On May 30th the National Hot Rod Association, in conjunction with an entity entitled HD Partners Acquisition Corporation of Santa Monica, CA, announced the possible sale of NHRA’s Pro racing assets for a reported $100 million-plus. Contrary to the initial wild speculation that followed this announcement, the world as we know it has not yet come to an end, and is unlikely to in the foreseeable future. But, there can be little doubt that major changes are on the way for every aspect of drag racing.

If anyone suspected that drag racing was off the map of the nation’s consciousness the resulting publicity avalanche should forever put that notion to rest. Publications ranging from tabloids to respected business journals had people from board rooms to coffee counters talking about the endeavor. Some of them were shocked by the revelation that the sport they once considered the bailiwick of street corner hoodlums with ducktail haircuts had become a rather impressive major league activity with races in every major market in the country. Despite there being vehicles in competition called “Funny Cars,” that misnomer had to be ignored considering that many of those cars were sporting sponsorship agreements in the seven figure area. Finding out that drag racing had grown up definitely shocked some in the business establishment.

The principals of HD Partners include Eddy Hartenstein, Bruce Lederman, Bob Meyers, Steve Cox and Larry Chapman. The group’s most impressive business dealings to date surround the formation of DirectTV, which has become an annual financial behemoth with ten figure revenues. Yes, that means the big “B” as in billions. If any of these gentlemen has a direct or even indirect connection to drag racing we’ve been unable to confirm it one way or the other.

ANALYSIS:  THE POSSIBLE SALE OF NHRA’S PRO RACING ASSETS AND WHAT IT MAY MEAN

On May 30th the National Hot Rod Association, in conjunction with an entity entitled HD Partners Acquisition Corporation of Santa Monica, CA, announced the possible sale of NHRA’s Pro racing assets for a reported $100 million-plus. Contrary to the initial wild speculation that followed this announcement, the world as we know it has not yet come to an end, and is unlikely to in the foreseeable future. But, there can be little doubt that major changes are on the way for every aspect of drag racing.

If anyone suspected that drag racing was off the map of the nation’s consciousness the resulting publicity avalanche should forever put that notion to rest. Publications ranging from tabloids to respected business journals had people from board rooms to coffee counters talking about the endeavor. Some of them were shocked by the revelation that the sport they once considered the bailiwick of street corner hoodlums with ducktail haircuts had become a rather impressive major league activity with races in every major market in the country. Despite there being vehicles in competition called “Funny Cars,” that misnomer had to be ignored considering that many of those cars were sporting sponsorship agreements in the seven figure area. Finding out that drag racing had grown up definitely shocked some in the business establishment.

The principals of HD Partners include Eddy Hartenstein, Bruce Lederman, Bob Meyers, Steve Cox and Larry Chapman. The group’s most impressive business dealings to date surround the formation of DirectTV, which has become an annual financial behemoth with ten figure revenues. Yes, that means the big “B” as in billions. If any of these gentlemen has a direct or even indirect connection to drag racing we’ve been unable to confirm it one way or the other.

The mere mention of an entity like DirectTV in conjunction with NHRA brings forth the ugly prospect of Pay Per View television packages for the POWERade Series, but such a scenario appears highly unlikely at this point. If this sale goes forward (much more on that later), Hartenstein, et.al. are unlikely to try and void the existing broadcast agreement with ABC/ESPN in favor of a PPV effort, because that would immediately cut back the potential audience by significant numbers. A decline in actual viewers would have a long term negative impact on the race teams because sponsors aren’t going to pay more dollars tomorrow to reach fewer viewers than they’re reaching today.

It’s also worth noting that NHRA’s previous efforts with PPV packaging were disastrous. Rained out races left on-air commentators scrambling to fill hours of down time because there’d been no back-up plan that included previously filmed, in-the-can features that could be trotted out in such emergency situations. Purchasers of those packages couldn’t get their money back from their local cable or satellite system operators, so they vented their frustrations on an NHRA in full defensive mode to blunt their very real and fair charges of having paid for, well, pretty much nothing but views of soaked racing surfaces and fans departing en masse.

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Potential team sponsors remain far more impressed with the POWERade series appearing on the ESPN family of stations (never mind that espn2 remains, in the minds of many, a secondary outlet despite the fact that its total household reach is almost on a plane with the flagship station) than they’d be with knowing that they were “buying” promotional properties that would be restricted to PPV television exposure.

