It has emerged that Formula One’s owner, Liberty Media Corp, was questioned by the Securities & Exchange Commission (SEC) in August last year over fees it receives in connection with broadcasts of the auto racing series in Syria and Sudan.
Liberty, which is listed on the Nasdaq with the ticker FWONK, bought the rights holder of the F1 World Championship for $4.6 billion in January last year. It raced into the headlights of the stock market regulator the following month when it filed its 10-K annual report.
This stated that F1’s key broadcasters include beIN Sports in the Middle East which has a presence in Sudan and Syria. It fuelled questions from the SEC which were sent in a letter to Liberty’s chief financial officer Mark Carleton on 8 August 2017.
The letter said that “Sudan and Syria are designated by the Department of State as state sponsors of terrorism, and are subject to U.S. economic sanctions and export controls.”
It asked Liberty to describe “the nature and extent of any past, current, and anticipated contacts with Sudan and Syria, whether through subsidiaries, affiliates, distributors, partners, customers, joint ventures or other direct or indirect arrangements. You should describe any services, products, information or technology you have provided to Sudan or Syria, directly or indirectly, and any agreements, commercial arrangements, or other contacts you have had with the governments of those countries or entities they control.” Liberty had a robust response to this.
Last year 33.7% of F1’s $1.8 billion in revenue came from television broadcasters. It was driven by 54 contracts but they aren’t all the same as some cover a much wider area than others. F1 is screened in a total of 200 territories and although they include Syria and Sudan, both are part of a Television Rights Agreement (TRA) which covers a broader region.
Crucially, the TRA is between F1 and a distributor which then arranges coverage in countries within the region. It means that Liberty isn’t directly receiving money from Syria or Sudan and Carleton says that this puts the brakes on any suggestion that the company or F1 has a relationship with them.
In a reply to the SEC sent on 28 August Carleton said that “neither Liberty nor any of its subsidiaries has had any direct contacts with Sudan and Syria, and any indirect contacts have been minimal, arising only from Formula 1 following the completion of the acquisition.
“Neither Liberty nor Formula 1 has business offices or ongoing operations, including holding races or hosting events, in Sudan or Syria. Neither Liberty nor Formula 1 has ever had any form of agreement, arrangement or other form of contact with the governments of Sudan or Syria, or, to their knowledge, entities those governments control (except that a Dutch subsidiary of Formula 1 filed for extensions of its international trademark registrations in Sudan prior to the acquisition of Formula 1 by Liberty).”
It is a different story with auto racing’s regulator, the Fédération Internationale de l’Automobile (FIA), which, according to Liberty’s filings “owns the World Championship”. It has had contact with Syria for a number of years and, as this news release shows, in 2010 the FIA’s president Jean Todt visited the country and “lunched with the Syrian Minister of Tourism.”
Not having contact with Syria isn’t the only reason Carleton gave in his response to the SEC. “The business of Formula 1, including its media and broadcast operations, is conducted by entities that are not considered U.S. persons subject to the current sanctions on Sudan and Syria that are administered by the Office of Foreign Asset Control (‘OFAC’). If, however, Formula 1 were to be subject to those sanctions, Liberty and Formula 1 believe that the arrangements…would be permissible pursuant to the exemption from OFAC sanctions relating to ‘information’ and ‘information materials.’”
Carleton added that “Formula 1’s programming is presently broadcast to viewers in Sudan and Syria under two TRAs covering large territories across Africa and/or the Middle East that include Sudan and/or Syria within their respective coverage. One TRA is with a sports content distributor incorporated and located in Monaco under which the distributor has the right and associated obligations to distribute live and delayed Formula 1 content to broadcasters within an agreed territory.
“One such broadcaster is beIN, which includes Sudan and Syria in its covered territory. Pursuant to the terms of this TRA, the distributor (not Formula 1) selects and contracts with the broadcasters as principal. Under the TRA, the distributor pays a fixed annual fee to Formula 1.
“The second TRA is with a South African pay TV operator, SuperSport, under which SuperSport has been granted a pan-regional license by Formula 1 through which it distributes Formula 1 content on its channels serving the entire sub-Saharan Africa region, including Sudan. Under this TRA, SuperSport pays Formula 1 a fixed annual fee. Liberty is not a party to, nor is it involved in the management of, either of these TRAs.” The response to the SEC’s next question revealed that they are far from blockbuster deals.
It asked Liberty to disclose “the materiality of any contacts with Sudan and Syria…and whether those contacts constitute a material investment risk for your security holders. You should address materiality in quantitative terms, including the approximate dollar amounts of any associated revenues, assets, and liabilities for the last three fiscal years and the subsequent interim period.”
The SEC added that “various state and municipal governments, universities, and other investors have proposed or adopted divestment or similar initiatives regarding investment in companies that do business with U.S.-designated state sponsors of terrorism. You should address the potential impact of the investor sentiment evidenced by such actions directed toward companies that have operations associated with Sudan and Syria.” Carleton insisted that Liberty isn’t one of them.
“Liberty does not believe that the minimal contacts with respect to Sudan and Syria described in response to the foregoing comment are material in quantitative or qualitative terms, nor does Liberty believe that such contacts present a material investment risk to its stockholders.”
He added that “at June 30, 2017, the revenue recognized by Formula 1 under the TRAs described above was less than 1% of Liberty’s consolidated revenue. Liberty believes that any future additional revenue recognized due to an increase in the annual fees paid under these TRAs will continue to be immaterial to Liberty.
“In addition, the TRAs described above provide for fixed annual fees and do not provide for the allocation of any portion of the annual fee to a particular country. Thus, any portion of the annual fees under these TRAs that could theoretically be ascribed to Sudan or Syria would be an even more immaterial amount given the large territory covered by each TRA.
“Neither Liberty nor Formula 1 has any present intention to expand its business activities, if any, in Sudan or Syria and, therefore, neither expects its contacts with these countries to have any future material impact on its business, financial condition or results of operations.
“On a qualitative basis, Liberty does not believe that a reasonable person would consider Formula 1’s current limited contacts with Sudan and Syria to have a material impact on making an investment decision…Liberty does not believe that the broadcasting of Formula 1 content in Syria and Sudan…would have any material impact, especially given the absence of any other, more material, contacts, including business operations, in these two countries.”
That may not be the end of the road though. F1 could be on track to face yet more questions about Syria and Sudan as a result of an investigation by Britain’s ITV News TV programme last year. It revealed that money from F1’s governance contract was used by the FIA, to establish a fund which paid grants to an organization in Syria. The organization arranges events which are sponsored by the Assad regime and are used as propaganda by his Tourism Minister who is subject to European Union sanctions.