Investors Leveraging MotoGP for Sizable Payout

04/12/2017 @ 2:09 pm, by Jensen Beeler17 COMMENTS

According to several reports in the financial sector, the investors behind Dorna Sports S.L. are readying themselves for another sizable payout from the media rights holder for the MotoGP and WorldSBK Championships.

Using a bit of financial finesse, the move would see Bridgepoint Capital and the Canada Pension Plan Investment Board (CPPIB) – the two major investors in Dorna Sports – taking roughly €889 million off the books of the Spanish media company, according to Reuters.

As such, today’s news would make this the third time that Bridgepoint and the CPPIB have raided the piggy bank for motorcycling’s premier racing series, having done similar deals in 2011 (€420 million) and 2014 (€715 million).

The money being taken in this scenario is made accessible by what is called a dividend recapitalization, which is a way for investors to raise capital from an investment they own, without having to offer stock or securities from the business in exchange for the money.

The payout made from a dividend recapitalization is generally generated by the company taking on a loan or some other kind of debt, which is then used to pay the company’s investors or owner, in cash.

So, in the case of Dorna Sports, the media rights company will assume a debt from an unnamed creditor, and the money loaned to Dorna will be passed onto Bridgepoint and the CPPIB, to the tune of nearly a billion euros.

The effects of this transaction see Dorna Sports likely burdened with having to make payments on this new debt, which will affect not only the company’s creditworthiness, but also its operating capital for racing series like MotoGP and WorldSBK.

The move is however a strong one for Bridgepoint and the CPPIB, as they will have effectively secured a large sum of money, without presumably being on the hook for its repayment.

These investors also benefit from using Dorna Sport’s credit, and its ability to borrow money against the profits it generates from running racing series like MotoGP and WorldSBK.

This isn’t necessarily a bad thing, if Bridgepoint and the CPPIB can make returns on the €889 million that are larger than the interest rate that Dorna Sports must pay to cover the loan, then the net-deal comes out in the positive.

The downside of course is that Dorna Sports is the entity that gets left holding the bag if the debt amount goes into default (Bridgepoint and the CPPIB would likely bail out Dorna, but aren’t necessarily obligated to do so).

This also means that instead of using its free capital to re-invest into its business, Dorna must instead use those funds to pay down its new debt. Depending on the financial state of the Spanish firm, which is rumored to make thin profits on its sizable revenue each year, this can have consequences of varying degrees.

Welcome to the world of high-level leverage financing in the business world.

Source: Bloomberg & Reuters

  • Dustin Nisbet-Jones

    I guess this is both bad news as a MotoGP fan and good news as somebody who pays into CPP.

    I wonder what this means for the future of MotoGP & WSBK. Surely there will be other investors who would want to shove some money Dorna’s way.

  • Yarhj

    Ah, the old Private Equity switcheroo…

  • Aaron

    So CPP owes part of Dorna, does that mean I can sit in the owners box at races?

  • Michael Uhlarik

    I love motorcycle racing. But I love the CPP more.

  • Wiggysan®

    Expect the 2018 subscription price to increase 10 fold ………

  • keithfinnie

    I pay for with CPP :-)

  • Ayabe

    Gross, as usual.

  • transistorplanet

    Tl;dr – “The payout made from a dividend recapitalization is generally generated by the company taking on a loan or some other kind of debt, which is then used to pay the company’s investors or owner, in cash.”

    I know they have every right to do this (and that it was likely the basis of their investment in Dorna in the first place, which to some extent may itself be responsible for the strong output over the last few years), but as a former corporate transactions lawyer I’ve seen some truly awful decisions made about what constitutes a realistic rate on a debt instrument. I know this is your former field as well, so you’d have a much better sense, but I’d guess that Dorna isn’t big enough to be paying anything less than 5%/yr over 5-10 years, if this is senior unsecured, and given that they’re headquartered in a troubled national economy also dealing with Brexit implications. I’d guess closer to 8-10% per year. If my half-baked guess is anywhere close to correct, that’s a very heavy growth burden to bear for any company.

  • Paul McM

    I don’t get it at all. If I do the math, these two investment groups have pulled out €420 million plus €715 million and now plan to take out €889 million. That’s 2.024 Billion Euros, or $2.148 BILLION dollars. WTF? How much did they actually give Dorna in the first place?

    How is Dorna/Moto GP worth anything like that?? What are Dorna’s actual assets? Is Dorna generating hundreds of millions of actual net Revenues? What lending group would be crazy enough to give a racing series two billion in loans? At what interest rate? And if Dorna doesn’t pay, then what does the lender do? Foreclose on a race? Seize a bunch of banners? Lock up a website that no longer has any content (if the races aren’t being held)?

