and 22 times cash flow. But you know, 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 cash flow.
- [58:49]
Daniel
Well, so 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's anything particularly attractive about Warner Brothers existing business and cash flows. And 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 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. So what explains that? How do you think about that?
- [60:00]
Kyle Grieve
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 and 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, you know, kind of a positive. And like you said, it just simplifies things. You just get Netflix as is. So, 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. 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, you know, this was a kind of like a one time fee, but just to buy the land that they have that race on cost $241 million. 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 you know, I think that's probably a pretty good estimate of maintenance capex going forward. And again, you know, 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 with that they did with Las Vegas and maybe some other venue. Maybe it's in the U.S. maybe it's somewh. 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. But for now, maintenance capex is only 1.5% of F1 Group's consolidated revenue, making this a pretty capital light business.
- [62:23]
Daniel
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.
- [62:40]
Kyle Grieve
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 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%. KEGR 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. Now, this yields a 2030 price of about $67, applying a 13 times EV to EBITDA multiple.
- [63:34]
Daniel
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 bear scenario to play out?
- [63:45]
Kyle Grieve
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 Group's bargaining power and they're forced to give up a larger share of revenue back to the teams. 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, you know, let's say global economic weakness. Fourth is that the MotoGP integration just simply stumbles. Cross promotion between F1 and MotoGP failed 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. 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.
- [64:56]
Daniel
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?
- [65:13]
Kyle Grieve
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 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. 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, meteorites 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. 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 cash flow. So in this scenario, I get a 2030 price of about $240 on a 27 times EV to EBITDA multiple. Now the assumptions here are first, the Concorde renegotiations which will occur somewhere in 2029, allows F1 to cap or maybe even reduce team payouts as a percentage 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 F1TV 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, cross promotion synergies kick in and MotoGP EBITDA increases to the 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 cash flow generation and margin expansion. I assume net debt leverage drops to approximately one times by 2030. Now this is going to open up additional opportunities maybe for M and A as well. You know, 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.
- [68:24]
Daniel
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 concrete 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. But 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 yeah, so one
- [69:04]
Kyle Grieve
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 edit 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 used 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. 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% KEGR. But I 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, you know, 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. You know, the business I think gets really, really interesting when it gets below $70, 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 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.
- [70:42]
Daniel
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. I 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 docu series. And you know, it's also great when you can find businesses with lots of reinvestment opportunities. And that's difficult with sports leagues and franchises. It's, you know, it'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. And so to me, whenever I'm sort of on the margins 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 watch it at a distance. Which is how I feel for now, I think with F1 Group.
- [72:19]
Kyle Grieve
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 to 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, you know, 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. So I'm kind of with you here. I'm fine, you know, 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.
- [73:19]
Daniel
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 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. The products or services that have wide sustainable moats 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.
- [74:20]
Sean O'Malley
Thanks for listening to tip. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This 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 principal 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. References to any third party products, services or advertisers do not constitute endorsements and the Investor's Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.