Early in the month of May HD Partners (which is sometimes referred to as a “SPAC” – a special purposes acquisition corporation) put out a press release indicating that it was “formed to acquire a company in the media, entertainment or telecommunications industries. While drag racing purists may rebel at the concept, NHRA drag racing definitely qualifies under the definition of “entertainment industry.”

Buried deep in HDP’s annual report are statements from the company’s auditors stating only, “In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HD Partners Acquisition Corporation as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the year ended December 31, 2006, for the period from December 6, 2005 (inception) to December 31, 2005, and the cumulative period from December 6, 2005 (inception) to December 31, 2006 in conformity with United States generally accepted accounting principles.

HD Partners stock (Amex symbol: HDP) continues to float in the seven dollar range. As of Friday’s market close the stock was at $7.672, up $0.022 (there are an estimated 23.44M shares out there). More than 869,000 shares changed hands Friday.

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Sources within NHRA have told Torco’s CP.com that at about the same time the announcement of the pending purchase was made, NHRA president Tom Compton personally called Bruton Smith (Speedway Motorsports, NYSE stock symbol: TRK) to inform him of what was going on. As was widely reported at the time (March, 2005), Smith was a serious suitor for NHRA’s assets, although an earlier approach from Texas Motorplex owner Billy Myer had been summarily rejected. We have also heard from usually authoritative sources that, over the years, there have been several offers in the $40 to $50 million dollar range that were also quickly rejected. But, Smith’s offer, which apparently never got down to hard dollars and cents, was also rejected even though Wally Parks acknowledged, “Bruton certainly has all of the qualifications, all of the eligibility and certainly all of the money if NHRA were for sale…”.

However, as the owner of three POWERade Series venues holding four races (Las Vegas, Bristol and Sonoma), Smith remains a powerful force to be reckoned with, so the call to him was certainly proper. What remains to be seen is how Smith may react to the potential sale of a company he apparently had serious designs on.

That naturally brings us to the concept of NHRA’s “pro racing assets.” Behind the smoke and mirrors of the public pronouncements of what, exactly, those assets consist of, one facts remains immutable – racers are not slaves and are therefore not the “property” of the NHRA in any way, shape or form. They are independent contractors able to determine their racing futures as they see fit. If that includes competing in the POWERade Series, IHRA events, or match races at Firebird Raceway in Boise, the choice is solely theirs, and not the sanctioning organization’s. While the sponsors will obviously make their feelings known as to where they feel the best exposure might come from, the decision as to where to race still resides with the team owners – who would obviously risk losing their deals if they rejected their sponsor’s wishes, an unlikely scenario.

But, suppose for just a moment that Mr. Smith, angered at losing his opportunity to purchase NHRA, decides he wants his own drag racing organization to go along with his flourishing NASCAR-related operations. With his existing racing facilities – arguably among the best in drag racing from many standpoints – he has a base from which to start. If he could convince just two or three track owners who currently host POWERade Series events to go along, he’ll only need two more things to be ready to rock – a television package and a series sponsor. Considering that growing cable ventures like SPEED TV remain desperate for racing programming – any racing programming – and that Smith’s contacts in the corporate world could probably net a series sponsor that would ultimately be more supportive of the sport than POWERade has been to date, the potential speed bumps in his path are far smaller than they might first appear.

Another potential scenario would have Smith purchasing IHRA and using those tracks as his base from which to start. There are several IHRA national event facilities that are close enough to what we’ve become accustomed to that they may not need massive investments to make them truly national event ready.

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Dissecting the press materials disseminated by the NHRA following the HD Partners announcement is somewhat akin to listening to a politician campaigning for national office. If you listen carefully you realize that while they’ll agree that certain issues need to be addressed, they never actually do so. Saying “We need to address the issue of global warming” is one thing, pointedly saying, “We need to curtail greenhouse gases by immediately doing…” is quite another. The question and answer section is almost legalize that actually says very little in terms of factual information.

The only hard properties to be purchased under this agreement are four race tracks, the NHRA headquarters building in Glendora, CA (the building housing the NHRA publications division about a mile away is a lease operation and is not owned by the organization). This means that any improvements to those facilities will be funded solely by HD Partners, and after forking over $100 million in cash and an additional $21 million in stock, we wonder how much deeper they’ll dig to improve the value of their purchase.

A teleconference on Thursday, May 31st proved interesting. HDP principal Eddy Hartenstein stated that “NHRA was not an active seller,” but agreed to go forward after “they…saw the unique strength that we can bring to the table.”