    I’m no financial wiz, but this seems crazy from all angles. It looks like Bridgepoint and CPP simply want to bail on their investments. This can’t be good for the sport at all…

    Seems like there’s a big storm looming on the horizon if Dorna can’t pay off the loan…

  • Ayabe

    This is standard operating procedure for these vultures, sometimes they survive and sometimes they don’t. Many good companies have been ruined by this crap, there is little to celebrate unless you’re a part of the vulture class.

  • sfk

    I could be wrong here, and I am certainly not an expert in this stuff.

    But clicking through to the Reuters article, I see an interest rate in the third to last paragraph: “EURIBOR + 350 bps”. Euribor is currently -0.33%, so that suggests that the coupon on the debt is, at the moment, closer to 3.17%. Seems like they are “talking” to investors right now, so this might not be what it ends up at. It could very well end up being more depending if investors see a lot of risk on the deal.

    Also, I just looked up Dorna’s current debt on my Bloomberg terminal. I see several tranches that total to approximately €745M that pays a mixture of LIBOR + 400 bps up to LIBOR + 750 bps. LIBOR is around 1.15% right now, so it looks like Dorna is paying at least 5.15% on existing debt. A good portion of this more expensive debt is being taken out/extinguished as a result of the transaction we are now talking about.

    So it looks like Dorna is taking on incremental debt. But a good portion of this new debt pays a lower interest rate than the old debt. So I think it’s hard to say what happens to the actual interest expense that Dorna pays before and after.

    It seems to me that, in addition to taking a little something for themselves, Bridgepoint/CPP might be taking advantage of favorable financing environment.

  • sfk

    Here’s an alternate take on the math, and I am definitely not an expert.

    I think that each one of the dividend recaps doesn’t sum like you’ve got (420 + 715 + 889) to arrive at the total payout to investors. Some of the recap is used to take out existing debt, and some of it used to pay investors in the company (e.g. Bridgepoint and CPP). But I think your intuition is right here that the debt in the company is growing, and that is concerning.

    Here’s what I think is happening in the current transaction. Dorna is taking out a €889 loan. A portion of this loan will retire existing debt, approximately €615, as specified in the Reuters article. The remaining €274 gets paid out to investors in the company. Something like this probably happened in the prior recaps, so it’s hard to say how much Bridgepoint/CPP really got as a dividend in each of the prior transactions.

    I’ve got another note above that talks about the relative interest rate paid on the old versus the new debt. Suffice it to say that Dorna is paying a lower interest rate on this new €889 debt. But it has a more debt, €889 versus the €615. Someone can probably do the math to figure out what the interest payment is before and after.

    Finally, you brought up an interesting point about the value of Dorna. What is the company worth? I was curious too. In 2012, CPP purchased a 39% stake in the company, and they paid €400 to get that stake. (I got that from another reuters article on the web.) Just reverse engineer that math and you get that Dorna was worth €1,025M back in 2012. At exhange rates back then, Dorna was worth approximately $1.3B. I’m guessing it’s worth more in 2017.

    This is all back of the envelope.

  • Kelso

    Hold my capital, I’m going in

  • Paul McM

    Thanks for your insights. I’m just going off the story text: “Bridgepoint and the CPPIB have raided the piggy bank for motorcycling’s premier racing series, having done similar deals in 2011 (€420 million) and 2014 (€715 million)”. I’m just flabbergasted that any lender would give billions to a race series that doesn’t own any real assets other than media rights (and a percentage of ticket receipts). So many race organizers have folded in the past, I’m just stunned at the figures quoted in this story — almost seems like the numbers are off by an order of magnitude.

  • Going off memory here, so I could be wrong, but I believe Dorna generates something like 200 millions euros in revenue each year. So, it’s not crazy that a bank would lend them money based on that top line figure.

    If they failed to pay, Dorna would go into receivership, similar to what MV Agusta just did, and the debt would be restructured.

  • Good analysis. A little bird told me it’s closer to 200 million off the table, which would be inline with your thinking here.

  • halfkidding

    Let’s see. A business which runs motorsports spectator events which has manged to make the events live or even replays invisible in the United States and which makes little if any cash flow profits is going to pay stockholders over $200m. Try to get your mind around having no media presence in America. Cripes, you can watch rugby or curling easily here, but not Moto GP. It’s insane.

    Well if Amazon which has never made a profit is ‘worth’ $417bn and Tesla which will never make a cash flow profit is ‘worth’ $47bn, $2bn more than Ford while selling, oops I mean leasing, 98% fewer vehicles then why not.

    There are no words to describe how stupid the lenders in this are because nobody is going to bail out Dorna when the time comes and it will come. This is classic late stage bubble stuff. The bubble being the credit bubble. Of course nobody can understand what I am talking about with this credit bubble stuff but file it away in the back of your mind anyway. Someday it will be obvious what it means.

    Adam Smith rolls over in his grave.