Mubadala and Formula 1 Racing

n Arab-focused private equity firm has found itself in the fast-money world of Formula One. Samir A. Arab, MerchantBridge’s marketing manager, tells Alistair Crighton why, contrary to popular wisdom, F1 is a better bet than simply burning piles of cash.

When MerchantBridge’s Samir A. Arab test-drove a Spyker car a few years ago, he was impressed. “How much?” he asked. “$250,000,” came the reply. “No, no. For the company …”
So in true Victor Kaim-style, MerchantBridge, a London-based private equity firm with offices and interests across the Middle East, found itself with a stake in an up-and-coming supercar manufacturer and with a seat on the company’s board.
Spyker had bigger ideas than just building small runs of super-exclusive sports cars. In 2006, it bought Midland F1, the struggling motor racing team, for $106.6 million. Midland itself had a decent enough pedigree: it traces its roots back to former Formula One driver Eddie Jordan’s Jordan Grand Prix, which launched in 1991 and, amid financial struggles, was sold to Midland in early 2005. With a 12-team limit in Formula One coming into play from next year, and all these slots likely to be filled, a Formula One team could make for a very interesting – and potentially lucrative – investment above and beyond the obvious publicity factor.

What’s MerchantBridge’s interest in Formula One?
Well, Spyker decided that for its brand awareness the opportunity of buying the Midland F1 team would be ideal. There are only 11 teams now, and they’ll be joined by another and that will be it. There will be no more Formula One teams other than these 12. Also, the ticket for going into a Formula One team, to set up a new team, just the ticket to get it, is $48 million, or something like that, and that’s before you even talk about anything else. So it was an opportunity for Spyker to make people more aware of their car – and of course it’s more than a car, it’s a brand, which we’re developing.

What’s MerchantBridge’s stake in Spyker?
We own between 5 percent and 10 percent. I’m on the supervisory board of the company, joined by a gentleman from Mubadala, the investment arm of the government of Abu Dhabi, which also has a stake.

Will MerchantBridge itself be trying to leverage publicity from its involvement?
Well, obviously, there is publicity, but we’re really going after the brand value. We feel the brand can be developed into something really big. Midland has already been rebranded as Spyker. It was Spyker Formula One, and now it’s Etihad Aldar Spyker Formula One.

How does the ownership of the Formula One team break down?
The company is fully owned by Spyker. Etihad and Aldar are sponsors of the Formula One team. Normally, when you have a major sponsor, you rebrand the name on the racing circuit to their name.

From 2009, with Abu Dhabi joining the fray, the Middle East will have two races. Is there room for a third?
That’s a very hard question to answer. Formula One is widely watched and followed all over the world. I think from the start of the Bahrain Grand Prix in this part of the world people started to take more interest. If you were at the last Grand Prix there you would have seen that the numbers are increasing. People are taking more interest, not just in Bahrain, but in the whole region. Probably I feel, with 2009 coming up in Abu Dhabi, that’s an added value. In Europe, you’ve got so many venues, so there’s always room.

The cost of entering Formula One, even the way you did, with already existing support – how is that justified in terms of what you as a company are getting out of it?
Well, if you look at it short term, from any company’s point of view, there’s no justification. Long term there is definitely a justification. Number one, you try to build a team. We’re building one almost from scratch, and we should have a new car out in July. We’ve got Ferrari engines, and with the new car, that should help us improve our standing and get placements. The better your standings and placements the more money you get from TV rights, etcetera, plus you attract more sponsors.
Plus, in the long run, when we bought this company we made it clear that it has to be standalone. It has to generate enough revenue to keep itself going, through sponsorships. At the beginning, it’s a little painful, but we’re passing that stage slowly. It’s long term. I can’t tell you that next year we’re going to be placed, but I can tell you that in five years’ time we should be in good standing.

At what level in the placements do you have to be for this to be economically viable? If you’re ninth out of 12th, say, is that going to be enough to justify investment?
Well, it depends. Ninth out of 12th is not bad for someone who’s just started. But in five years’ time I’d be expecting to do better than that. I don’t want to put numbers, but edging toward a better position than that.

What’s the plan, then? When does competition start in earnest?
Well, the car raced under the Spyker name for the last three races of 2006. Then they started in Australia, in the first race of the year, as Spyker, as we wanted it to be. So 2007 will be our first proper season.

Where does your personal involvement come from? Does this come from a love of cars, a love of Formula One?
I’ve always been interested in Formula One and cars, but the reason we invested in this company, in Spyker, is because we believe in it, and we believe this company can go very far. Of course, you’ve seen many small manufacturers fall by the wayside, but we think this company has something special to offer, and we can see this from our figures – the turnover, the backlog in orders, stuff like that. It’s been moving quite nicely, the curve is heading up. Nice and steady.

So how fast have you been growing?
Well, I’d say we’ve grown quite fast as of last year. The year before, 2005, we produced about 40 or 48 cars. Last year we reached 94, if I believe right, and we expect to produce between 160 and 180 cars this year.

What’s your target in five years?
I’d say probably over 500 cars a year.

Who would you be competing with at the 500 stage?
I wouldn’t say we’re competing. People who own a Spyker probably already own a Ferrari, a Lamborghini and a Porsche. So I would say Spyker is the sixth or seventh car in a stable. But if you want to put us in competition, our rivals would be Ferrari, Lamborghini and Aston Martin. That sort of thing.

In the 1970s those marques were producing models in the kind of numbers you’re aiming for – 500 or 600. What other bespoke companies are producing similar numbers?
Without being very humble, we stand in our own category. There are so many bespoke car companies coming up, there’s no day that passes without me seeing a new car out there somewhere. But I think our cars have developed a very good reputation. Our cars are very much liked. We have just launched a limited edition of 24 of our car by Zagato at the Geneva Motor Show, and by now they’re all be gone.