Professor Elam

Thursday October 11, 2012

There are four levels of probability. From the least likely they are

Possible

Plausible

Probable

Certianly True

The trick in business is distinguishing between the middle two, the plausible and the probable. The certainly true and the just possible are usually fairly evident.

Which brings me to the topic of the $400 Million Circuit of the Americas.  That is a link to the story in the San Antonio Business Journal about the Formula One Racetrack in Southeast Travis County, that would be Austin. Yes, this idea has taken such flight that a track some one hundred miles away is going to be a big winner for our town.-San Antonio!  By the way how is the Retama Horserace Track fairing?  But I digress…

Here is the link to the Official Website.

Yes they claim to have sold 300,000 tickets to the Formula One Race due there next month. At a minimum they will create the largest traffic jam in Travis County. And this is going to rent hotel rooms all the way to yes San Antonio.

As you can see from the website, motorcycle races are planned as well. But being the skeptical guy you know I am, I said well what about those other 40-50 some odd weekends?

The answer I got was, inhale before reading further,  that is when they make  the big money on the track. Yes, there are apprently, so the story goes, thousands of folks around the world just waiting for the chance to jet in to Austin, TX, be treated like royalty, ferried to and fro from a 4 Star hotel to a real race track experience. The race cars will be speed limited to say 120 mph but other than that your $10-15 thousand dollar entry fee will get you time on the track as well as analysis by a pro race driver in residence. Think Formula One Camp!

Now we are studying break even analysis in class. And we have studied the time value of money. In one article Red McCombs said it was much harder to raise the money than he thought it would be. Admittedly this is the only Formula One Track in the US, there used to be others, and so we have exclusivity but also a lack of familiarity with the Sport. I was not surprised it was hard to raise the money but then I already admitted to being bit skeptical.

I don't know the interest rate they got on this deal but I suspect there is little equity and lots of debt. What would be reasonable interest rate on a one of a kind idea. I promise to inquire about the interest rate.

But assuming 6-8%, what would the payment be required on  say a twenty year annuity to retire $400 M in debt?  A big number I bet without consulting the tables.

So what do you think, will this work?

This goes hand in hand with the Skyscraper Theory.  As positive social mood pushes markets higher anything becomes possible. The kilometer high Kingdom Tower claims to have financing in place. Now the $400 M Circuit is expected to be a great success. You will recall similar predictions about oh say the

Alamodome – sure to attract a pro football team, it finally got UTSA, at least a realistic outcome, but does the Alamodome really really pay out?

the Houston Astrodome may finally get demolished

The former Summit in Houston, home to the basketball and hockey teams, today is Joel Osteen's Church.

And so it goes. What is your take, wanna buy some Circuit of America bonds?