Volume IX, Issue 5, Page 95
NEWS & ANALYSIS

More Questions Than Answers -- For Now

SEE ALSO

Publisher “Jeffe” Burk is adamant that I not write the “War and Peace” version of my take on the NHRA division and sale to HD Partners Acquisition Group (HDP) – I believe his exact words were, “I’m not paying you by the word, Grissom!” But it will be a challenge for wordy me to analyze and comment and speculate on the single most important action in the 50-plus years of the NHRA in less than 5,000 words.

I have to give it to the NHRA for keeping this mega-ton info on the sale so quiet on the media front. The equivalent in the stock car racing world would be if NASCAR were suddenly sold to an investor group (for a whole lot more money!). I’ll guess even Bruton Smith was surprised by the NHRA sale – and particularly for the low overall valuation of its assets and sales price.

I’ve reviewed the investor slide presentation on HDP’s website (there’s financial info there that NHRA employees didn’t know), and listened in to the investor presentation phone call led by HDP’s Chairman Eddy Hartenstein. (Hint: Never ever read your complete PowerPoint investor presentation over the phone  – especially if it is 36 slides long.)

Media types like I were not allowed to ask questions during this call; only investors, and there were only a handful of questions of not much consequence. With any financial transaction of this size in the sport, there’s going to be plenty of head scratching and questions and speculation. I couldn’t do that on the phone call, so let’s get to them here.

What was the sale?

I’m no business maven, but it amazes me that a 56-year-old non-profit, basically taxed-favorably company like the NHRA can suddenly be cleaved – Solomon-like -- into two businesses. Now, there is a new company that is a publicly held (stock-based), for-profit, company wholly owned by HDP called NHRA Pro Racing. The other is still non-profit – the NHRA Association – where all the NHRA members stay.

NHRA Pro Racing was bought for $121Million value, and $100M of that was cash (wow!). The $100M is to be used to keep the NHRA Association going. Chairman Hartenstein said the NHRA, “was not an active seller.” Wonder what sealed this deal then in the NHRA management’s minds? That is a hunk of cash to get – other buyers/investors might have tried to pay for the NHRA mostly with stock options. Cash is good.

Yet, I’m confused. You have a 56-year-old non-profit company (NHRA) suddenly sell off only part of its original corporate body for $121M, and make another company? I thought that was one of the reasons noted over the years that the NHRA would be hard to sell because it was a non-profit with all those NHRA members as essentially “shareholders.”

Who pays taxes on this $121M perceived gain from the original non-profit? Wonder how the IRS sees this transaction? I know when I sell my house, I have to pay capital gains tax (with certain exemptions) – are there equivalent exemptions here? I sure don’t know, but my green eyeshade hat’s off to the clever accounting guys that do – and we all know HDP and the NHRA have top-flight accounting resources to manage such a for-profit company un-docking from the mothership.

I’m guessing from the (very) little I know about non-profit companies, if the NHRA Pro Racing uses the $100M cash to keep the non-profit NHRA Association going -- say, by earning interest in an account for the Assoc. to draw on year after year -- the Pro side won’t have to pay taxes on it. The profit money’s not being distributed to any members. So, all you now-NHRA Association members/racers who paid your dues over the years, don’t look for a windfall check from the sale.

The New Ladder

The division of assets between NHRA Pro Racing and the NHRA Association are now:
 
NHRA Pro Racing Owned By HPD (For $121M value)
POWERade Pro Racing Series and all professional NHRA drag racing assets
Exclusive worldwide branding of NHRA
Four NHRA-owned tracks, lease on Pomona, and the Glendora headquarters
Media exploitation rights
Exclusive merchandise rights for NHRA Pro and NHRA products
NHRA.com website

NHRA Association Gets

Sportsman / Amateur racing
National Dragster
Nostalgia / Reunion events
Youth / Education programs
NHRA Museum

The 3x5 card version? Anything that can make money (profit) is now NHRA Pro Racing controlled by HDP – which was originally formed as a pool of money ($150M raised by selling stock) to pursue entertainment, media, or telecommunications acquisitions. Anything that can still be operated non-profit is under the NHRA Association.

Does this NHRA Pro Racing / NHRA Association division / cooperation remind you of another racing series cozy structure? How about stock car racing’s ISC / NASCAR grouping? For example, from now on NHRA Pro Racing builds up the events/tracks and the NHRA Assoc. only sanctions and does race operations of them. The NHRA Association has become essentially a maintenance organization, it seems to me, for the Sportsman ranks to keep it alive and breeding racers to move to Pro.

The profit growth is now on the NHRA Pro Racing side of the ladder. Indeed, the HDP presentation uses NASCAR’s growth as one model of just how much money-producing opportunity NHRA Pro has. If you liked the saturation NASCAR has achieved for its sponsors, etc., you are going to love the new NHRA Pro’s mindset and marketing model.
 
To calm the Sportsman ranks (“Is there going to be Sportsman racing anymore?” hit the blogs almost immediately.) the two NHRAs released this statement:

“This new relationship ensures, through a long-term agreement, that all the unique attributes of the sport remain intact, including Sportsman racing at NHRA POWERade Drag Racing Series national events. The initial term of the agreement is 25 years. Everyone understands that the foundation of our sport is based on Sportsman racing, and NHRA and HD Partners recognize the significance of ensuring that Sportsman racing at NHRA POWERade Drag Racing Series events continue.”

