Formula 1 in Las Vegas: The Race That Hopes You Don’t Sleep

Formula 1 in Las Vegas: The Race That Hopes You Don’t Sleep

Brent Shockley, Director at ValueScope

November 17, 2023 

Formula 1 In Las VegasFormula One/1 racing returns to Las Vegas this weekend for the first time in over 40 years.  The Heineken Silver Las Vegas Grand Prix 2023 is the start of a three-year contract with the city; although Formula 1 intends to support the race for at least 10 years and the entertainment and gaming hub of the U.S. intends on a “lifetime partnership” with the top class of international racing.  The nearly four mile track will wind through Las Vegas landmarks, hotels, and casinos with a straightaway section down the famous “Strip” at speeds reaching 212 miles per hour in cars that can range in cost from $12 to $20 million.  The Las Vegas Grand Prix is the next to last F1 race on the 2023 circuit.

The race promises to be a visual spectacle….for those in the U.S. that stay up to watch the event.  The Las Vegas Grand Prix will start at 10pm Pacific time on Saturday night, which is midnight or 1am for half of the U.S.  Typical F1 races are designed for 90 minutes but can often go up to two hours with delays.  To prep the drivers, practice runs are set for late Thursday and Friday evening with qualifying from 12am to 1am local Vegas time on Saturday ‘morning.’

The two F1 races in the U.S. this year (Miami and Austin) started in the mid-afternoon local time but this race was set later for the nighttime atmosphere of Las Vegas Strip and to appeal to international viewership, which greatly exceeds that of the U.S.  Global viewership for F1 races averaged 70 million in 2022.  By comparison, U.S. viewership averaged just over 1 million.  F1 interest in the U.S. has seen a significant increase since the debut of the Netflix series “Drive to Survive” in 2019.  Average U.S. viewership of F1 races jumped about 545,000 in 2017 and 2018 to 672,000 to 949,000 in 2021 and 1.2 million in 2022.

Formula One Group, founded in 1950, was purchased for $4.4 billion in 2016 by Liberty Media.  It operates as subsidiary of Liberty under the Nasdaq ticker FWON.K.  The subsidiary reports $2.8 billion of annual revenue and $560 million of EBITDA.  It’s current market capitalization is approximately $15 billion.  It is reported Liberty Media spent between $400 million to $500 million to stage the race, which included $240 million for a purchase of 39 acres on the northeast corner of Harmon Avenue and Koval Lane for the construction of part of the track and a three-story, 300,000 square foot paddock building constructed in less than a year.   The building is a permanent structure as the hub for future F1 races.

Despite the marketing hype beyond any Vegas headliner show or prior sporting event, preparations and demand for the race have hit a speed bump.  Locals, tourists, hotels, and businesses along the Las Vegas Strip have been frustrated throughout 2023 by construction to turn one of the World’s most famous streets into a racing circuit.  Hotels and casinos initially sold high priced ‘experiences’ in the thousands of dollars to include parties with A list entertainers, celebrity chefs and club type accommodations to view the race.  Joe Pompliano reports hundreds of private jets are set to descend upon Las Vegas paying overnight parking fees of $1,500 to $7,500 per night.   However, as the green light gets closer, general ticket sales have been disappointing, with prices dropping by 60% and hotels slashing room rates by up to 80%.

The city of Las Vegas continues to add major sporting events to its list of entertainment options and attractions.  The $2 billion Allegiant Stadium opened in 2020 as the home of the NFL’s Raiders franchise and will host Super Bowl LVIII in February 2024.  The Vegas Golden Knights, founded in 2017, are the defending National Hockey League champs.  The Las Vegas Aces are back to back WNBA champions and the city is host to part of the NBA’s Summer League. On Thursday, Major League Baseball owners approved the relocation of the A’s franchise from Oakland to Las Vegas.  A new baseball stadium along the Las Vegas strip is expected to be ready for the 2028 baseball season.  The city had no major sports franchises prior to 2017.

*The ValueSport blog is a look at the hybrid world of sports and business.  It is published by the professionals at ValueScope, a leading business valuation and advisory firm headquartered in the Dallas-Ft. Worth area.

