Invest in McLaren F1

I: Your client, Tata Motors has been offered the McLaren F1 team for $400 Mn. They have asked you to evaluate the opportunity.

C: Just to reiterate, our client Tata Motors has been offered to buy out McLaren F1 for $400Mn and we need to analyze if it is a good deal or not.

I: Yes, that is correct. What are the ways in which Tata Motors can move forward in this deal?

C: We can find the NPV of the McLaren F1 deal and depending on the value we can either - accept the deal, reject it, or negotiate with McLaren F1 for a better deal.

I: That is correct. How would you go about finding the NPV of the deal?

C: We can find the valuation of McLaren F1 by understanding their cash flows for the current year and by finding the expected cash flows for the next few years. We can divide the cash flows into two parts – Costs and revenues. The various expenses of the team are – licensing, the engine which can further be divided into a buy or make decision, R&D, transport which can be divided into travel expenses of personnel and car by either air, ship or road, building, pit stop equipment, factory and equipment and salaries for the drivers and staff. Can you let me know the expenses of McLaren under each header for the current year?

I: I do not have the data for individual headers, but the total expense incurred by the team this year was $180Mn.

C: Okay, so the spending of the team was $180Mn. We can now move on to the revenues. The revenues can be divided into prize money depending on the constructor position, hospitality, merchandise sale, pay drivers, sponsorships, and non-race events. Is this an exhaustive list?

I: Yes, we can move through individual components and understand the revenue amount for each vertical.

C: Okay, we can start off with the constructor position. What position did McLaren finish this year and are there any rule changes in the upcoming years?

I: This year McLaren finished 6th and there are no rule changes for at least 5 years. You can assume that they would be finishing 6th for the next 5 years.

C: Got it. What is the prize money that the team receives for finishing 6th in the constructors?

I: The prize money 2 years ago was $75Mn. Since then, it has risen by 10% for 2 years and it is expected to grow by 25% for the next 5 years.

C: So, the prize money for year Y-2 = 75, Y-1=82.5, Y0=90, Y1=110, Y2= $140Mn, Y3=$175Mn, Y4=$220Mn, Y5=$275Mn. Moving onto the revenue through hospitality, F1 teams can sell tickets that provide on-track experiences to their fans. These tickets are sold for every race. Do you have any information on the revenues gained through the sale of such tickets?

I: How many races are there in a calendar year, and how many fans attend a race on average?

C: The number of races changes on a yearly basis but this year there are 20 races in total. Around 150,000 fans attend a race.

I: Okay, for our calculations let us consider 10 races in a year with an average seating of 150,000. Every race has 75% occupancy and 5% of the occupied seats are bought for hospitality.

C: The total number of hospitality seats per year per race is given by the product of total seats per race, occupancy rates of the race, and share of hospitality seats as a percentage of total tickets sold. This gives the total hospitality seats as 5500 per race. 5500 divided by 10 teams gives us 550 seats which is the number of seats allocated to McLaren F1. Are all the hospitality seats sold? Could you also provide the price per ticket for the seats?

I: No, the hospitality seats are 90% full in every race. They are sold for $2,500 a piece.

C: Okay, this gives us a value of 500 seats which will be sold multiplied by 10 races at a price of $2,500 resulting in a revenue of about $12Mn.

I: Yes, that is correct.

C: Moving on to the sale of merchandise, do we have details on revenues by individual channels namely – online store, offline store and race day sales?

I: The sale of merchandise brings in a revenue of $15Mn per year and is expected to grow at the rate of inflation for the next few years.

C: Okay. What is the type of sponsors that McLaren F1 has and what are the amounts paid by each of them?

I: McLaren has received $60Mn in sponsorships but this is for a 10 year long agreement.

C: Does McLaren have any pay drivers in its lineup?

I: No, currently there are no pay drivers.

C: Okay. What is the revenue from non-race events?

I: McLaren Gets about $3Mn from non-race events every year.

C: I have all the information I need to find the valuation and NPV of the investment. I would need a few minutes to calculate the same.

I: Okay. Can you find the break-even point instead?

C: Yes, Tata Motors would be able to break even in their fifth year of operations, which is a very good return on their initial investment.

I: The calculations seem to be right. Can you provide a few recommendations for Tata Motors?

C: Can I get a few seconds to think about the recommendations to be provided?

I: Sure.

C: Since Tata Motors can retrieve their investment within the first 5 years this is a good deal for them. I would however recommend Tata Motors to try and negotiate with McLaren F1 for a lower price this would enable them to get the return faster while also reducing the risk that they are undertaking.