In a previous article we wrote about how we found Formula One Group (NASDAQ:FWONK) an attractive investment opportunity now that the company had new management. However, we did not present a valuation of the company. Given the complex nature of what assets and liabilities are attributed to the Formula One Group tracking stock we thought it would be helpful to share our valuation and also our reasons for viewing the stock as undervalued.

What Does Formula One Group Own?

For starts, the Formula One Group tracking stock contains more than just Formula 1. From Liberty Media's 10-K "including Liberty's interests in Live Nation, minority equity investments in Formula 1, Time Warner, Inc. ("Time Warner") and Viacom, Inc. ("Viacom"), the recovery received in connection with the Vivendi lawsuit and cash, as well as Liberty's 1.375% Cash Convertible Notes due 2023 and related financial instruments and Liberty's 2.25% Exchangeable Senior Debentures due 2046." And "representing a 15.5% intergroup interest in the Braves Group at December 31, 2016."

So let's start with the easiest parts first. Both Live Nation Entertainment (NYSE:LYV) and Liberty Braves Group (NASDAQ:BATRK) are publicly traded. Formula One Group's stock contains the groups 34% interest in Live Nation worth $2.45B at current market prices and Group's 15.5% interest in Liberty Braves Group worth $185M at current market prices. The group also has approximately $416M in Time Warner (NYSE:TWX) stock and $86M in Viacom (NASDAQ:VIAB) stock.

The Vivendi settlement mentioned in the 10-K appears to have already been paid to the group and so would appear in the cash balance on the latest 10-Q. Below is the language showing the suit has been settled and the payout received.

Vivendi Settlement. In connection with a commercial transaction that closed during 2002 among Liberty, Vivendi Universal S.A. ("Vivendi") and the former USA Holdings, Inc., Liberty brought suit against Vivendi and Universal Studios, Inc. in the United States District Court for the Southern District of New York, alleging, among other things, breach of contract and fraud by Vivendi. On June 25, 2012, a jury awarded Liberty damages in the amount of 765 million, plus prejudgment interest, in connection with a finding of breach of contract and fraud by the defendants. On January 17, 2013, the court entered judgment in favor of Liberty in the amount of approximately 945 million, including prejudgment interest. The parties negotiated a stay of the execution of the judgment during the pendency of the appeal. Vivendi has filed notice of its appeal of the judgment to the United States Court of Appeals for the Second Circuit. During the first quarter of 2016, Liberty entered into a settlement with Vivendi which resulted in a $775 million payment to settle all claims related to the dispute described above. Following the payment of a contingency fee to our legal counsel, as well as amounts payable to Liberty Global plc, an additional plaintiff in the action, Liberty recognized a net pre-tax gain on the legal settlement of approximately $511 million. This settlement resulted in a dismissal of all appeals and mutual releases of the parties.

The group also has a total of $1.07B in cash and approximately $5.8B in long term debt attributed to it.

So, with the easy pieces of the valuation out of the way let's look at what the implied valuation for just the Formula 1 part of the group is.

The tracking stock has a total market cap of $6.71B. So, plugging in our numbers we get an implied valuation of $8.3B for Formula 1. The table below shows the math for the calculation.

Implied Formula 1 Group Value

$8284.0M

Liberty Braves Group (15%)

$184.6M

Live Nation Entertainment (34%)

$2448.0M

Viacom & Time Warner stock

$502.0M

Add: Cash

$1071.0M

Less: Debt

-$5780.0M

Current Equity Value of FWONK

$6710M

What is a Fair Value for Formula 1?

Last year Formula 1 generated $1,829M in revenue and earned $479M in adjusted EBITDA. That means that Formula 1 is trading at 4.5 times revenue. There is approximately $3.4B in net debt attributed to Formula 1 which would mean the EBITDA multiple is approximately 26 ($8,284M equity value plus $3400M net debt divided by $479M in adjusted EBITDA).

Formula 1 is a unique business and probably the best way of valuing it is looking at other comparables in the sports world, especially recent transactions. We looked at valuations for the recent sale of the UFC, publicly traded World Wrestling Entertainment (NYSE:WWE) and Manchester United plc (NYSE:MANU). We also looked at premier North American sports franchises like the New York Yankees, and the Dallas Cowboys.

UFC was recently sold for $4B, which valued the company at approximately 6.6 times revenue and 22 times EBITDA. However, the buyers believe that the UFC's current media deal, which is up in 2018, can be renegotiated for a substantially higher amount. If that does happen, people peg the valuation closer to 13 to 14 times EBITDA.

WWE and Manchester United are publicly traded so it's easy to get valuation figures for them. WWE trades at 2.1 times sales and 20.5 times EBITDA. MANU trades for 3.9 times sales and 14.5 times EBITDA. For the Dallas Cowboys and New York Yankees we used Forbes valuation figures. The franchises trade at 6 times revenue and 7 times revenue respectively.

The table below shows the average valuation multiples.

Business/Team

Price/Sales Multiple

EBITDA Multiple

UFC

6.6

13/14 to 22

WWE

2.1

20.5

Manchester United

3.9

14.5

Dallas Cowboys

6.0

NY Yankees

7.0

Average

5.1

17.6

We are included to exclude the WWE from our comparables because of the "sports" demographic problem. During the past 16 years the median age for a WWE viewer has risen 26 years compared to other sports like the NBA and MLB which have seen age increases of just 2 years and 5 years respectively! An aging demographic is obviously less attractive for advertisers and thus lowers the value of the franchise.

Manchester United, while close to a global franchise like Formula 1, has much higher labor costs. As we've shown in a previous article European soccer (football) clubs pay out almost half their revenue in player salaries. In terms of economics Formula 1 is much closer to American major league sports franchises that have much lower labor costs.

If the new ownership group at Formula 1 can broaden the sports appeal, and we believe they can, a valuation multiple more in line with North American sports franchises would be more appropriate. That could mean up to a 50% increase in value over the next few years.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FWONK over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Excerpt from:

Formula One Group Could Be Undervalued By 50% - Seeking Alpha