SBJ/August 13 - 19, 2007/This Weeks News
New cash races into NASCAR
Published August 13, 2007
In the few weeks since Andrew Murstein’s bid to buy Robert Yates Racing fell through, the president of Medallion Financial says he’s been contacted by no fewer than five NASCAR teams.
|George Gillett Jr. bought a majority
stake in Evernham Motorsports.
Murstein, who led a failed bid to buy the Pittsburgh Penguins with Mark Cuban and Dan Marino last year, wants to own a piece or all of a professional team, and his interest has been noted by NASCAR teams in need of capital. Compared with what he’s seen from NHL teams and other professional franchises, a NASCAR team is highly attractive.
“NASCAR teams make more profit than teams in any other sports, and I know this is going to be a surprise statement, but that includes some of the teams in the NFL,” said Murstein, who has seen the books on two NASCAR teams but can’t identify them because he signed confidentiality agreements.
“The average NHL team or NBA team either breaks even or operates at a loss. The NASCAR teams I’ve looked at do very well.”
Had Murstein acquired Yates Racing, he would have been part of the changing face of ownership in NASCAR.
George Gillett Jr., owner of the Montreal Canadiens and co-owner of the Liverpool FC soccer team, closed on the purchase of a majority share of Evernham Motorsports last week. John Henry’s Fenway Sports Group bought 50 percent of Roush Racing earlier this year. Real estate developer Bobby Ginn bought MB2 Motorsports last year before recently merging with Dale Earnhardt Inc.
“This is the future of the sport. These folks have connections and business expertise that’s going to help their teams get stronger,” said David Jessey, vice president of sales and marketing at Evernham Motorsports, which will now be called Gillett Evernham Motorsports.
“At some point, you’re going to see a half-dozen teams owned by billionaire types, people of deep, deep resources. Watching Mr. Gillett and all of the contacts he has, there’s power in money and we all know that, but there’s really power in power. They play golf at Augusta. Their buddies run companies. They talk to the owners in other sports.”
The influx of owners who have come from outside NASCAR to buy into a race team has led to speculation about the direction of the sport, especially given the wealth and frame of reference these new owners bring. Unlike most other NASCAR owners, like Rick Hendrick, Richard Petty and Richard Childress, who have been around the sport most of their lives, Henry and Gillett owned teams in other sports before moving into racing, exposing them to different business models and league operations.
In baseball, where Henry owns the Red Sox, and hockey, where Gillett owns the Canadiens, owners are in charge of the league and they police each other. In NASCAR, though, the Frances run a family-owned, private business and owners have relatively limited control within the sport.
But the changing ownership landscape has the potential to alter the sport’s culture, some believe.
“You have a much more powerful owners group in other sports,” said Steve Pruett, a partner in motorsports agency Leverage Sports and a former investment banker. “No stick-and-ball league is as powerful as NASCAR. I don’t know how a bunch of rich owners will respond to that. It could mean change. It could mean a battle for control.”
Others have taken note of NASCAR’s growth in the last five to 10 years. Murstein’s New York-based Medallion Financial, which provides financing for taxi cab owners and other niche businesses, remains interested in making an acquisition, as does Blue Equity of Louisville, Ky., a company that has been making inquiries into NASCAR ownership. More could be on the way.
“It’s fertile territory. I think you’ll see more transactions,” said Matthew Doherty of McLaren Capital, the investment banking firm hired by Evernham to find a partner. “NASCAR is a place where owners with 95 percent of their net worth in the team are competing against owners with 5 percent of their net worth in the team. As the dollars in the sport get bigger, you need an edge, you need relationships at the board level.”
|John Henry (right) bought into Jack Roush’s team
earlier this year. Some say the changes in ownership
could alter the fabric of the sport.
Other teams are looking to grow through mergers. Sources say Murstein’s plan included buying Yates Racing, a two-car Cup team, and Wood Brothers/JTG Racing, which owns a Cup team and teams in the Busch and Craftsman Truck series, to form a four-car operation. Yates instead merged with the Champ Car team Newman/Haas/Lanigan. The Ginn Racing-DEI merger was a marriage of two struggling operations.
“The costs of competing have gotten so high,” said Bill Reid, a partner in Chartwell Investments, which has owned a minority stake in Richard Childress Racing since 2002. “Programs like the Car of Tomorrow are a multiyear expense, and in situations like that, it’s nice to have a capital partner.”