Although NHRA has consistently rejected requests for specific television viewership information, according to Hartenstein viewership has been steadily increasing for the last five years. In their presentation to the NHRA about the purchase, HDP says television viewership increased 49% from 2000 to 2006. If that’s true the viewership prior to 2000 must have been truly abysmal because the numbers we’ve seen aren’t all that impressive as of early 2007. He also said, “There is a huge lack of public sports media properties available in the market.” Does this mean that HDP sees an opportunity for, say, a monthly publication devoted to NHRA Pro racing?

Hartenstein’s statement that “NHRA Pro Racing will acquire the following set of assets from the NHRA: Coca-Cola through POWERade – and it is called the POWERade Professional Series – is the lead part of the asset, and all of the professional NHRA drag racing assets and the opportunities associated with that.” One assumes that he means POWERade will remain the series sponsor. The NHRA had previously announced an extension of the POWERade agreement through the 2011 season, but at no time has the organization indicated that the extension would ultimately produce a million dollar winner, something many in both the media and sponsorship communities agree is absolutely necessary to increase media exposure for the sport.

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Since Hartenstein addressed the issue of there being a lack of media properties covering the sport, we should address where National Dragster fits into the equation. We’re going to assume that its role may be slightly altered as it continues to extol the virtues of everything NHRA. It will undoubtedly remain the voice of the “new” NHRA, reporting on sportsman racing activities and the other aspects of the organization, but whether its editorial content will include pro racing remains to be seen. If that’s the case, will current enrolled members renew if their weekly tabloid doesn’t include pro racing coverage?

There are various legal definitions of what “membership” or “enrolled members” actually means, and while we won’t delve into that at this juncture, back in February, 1981 NHRA sent proxy forms to all of its “members” asking them to give the current Board of Directors the power to appoint and dismiss members of the Board without consulting the open membership of the organization. An attorney that was consulted at the time informed the staff of a respected enthusiast monthly that devoted considerable editorial space to all things drag racing that a simple majority of the returned proxies would grant total control of the organization to the Board of Directors. Once this simple majority of proxies was received the only way the “members” could overcome it would be to have the proxies of 75% of the organization’s total “membership” in hand. In other words, overturning the decision to grant total control to the existing Board would have been all but impossible.

In 1980 the California Corporations Code had been dramatically changed. Within a few year about two thirds of the nation had adopted the California format. At the time NHRA was considered a “legacy nonprofit,” and had the option of continuing to operate under the old code, or adopt the new one. They chose to work under the new code because it, and the proxy effort that followed a year later, allowed them to concentrate power on the Board of Directors.

After the sale is consummated the NHRA will pay HD Partners an annual fee of $800,000 to insure that sportsman racing continues in the POWERade Series national events. One assumes that at least a portion of this funding will come from sportsman entry fees and the like. That agreement is for a 25-year period.

There’s no question that HDP plans on working to increase drag racing’s fan base through aggressive marketing opportunities. They cite NASCAR’s successful growth and feel they can duplicate it. Let’s hope so, because in-house efforts to do that to date have been less than smashingly successful. Had they been so crowds at the POWERade races would exceed the 125,000 per race that are today’s estimates.

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The corporate world is flooded with terminology that often confuses the unwary, although some of the acronyms used by HDP, including EBITDA, are commonplace. One of their favorites, it means “earnings before interest, taxes, depreciation and amortization.” Although they offer no solid plan for doing so, their presentation claims they’ll double EBITDA “within the first three years” after the purchase.

There are already rumors circulating about a potential for schedule expansion, with HDP executive vice president and slated-to-be a dedicated executive in the NHRA Pro Racing hierarchy Steve Cox doing nothing to dissuade that talk when he said, “We can look at introducing new national events, increasing the current 23 national events by targeting underserved regions. I have already talked about a couple of the areas, and we've already talked to Tom (Compton)about where we can grow. We are not going to grow the number of events just for the sake of growing them and take the risk of cannibalizing the existing markets…but be very selective where we can grow that and expand the number of national events.” He then added, “"There are some targeted opportunities for international expansion, as well. These might begin as exhibition-type things, but we got some good neighbors to the north and to the south that would be the immediate targets today -- Canada and Mexico, obviously.”

In addressing the same situation, Compton said, “"In the near-term, over the next 3-5 years, hopefully sooner than later, we think we can add at least 3 new markets, and in a perfect world, add 4 or 5. Probably doesn't work out that way in reality given some of the challenges getting new places built. But, over the next five years we're gong to try to add a minimum of three national events."

It would appear that, whether or not this sale is ever consummated, the POWERade Series may be destined for expansion.

