Macca Beans - Ferrari Owners' Club

McLaren - How DoThey Afford It?
report by Tony Cotton

3.10.07

The news that McLaren are to be fined $100m for receiving information about Ferrari technical details had the bizarre and certainly unintended effect of raising sympathy for McLaren and Ron Dennis in all racing fans but the most fanatical Tifosi.

Whether a spontaneous whip-round for the Ronster will occur in paddocks throughout the country remains to be seen, but I thought it might be interesting to have a look at how well McLaren can afford the fine.

To do so I requested copies of the accounts of McLaren Group Limited and McLaren Racing Limited from Companies House. Obviously, Group is the holding company and its accounts summarise everything that goes on in the Grey Empire. Racing is the F1 division which runs the Grand Prix team.

Under company law, accounts have to be at Companies House within 10 months of the year end (December) so the latest on file are December 2005. Nonetheless they make (to a breadhead) interesting reading.

The opening line of the Group accounts is "McLaren's strategy continue to be dominated by our vision and passion for excellence and to be the best in everything we do." What a pity then that the standard of English usage in the accounts would, in my days at a Wolverhampton Comprehensive, have had the teacher's red pen into overdrive. Not only is the apostrophe ignored in "Manufacturers' Championship", but the cash performance, of which more later, is described as "credible". In a set of audited accounts, I hope it is, because credible means believable. I think they mean creditable.

The "passion for excellence" is also reflected in the Racing accounts where a typo multiplied the amounts purchased from Mercedes by 1,000, so Ron Dennis had to sign a special declaration about the error a month after filing the accounts. Wouldn't you have loved to be in the room when he was told he had to do this? And as an ex-auditor, how sorry am I for the partner at KPMG, the bean-counters who should have spotted it, especially in their first year as auditor? As I can have a good guess how much that partner gets paid, not at all sorry, as it happens....

As most people know, McLaren Group was owned by DaimlerChrysler (or WhateverThey'reCalledThisWeek) 40%, Ron Dennis 30% and TAG 30%, but in January 2007, the Bahrain Mumtalakat Holding Company, a wholly owned company of the Kingdom of Bahrain, acquired a 30% stake in McLaren Group. The shareholding structure of the Group is now 40% DaimlerChrysler, 30% Mumtalakat Holding Company, 15% Ron Dennis and 15% TAG Group (Holdings) SA. In other words Ron and Mansour weighed in 15% apiece. For the confused, Mumtalakat is not the same as Ferrari part-owner Mubadala which is wholly-owned by the Abu Dhabi Government.

McLaren Racing Limited
Bearing in mind that this is 2 years ago, the money floating around in F1 is astounding. I'm not surprised that former Clubmans and failed Formula 2 racer Max Mosley decided that if the penalty had to be proportionate to the income, $100m sounded about right.

In 2005 McLaren Racing earned £113m. £41m came from Mercedes and the rest from other sponsors - principally Reemtsa, the company behind the West brand - and the mysterious F1 prize/travel fund. The accounts don't include anything for "free" "Mercedes" engines as the amount isn't easily determinable.

Racing made a profit before tax of £3.2m, which is quite impressive, except that £10m of it came from an "exceptional settlement of a dispute with a supplier" - wonder who/what that was? In 2004 they made £2.2m, but £21m came from "exceptional non-recurring income in relation to sponsorship agreements". So ignoring exceptional items, McLaren lost £6.7m in 2005 and £19m in 2004 - not so impressive. However, the capitalist lackeys who draft accouting standards don't require Group charges to be disclosed, so these windfalls may have been sucked up by Group.

Turning to how much Racing own, their net assets are £20m, so a £50m fine will hit them hard. Bluntly, if they were a stand alone company and they haven't earned a big surplus in 2006, it would send them into insolvency. Of their assets, £5.2m is in as the cost of "historic racing cars" which are estimated to be worth much more than this sum. A further £18.2m is in "racing car development costs" - the cost of developing the 2006 car. This wasn't good value for money because it was one of their least successful for years, failing to win a single race.

Racing also owed £48.7m to Group companies - so if something happens at the top company it's the end for Racing. On top of that, they guaranteed Group's 2005 bank loans of £69.2m.

Looking at the accounts in detail, directors' emoluments is always interesting. The highest paid director got £4.4m, in 2004 £6.7m. A little deduction shows that this can't be Ron Dennis, so it was probably Adrian Newey - not bad for a wizzkid with a Rotoring and a pair of compasses (only kidding Ade - massive respec!) Staying in the same part of the accounts, there are 538 people (!) employed by McLaren Racing, earning £36.6m. That works out at an average of £51k for each employee! Wonder how long it'll be before they start getting in former Eastern bloc designers and mechanics?

McLaren Group Limited
The funding is in the top company, as always. The net assets of the holding company (i.e. - what the Group is worth) are, at 2005, £110m. The Group was probably worth, if you were to sell it, much more than this in 2005, but with the action of the FIA last week, it may be worth much less. Such is the power of Bernie and Max (why does that sound so much more sinister than "Max and Bernie"?)

The Group's biggest asset was its gin palace, a.k.a. McLaren Technology Centre, which looks as though it cost around £200m.

Elsewhere in the accounts, the borrowings (bank loans and overdrafts) show up as £71m (2004 - £105m). The cash generation of the Group seems to be around £35m a year, which means that to find a £50m fine today they may have to borrow. I've heard Northern Rock do a good line in mortgages....

In answer to the big question, the highest paid Group director earns £2.4m. I can only guess that's Ron. The other staff outside the race team struggle by on an average of £39k per annum. I say send food parcels to Woking!

Of course, the cash generation really lies elsewhere in the Group, outside the F1 team. McLaren Group reported a profit of £8.9m in 2005. Of this, £11.8m came from Motor Vehicle Manufacturing - the profit from the £111m paid by Mercedes to glue a body kit (and other mods) onto 652 otherwise harmless SLs to form a sort of X-pack Mercedes and thereby create the Mercedes-Benz McLaren SLR, once described as the world's only boring Supercar. Only £133k of sales and a loss of £42k comes from "race circuits" - you remembered they still own Lydden didn't you? Originally bought with thoughts of it becoming their own Fiorano, local residents soon put the kybosh on any idea of running unsilenced F1 cars round there. It's now leased out and hosts club racing and track days.

Conclusion
£50m isn't petty cash for a company the size of McLaren. It will hit them hard. Max Mosley's idea that it will come from existing, current year sponsorship or from next year's regular sponsorship is naïve. My guess is that they will have to borrow, and that the level of spending on car development will continue. Whether this is what Max had in mind must be left to speculation. Of course, this is academic because DaimlerChrysler cannot afford to see them founder, or even fail.

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