In addition to preparing multiple cars to run Car of Tomorrow races, mostly on short tracks this season, teams also are faced with growing expenses in testing, engineering and other areas of competition. Some pieces of equipment, like the relatively new seven-post shaker rig, which simulates how a car handles on the track, costs more than $1 million to install and requires a team of operators, all of whom must be trained.
It’s an expensive piece of equipment that illustrates the difference between the haves and have-nots in NASCAR. Only a handful of teams can afford to install and operate a seven-post shaker rig. When DEI and Ginn Racing merged last month to create a four-team garage, Ginn Racing had one and DEI did not, so much of their Nextel Cup operation will move to Ginn’s shop. Teams able to amortize such an expense over four teams instead of one or two create operating efficiencies that small-shop owners can’t duplicate.
“If you take on a partner, you want it to be someone who’s bringing in money to make you race better, not someone who’s just looking to turn a profit,” said Eddie Wood, co-owner of Wood Brothers/JTG Racing. “There’s a lot of investors out there just looking to turn a profit, and I’m not sure about a situation like that.”
Wealthy owners such as Henry and Gillett offer their teams an infusion of capital as well as the ability to broaden their sponsorship pool, which is critical considering that 70 to 75 percent of revenue for NASCAR teams typically comes from sponsorship.
Fenway Sports Group already has cross-pollinated some of its Red Sox sponsors onto Roush Fenway cars. Lumber Liquidators and Gillette, a pair of Red Sox sponsors, bought a one-race sponsorship on Roush Fenway’s No. 99 car for the New Hampshire race last month.
“On the marketing and sales side, the real world is about having assets,” GEM’s Jessey said. “Our assets have multiplied greatly. A sponsor like Stanley Tools, which is a significant international player … now we can offer them a bulk deal in Canada and Europe as well.”
|Ray Evernham’s multicar team is thought
to bring in close to $100 million in revenue.
Jessey said the marketing team at GEM will work with the Canadiens and Liverpool to offer sponsorship packages that include one, two or all three of the teams. Their sponsor summit, instead of being held at Evernham’s Statesville, N.C., headquarters, likely will go to one of Gillett’s ski or golf resorts.
“That should improve attendance,” Jessey said with a laugh.
Those other assets, such as Gillett’s resort businesses, also offer sponsors the opportunity to run sweepstakes that might include a ski trip with driver Kasey Kahne or a golf outing with Elliott Sadler.
It all amounts to a growing level of marketing sophistication and resources that stretch well beyond the hood of a race car.
“These aren’t ego buys for these owners,” Ginn said prior to his merger with DEI, which mostly was the result of Ginn’s inability to secure sponsorship.
“The value of these teams is going up. There is a healthy return on a NASCAR team and the value will only keep going up when there’s a scarcity of teams, which is what you’re seeing with consolidation.”
Determining the profitability of teams is like trying to hit a moving target because of the way owners closely guard their books, as well as sponsor and driver contracts. Industry insiders say that Hendrick Motorsports is believed to be the most successful team with more than $200 million in revenue annually, followed by Roush Fenway Racing at $170 million. Evernham Motorsports brings in close to $100 million, while the two-car outfit at Robert Yates Racing generates about half of that.
It’s even more difficult to gauge profit margin, but even at a modest 5 percent, the top teams are clearing close to eight figures and most teams are well into seven figures.
No figures were released on Gillett’s purchase of a majority share of Evernham Motorsports. Fenway reportedly bought half of Roush Racing for roughly $60 million.
Bob Caporale, chairman of Game Plan, an investment banking and sports consulting firm, said his office has taken more calls about the buying and selling of NASCAR teams in the last year than ever before. And his firm doesn’t even work in NASCAR.
“The interesting thing is the people who are looking to buy,” meaning owners and investors from other sports, Caporale said. “I think what’s happening is similar to what you see in other sports. When the discrepancy between the haves and have-nots becomes so large, it fosters more transactions.”
It’s the flurry of mergers and acquisitions this year that have many in the industry uttering the f-word … franchising. If consolidation continues, why wouldn’t NASCAR simply issue 10 franchises for, say, $100 million each, and make a ton of money? Owners would gain a level of security because their cars would have a spot on the track each week and their franchises would theoretically appreciate.
NASCAR maintains its age-old stance favoring open competition for any team that can qualify.
“Groups of us have screamed for franchises for years,” said Cal Wells, a former NASCAR team owner. “You never say never, but NASCAR doesn’t seem to see the upside.”