John Malone’s Liberty Media has made a bold, strategic play to scale up Formula One, an iconic but potentially under-monetized asset.

Liberty Media’s acquisition of the F1 franchise – a formidable free cash flow (FCF) machine with an US$8 billion enterprise value – is anchored to two important foundations: (1) Aggressively expanding and monetizing the sport’s global reach; (2) Capitalizing on the asset’s high levels (95% plus) of Ebitda-FCF conversion.

F1 revenues and profitability have been flat to declining since 2013, due to various currency and structural issues.

Liberty execs, however, believe that the top line can grow at a significant rate in the future.

F1’s prospects over the next few years depend on expanding beyond the sport’s strong foundation in Europe.

“F1 is a key player in the high-growth market for live premium sports rights,” said Chase Carey, newly appointed chairman, on a Sept. 7 M&A call.

“Our March renewal with Sky in the UK was favorable compared to other renewals in the market and bodes well for the media rights portfolio,” he added.

Longer-term, monetizing the global reach of F1 will be important, especially across the US, Latin America and Asia.

A big part of this could be realized via digital platforms.

“A global content business with portable IP that can be shared across so many countries and venues has enormous appeal,” said Liberty Media president & CEO Greg Maffei.

“The one that we have has been somewhat underexploited on digital, so that’s the big opportunity, and emerging technologies [i.e. augmented or virtual reality] will only accelerate that.”

BUSINESS MODEL

The good news is that F1 has already contracted more than US$9 billion worth of revenue through 2026.

Today, F1’s business model is relatively well balanced. Both race fees and media rights contribute 30-35% to total sales, while advertising and sponsorship account for 35%.

Europe and the UK contribute the most to sales.

F1’s biggest media distributors include: (1) Sky in the UK, with exclusive rights from 2019-24; (2) NBC in the US, whose rights end this year; and (3) Canal Plus, whose rights end next year.

Contracts typically last three to six years with annual escalators.

DEAL TERMS

Liberty ends up with all of F1 in two stages. The first completed this month, with Liberty buying an 18.7% stake for US$746 million.

The next stage should occur in Q1 2017, once all approvals are secured. Then, Liberty will pay out US$1.1 billion in cash to the sellers (a group of investors led by private equity firm CVC), while issuing 138 million shares of Liberty Media stock (equivalent to US$2.9 billion in equity) together with a US$350 million exchangeable note issued by F1.

Chase Carey has been appointed Formula One chairman while Bernie Ecclestone remains CEO.