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SBJ/20090112/This Week's News
Race teams combine to survive
Published January 12, 2009
During better economic times, NASCAR teams found infusions of capital from billionaires like George Gillett and John Henry, from private-equity firms and other sugar daddies attracted to the sport’s growth.
But now that investors are safeguarding their savings and sponsors are not spending, struggling NASCAR teams are looking for help from within their ranks. And for their survival, they’re finding comfort in one another’s arms.
In the two months since the 2008 season closed, many of the teams in NASCAR’s top series have engaged in a flurry of mergers, acquisitions and other assorted alliances that have changed the ownership and team landscape. Most teams now can’t be spelled without a hyphen or said without taking a breath.
“This is a new era for NASCAR,” said Ray Evernham, a minority owner in Gillett Evernham Motorsports and an analyst on ESPN. “The things that are happening today have the potential to mold what the sport is going to be 25 years from now.”
Some of NASCAR’s most storied names and teams have been among the casualties because they couldn’t secure sponsorship for 2009. Most teams generate 75 percent to 80 percent of their revenue from sponsorship.
Petty Enterprises, a 60-year-old business started by Richard Petty’s father, will cease to exist as the iconic No. 43 car merges into the operation at Gillett Evernham Motorsports.
Dale Earnhardt Inc., founded by one of the sport’s most legendary figures some 20 years ago, is losing its racing identity to partner with Chip Ganassi Racing in the formation of Earnhardt-Ganassi Racing.
Two other teams, Hall of Fame Racing and Yates Racing, are forging a relationship that is expected to include sponsorship from Ask.com, one of the few companies with new money to spend in the sport.
Many more teams are working on less formal technical partnerships that will enable them to cut costs by sharing engines, testing equipment and other million-dollar resources.
Practically every team is in bed with somebody else, assuring that the Sprint Cup garage in 2009 won’t look anything like it did in 2008.
“Most folks believe that things will turn around, so they’re looking for ways to just avoid shutting down completely,” said Steve Newmark, an attorney for Charlotte-based Robinson, Bradshaw & Hinson, a law firm that represents several race teams. “The way they do that is to look for efficiencies, whether that’s through a joint venture, a merger, whatever.”
The question, Newmark said, is whether these ownership changes will be permanent or temporary.
“It wouldn’t surprise me if they were temporary, to weather the storm,” he said.
In the Earnhardt-Ganassi deal, DEI will continue to exist as a business that represents Earnhardt’s legacy, licensing and other ventures. Ganassi Racing will exist for its IndyCar Series and Grand Am teams. Earnhardt-Ganassi Racing will be a third entity representing the NASCAR teams and will use facilities at both locations.
Neither of the operations have expressed an interest in selling their Charlotte-area shops, which leaves open the possibility that they could break into their own camps when the economy turns around. Neither side is talking publicly, but sources say Earnhardt-Ganassi Racing’s ability to compete on the track will dictate the team’s future as a joint operation.
With so many teams restructuring, more than 500 workers have been laid off to cut costs — personnel is the single greatest expense for teams.
“None of this really comes as a surprise,” said Jim Hunter, NASCAR’s vice president of corporate communications and a veteran track promoter. “Most of these teams have been struggling for years. If your entire business model is built on sponsorship and then you don’t have it, the business model will go through a correction.”
NASCAR typically keeps its distance from team-related travails, insisting that they’re independent contractors. The sanctioning body did institute a ban on testing race cars at Sprint Cup tracks as a way to reduce costs, and Hunter said NASCAR is considering a rule that would limit the number of crew members at the track on race day, another cost-cutting measure for teams.
Ultimately, though, “the people who complain are the same people spending anything to go faster,” Hunter said. “When it comes to a team’s finances and payrolls, it’s not our place to get involved.”
Granted, most of the teams scrambling to survive are fighting for scraps. Until something changes, only four teams truly matter from a competitive standpoint: Hendrick Motorsports, Roush Fenway Racing, Joe Gibbs Racing and Richard Childress Racing. All 12 of last season’s Chase for the Sprint Cup finalists came from those four operations.
They’re also about the only teams that haven’t experienced some level of upheaval because their cars are fully sponsored going into 2009. Each of those teams went through a modest round of layoffs, about 20 employees or fewer per team, but nothing like what the other teams experienced.
Two of those teams have investors that supercharged their operations. Jack Roush sold half of his team in 2007 to Henry, the Boston Red Sox owner, for more than $60 million. In 2003, Childress sold a minority share to Chartwell Investments, a private-equity firm that remains a partner.
Petty Enterprises tried to go in that direction last June when it sold the race team and the Richard Petty Driving Experience to a private equity, Boston Ventures, for $40 million to $50 million, according to industry sources. But without enough sponsorship, Boston Ventures burned through cash to keep the team afloat until it sold the No. 43 and the Petty intellectual property to Gillett Evernham Motorsports.
“Boston Ventures came in at a very unfortunate time, just before the recession,” said Bill Reid, a partner at Chartwell Investments. “Anyone looking to invest has to understand that timing is critical. Our confidence in the sport is not shaken, but I’m sure what’s happened is going to scare people.”
“We haven’t seen nearly as many private equities exploring acquisitions as we did in the past,” Newmark said.
One person who isn’t scared is Mike Held, a 20-year veteran of the sport who has been a team co-owner in the past and currently runs Co-Pilott, a California-based motorsports marketing agency representing brands such as Menard’s and Sony.
He teamed with business partner Marty Gaunt to buy Bill Davis Racing, a single-car Toyota team, two days before Christmas, although they have not committed to run a car in 2009 until they secure sponsorship.
“Most of the people who know me say I’m crazy or I’m a genius, but they aren’t sure which,” Held said with a laugh.
He’s certainly driving against rush-hour traffic at a time economically when many owners are looking to get out or reduce their role. The way he sees it, the next generation of owners have to come from somewhere.
Hendrick is the youngest of the top four owners at 59, while Childress is 63, Roush 66 and Gibbs 68. None of them appear to be planning their exit, but as Held says: “These guys have to pass the baton, and who’s going to be there to take it?”