Despite those who, either gleefully or resentfully, said that the sale would make a handful of people in Glendora instant millionaires, that scenario will not take place. The laws regarding how NHRA operates are very clear on this.

 

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Here is one possible scenario: NHRA invests the money and “lives” off the interest, akin to how a foundation operates, typically using 4-5% of assets annually. They will still be able to raise tax-exempt revenue derived from activities consistent with their exempt functions, and can raise additional funds from activities unrelated to their exempt purpose subject to unrelated business income taxes(UBIT)—just like they do now. Nothing changes unless NHRA changes its structure and tax status, which, as far as we can tell, it has no need to change. That is the beauty of this deal. Essentially, NHRA’s current revenue producing activities can continue to operate as they do now.

Going a step further, and speculating to some degree, it would also appear that if this deal fails to be consummated NHRA’s operations will continue as if nothing had happened.

The revenue generated from the sale is to be earmarked for the perpetuation of the organization as founder Wally Parks envisioned it. That means that efforts like the Youth & Education program will continue uninterrupted. It also means that sportsman racing, which both the potential purchasers and NHRA’s current management team recognize as being critically important to the sport’s growth, should thrive. With substantial additional funding available for that purpose, a failure in that area would be monumental.

Regardless of the “instant millionaires” rumors – rumors that a scandal-loving drag racing audience can’t seem to resist, NHRA board member Dick Wells did his best to put those rumors to rest in a private note to former Hot Rod Magazine photographer Eric Rickman and several others. The letter was circulated to a members-only chat room, and from there was re-transmitted to many others, with parts of it including, “This entire transaction is a win-win for all involved. No, Wally isn't socking away loads of money (he never has!). What this does is take professional drag racing to an all-new plateau of progress and popularity; the new company is NHRA Pro Racing. A substantial infusion of cash will enable track improvements, more races, more and better television coverage, major public awareness and extensive merchandising programs.”

Wells included this cryptic reference to Bruton Smith in the letter; “We have warded off the lowball offers from the likes of Smith and a half dozen others who wanted to buy NHRA for a third of its value, take the professional racing and run with it, and close down the rest of NHRA, leaving sportsman and all the others out in the cold.” We’re unaware of Smith or any other potential purchaser as having completely devalued the sportsman racing aspects of NHRA, but that also doesn’t mean a purchase offer didn’t include that message.

So, where does this leave us? First, this sale is a long way from consummation. As one NHRA executive phrased it late last week, “we hope to conclude this sale by the end of the year.” A lot can happen in six or seven months, of that you can be sure, and right now the onus is on HD Partners. As stated earlier, if they don’t have a viable “business combination” in operation by December 7th they could be forced by law to disband and return whatever investor monies they’ve taken in. However, the filing of the paperwork on the pending sale, i.e., the “definitive agreement” between the parties involved, may add six months to the time period in which a going concern must be in operation.

But, no matter where this may ultimately lead, and one thing no potential purchaser of the National Hot Rod Association’s so-called Pro Racing assets can be assured of, is the loyalty of the competitors themselves. Many of today’s top racers – including some considered to be in the “younger generation” – base at least some of their loyalty to the NHRA POWERade Series on their personal affinity for NHRA founder Wally Parks and what he stands for. With Mr. Parks’s advancing years and the strong likelihood that if this sale is consummated his involvement will remain with the “traditional” NHRA, it’s possible that an as yet unknown player could enter into the fray with a plan that could radically change drag racing as we know it even more.

A possible indication of future attitudes became evident during what was supposed to be a “closed door” meeting between NHRA executives, the pro drivers and team owners and team PR people on Friday afternoon at the Topeka race. Despite NHRA executives informing those members of the media who did mange to attend that everything was embargoed, more than a dozen “legal” attendees of the meeting quickly began informing anyone who asked just what took place. Two driver reactions may be indicative of what the future holds in store. Fourteen-time champ John Force asked if there was any possibility that HD Partners might in turn sell the NHRA Pro racing assets to someone else, with Tom Compton reportedly struggling to provide an answer (remember, as of now there’s been no sale). Force’s concerns were based on his sponsors being uneasy to sign long term agreements without knowing who he would be racing for, and where. An unnamed racer then asked who would be running the show under the new ownership, and when Compton answered that he would; and maybe by coincidence or on purpose, Jim Head, got up and walked out of the meeting.

Head said of his exit, "I had to go work on my car."

Obviously, this is but the first chapter in a long “book” that’s yet to be completed.

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