Disney PENN & ESPN Bet

Disney and PENN Entertainment Team Up to Launch ESPN Bet

Disney PENN & ESPN Bet
Disney Penn &Amp; Espn BetPenn Entertainment (Nasdaq: PENN) has rebranded its online sportsbook with a 10-year, $2 billion licensing deal with ESPN. The new look mobile app and website launches today, November 14th, and is available in 17 states including Arizona, Colorado, Illinois, Iowa, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia. The state of Nevada is noticeably absent due to the state’s requirement for in person registration at a participating casino and ties to some of the biggest brands on the Las Vegas strip such as MGM, Caesars, and Wynn, each with their own sports betting apps. ESPN Bet is a bold endeavor for PENN to gain market share from industry leaders DraftKings (39%) and FanDuel (31%). PENN currently has only 2% of the legalized online betting in the U.S. but believes licensing the ESPN brand will allow it to reach its 20% market share target by 2027. It’s been a rough 2023 for PENN in the gambling space. Earlier this year, PENN acquired the remaining 64% stake in Barstool Sports for $405 million. PENN purchased a minority 36% stake in the Barstool in 2020 for $163 million. However, the acquisition of Barstool in February turned negative quickly as PENN was denied gaming licenses attributed to the controversial and polarizing content and personalities of Barstool Sports. As a result, PENN was compelled to sell Barstool back to founder Dave Portnoy for $1.00 in August, just months after the acquisition of the company. PENN reported a loss of disposal of Barstool in the amount of $923 million in its latest 10-Q, which included $715 million of goodwill and intangible write offs. The sale back to Portnoy included the right to 50% of any future sale of Barstool; although, Mr. Portnoy claims he will ‘never’ sell the company again. ESPN is diving deeper into the world of sports betting after strategically incorporating more betting odds and information into its broadcast content in recent years. The ‘worldwide leader in sports’ rebranded its Daily Wager show to ESPN Bet Live in September and moved its studio to ESPN headquarters in Bristol, Connecticut after three years at the LINQ Hotel on the Las Vegas strip. The LINQ residency was a partnership between Caesars Entertainment (owner of the LINQ) and ESPN. Now that ESPN has joined forces with PENN, it was time for a split and change of venue. Although there are concerns about ESPN’s sports broadcasting rights and its new venture into sports betting, the Disney owned company has placed wagering restrictions on select employees that could learn inside information as part of their coverage. The increasing commercial interest in U.S. sports betting is a result of the Supreme Court overturning the Professional and Amateur Sports Protection Act (PASPA) in 2018. The PASPA previously prohibited sports betting outside of the state of Nevada. Earlier this month, DraftKings reported revenue for the third quarter increased 57% to $790 million. Online sports betting revenue in the U.S. is expected to reach $7.6 billion in 2023 with projections to increase to $14.4 billion by 2027.

PRESS RELEASE: U.S. Court of Federal Claims Concurs with ValueScope Expert’s Opinion in Russian Recovery Fund

Southlake, Texas, August 19, 2015:

In a decision for the United States, the U.S. Court of Federal Claims disallowed tax losses claimed by an affiliate of the Russian Recovery Fund in an unusual and complex tax shelter case.

Facts
The primary actors in the case are three hedge funds:

Tiger Management affiliated funds (“Tiger”) – an independent third party
Russian Recovery Fund (the “RRF”) – the plaintiff
FFIP – the taxpayer and a hedge fund affiliated with the RRF

In 1999, Tiger contributed more than 3.0 billion rubles of Russian debt instruments to the RRF as an in-kind contribution for RRF shares. Although the fair market value of the contribution approximated $15 million, Tiger’s tax basis in the contributed assets exceeded $230 million. Two weeks later, Tiger sold its RRF shares to FFIP for $14.1 million.

The high-level economics of the tax case are illustrated below:

Unlike other tax shelter cases, the RRF case was significantly more complex because the contributed securities generated significant economic returns and had economic substance. Debt typically contributed to Distressed Asset Debt (“DAD”) tax shams involves high basis debt instruments on which little or no value is ever recovered.

The Court’s Opinion
Through the facts of the case and the testimony of its expert witnesses, the U.S. Department of Justice (“DOJ”) demonstrated that Tiger’s in-kind contribution was a disguised sale. They also demonstrated that the RRF’s fund manager was aware that Tiger was a seller of Russian debt rather than an intentional investor in RRF, as the Taxpayer claimed.

The Court found the expert opinions of Chris Lucas, ValueScope Director, to be helpful, citing his testimony 16 times in its opinion, including:
“[Mr. Lucas’] primary opinion was that RRF was structured more as a tax shelter than as a legitimate hedge fund.”

The Court agreed with Mr. Lucas’ expert testimony:

“…that the losses claimed by RRF ($223 million in total) are so disproportionate to its investment in Tiger assets (roughly $14 million) as to be unreasonable. We found Mr. Lucas to be a persuasive and knowledgeable witness.” (page 22)

Mr. Lucas helped the Court appreciate the unreasonableness of the economics claimed by the Taxpayer based on its argument that it had made an at-risk investment in Russian debt. The Court saw through this, however, and realized that FFIP was attempting to earn a large, riskless profit from the US government with significant potential economic upside.

The Court reviewed the facts and concurred with Mr. Lucas’ testimony:

“Our conclusion that Tiger was never a real partner in RRF is arguably sufficient by itself to undo the loss carryover. We would not recognize the transaction as anything other than a sale because that is what Tiger intended it to be. However, there is a massive amount of circumstantial evidence that the RRF was aware early on that Tiger had no real interest in becoming a partner, and was a willing participant at some point in facilitating the transfer of assets through the sham partnership.” (page 35)

About ValueScope, Inc.
ValueScope, Inc. is one of the nation’s foremost experts in complex federal tax matters.  ValueScope’s Principals and Directors are called upon to testify regularly in U.S. Tax Court and Federal District Courts.  Its team includes experienced valuation experts, management consultants, Chartered Financial Analysts, Certified Public Accountants, PhD’s, statisticians and creative and strategic thinkers.* ValueScope develops sophisticated financial and econometric analyses to support our clients’ needs for litigation support, financial reporting, tax reporting, management consulting, transaction advisory, and other needs.

*ValueScope is not a licensed CPA firm.