It’s good to know the commitment the two NHRAs have to the amateur ranks.

Who are these HDP guys?

Southern California-raised Eddy Hartenstein noted during the investor phone call that he “likes stuff that goes fast,” and that HDP are “not just financial hacks.” He continued with a nice homey story about how he used to try to sneak through the chain link fence into the drags at Pomona. All this to imply HDP are “car guys” and in drag racing for the long term [3-5 years?], and will not just quickly flip the NHRA Pro section to the next buyer overnight. I’d really like to believe that because they want to develop plenty of new profitable sports products off the NHRA Pro side, and have the background and connections to do so.
 
Certainly one product that could be improved would be a better (read: profitable) TV package (i.e., behind the scenes pay-per-view at events, for one). With HDP being begat from DirecTV alumni who grew it to 12.2M customers and 7.7Billion in revenue, this will be a no-brainer, and only one of the first electronic profit-making expansions of the NHRA Pro Racing brand.

For another, I’m speculating that NHRA.com will keep some informational content, but have supercharged e-commerce added. What better way to feature and deliver all that amazing content in the photo and video archives HDP now owns?

Another expansion of the brand HDP plans is more events. These are the big- money makers. During the investor call, HDP noted they’d like to add three (minimum) more NHRA Pro events in the next 3-5 years, and would try for 4-5 (that’s aggressive) in that time frame. Of these they said to “look to our neighbors to the North and South” (Canada and Mexico) – which would likely be a couple of exhibition events to begin with.

Yeah, Eddy, I used to try to sneak into drag races (still do), but if I and my well-oiled management team went to all the trouble to set up a company using other peoples’ money (via stock) to buy an entertainment enterprise, I’d be a money-guy first, and a car-guy a (very distant) second. Have no illusions, people, these people are about “The Benjamins”. As Hartenstein stated in the phone call, this action “divides [the NHRA] into its most efficient operations.” That would be profit on the Pro side, and “good works” on the Association side.

Smokin’ Deal 101 – Only $121M Value?

This is the Louisiana Purchase of racing deals – HDP got an incredible amount of inventory and revenue-generation capability for a total valuation of $121M. This valuation was based on 11-times multiple of the NHRA’s adjusted 2006 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $11,052M.

Most would consider a 3- to 5-times multiple of EBITDA to be a home run for a business like the NHRA. An 11-times multiple is pushing up in the lower dot.com valuation territory. The financial websites will explain the liabilities of using EBITDA as a business valuation method, and HDP does specify that it is a non-Generally Accepted Accounting Practice (GAAP) financial measure in their slide show. Yet, they use it as the main metric of valuation.

Let’s place this $121M valuation into a little real-world comparable valuation perspective. In 1999 Bruton Smith paid $215M to buy Las Vegas Motor Speedway, a NASCAR track. True, he was bidding up against the France family’s International Speedway Corporation (ISC), who thought they had a lock on the property, and that drove up the price. Plus, it was a NASCAR venue and not an NHRA one – the former even then more valuable than the latter.

I’d speculate that HDP’s Indianapolis O’Reilly Raceway Park (Indy) track complex they now own could bring at least $50-100M if it were put up for sale tomorrow. Wonder if Bruton has called HDP yet? How much would they get for all four of their tracks? Why didn’t this whole deal approach the $200-$500M level of value?

I doubt they’ll sell them immediately – they are only going to get more valuable. About half ($46M) of the NHRA’s 2006 total revenue ($93M) came from spectator admissions. [No wonder you’d want to add more events!] Well, if I had 50% of my revenue generation coming from ticket prices, the first action I’d take to bring more money in would be to raise their prices. It’s the biggest and quickest lever I have to make revenue. Bump the admission price up a little (in 2008) at the tracks and line up the dump trucks to haul away the additional revenue.

The NHRA had total revenues of $93M in 2006. Amazingly, (can you say non-profit?) total operating expenses were about $83M. I would sure like to see how that $83M broke down in expenses, but it’s not in the HDP slides. NHRA didn’t have a corporate jet hangered somewhere did they? Still, you have a company that generated nearly $100M in revenue and you sold it for $121M? What a deal.

For goodness sakes, over in NASCAR Cup racing, with Dale Earnhardt Jr. leaving DEI, his worth has been estimated anywhere from $50-$150M to a race team or what he could get to go build his own. (Wonder what his EBITDA is?) This guy alone could be worth what HDP paid for a complete professional racing series!

What’s In It For Me?

John Force, Kenny Bernstein, Connie Kalitta, and Don Schumacher are some of the big racer players on the Pro side. They are also businessmen. Do you think they would like a piece of the coming growth of NHRA Pro Racing? If I had barbequed my body as many times as those racers and strewn parts across tracks at NHRA events as they have – you’re darn right I would.

But in the cold, hard racing world, their combined “sweat equity” in drag racing is worth nothing – just like Richard Petty’s in NASCAR. Here’s a novel idea. You want to really put your revenue potential quickly in the NASCAR leagues, HDP?

Set a new benchmark in racer / organization unity and shared risk / growth – establish a franchise system for the NHRA Pro race teams. You might even pull a couple of NASCAR teams (and don’t forget sponsors) over to your type of racing with such a stable clan of pro racers at the ready for your every event. What a package you’d have to sell / distribute then at every level you plan to merchandise.

It’s going to be a grand time to cover our sport as its future is wide open.