Why Jaypee invested $400 million in F1 race

Sameer Gaur Managing Director and CEO, Jaypee Sports International ameer Gaur has become slave to manuals. Next to his large wooden desk in his office in Greater Noida are stacked a pile of manuals: on catering, on logistics, on safety, on hospitality, among others. Created as templates for his employees, each contains minutiae on the exacting standards the facility that is getting ready to host India's first Formula 1 race-the pinnacle of motor racing- must achieve. Not aspire to, but achieve.

Even then, if everything goes according to those manuals and there's a full house on October 30, the MD and CEO of Jaypee Sports International will see his company lose about $35 million. It will lose a similar amount every year it hosts an F1 race. But Gaur won't mind. The current operating structure of F1 is such that it gives nothing to race circuits except a global calling card. But it's a card opens many, many doors, and that's what Gaur is eyeing.

A week of F1 will only build brands: of the Buddh International Circuit as a motor-racing venue, of the Rs 18,500 crore ($4 billion) Jaypee Group as an organiser and developer, of India as a market with possibilities. The business the circuit does in the other 51 weeks will determine if it turns a profit. "It's the other 51 weeks that need to be worked to cover costs," says Indian F1 driver Karun Chandhok. Gaur predicts a break even in "three to four years", riding on the visibility that F1 brings.

F1 is controlled by Formula One Management (FOM), in which private equity firm CVC Partners holds 70% and financial services firm JP Morgan holds 20%. But the face, voice and spirit of FOM is minority shareholder Bernie Ecclestone-a diminutive, 80-year-old, with a clump of white hair.

He is the gregarious power broker who negotiates with teams and circuits, among others. He tends to give them a deal they resent, after they see what he has kept for the people he represents, but grudgingly play along because what is left is still a fair bit. Fom is the supreme power in the sport. So, it receives all revenues from the sale of TV and Internet rights, gaming rights, and event and track sponsorships.

And the $1.5 billion entity doesn't pay a circuit to host an F1 race-the circuit pays it an annual fee. Since FOM is a private company, official numbers are unavailable, but it's widely quoted that 50% of its revenues are divided among the teams in a certain formula. However, nothing from that central pool comes to circuits. Circuits reportedly pay FOM $35-45 million a year as licence fee; the initial contract is for five years. Jaypee will also spend $15-20 million in operational costs-track and event management, logistics, and transport. That's a total operating cost of $50-65 million.