Recently, I stressed the utmost importance of Aston Martin Lagonda Global Holdings Plc (OTCPK:AMGDF; OTCPK:ARGGY) raising a significant amount of new capital, if the company is to survive. The carmaker’s debt level has risen to unsustainable heights while at the same time it lacks profitability. And all that amid rather costly plans for future product launches. So all in all, Aston Martin’s situation does not look too rosy as it is.
Now, it has found a savior, or so it seems. The company announced the issuance of new equity totaling GBP500 million. Canadian billionaire Lawrence Stroll will provide the largest chunk of that money. First, he will make a strategic investment of GBP182 million. This will give him a 16.7 percent stake in Aston Martin. Furthermore, Mr. Stroll will participate in an additional capital raise of GBP318 million alongside existing shareholders. In the process, he intends to boost his stake to about 20 percent. Following the completion of said transactions, Mr. Stroll will join the board as executive chairman, thus replacing current chair Penny Hughes, who is to leave the board.
As I predicted back in early December, Mr. Stroll will not conduct the investment all on his own, but will lead a consortium consisting primarily of the same people whom he has teamed up with once before, when buying Formula One (FWONK) team Force India (now named “Racing Point” and to be re-christened “Aston Martin Racing” in 2021). Notably, Jonathan Dudman, head of Monaco Sports and Management S.A.M., is not explicitly mentioned as an investor in this endeavor. On the other hand, Lord Bamford, chairman of privately owned JCB (which is a sponsor of Racing Point) and an avid car collector himself, is part of the consortium.
Financing Conditions Improve Majorly
The fresh capital is instrumental in addressing Aston Martin’s foremost problem, namely the company’s unsustainably high debt burden. At the end of last year, it reported net debt of GBP885 million and a cash balance of only GBP107 million, despite recently raising GBP150 million through newly issued bonds. And as the debt load has been rising steadily, so has the interest. That vicious circle seems to be broken for now. Through Yew Tree Overseas Ltd., Mr. Stroll will provide GBP55.5 million of short-term working capital support at “significantly favourable” conditions. Hence, Aston Martin does not have to draw an additional GBP100 million, as it had initially planned to. Previously, Aston Martin had to pay interest rates of up to 12 percent. Those conditions would have applied to the additional draw notes.
Additionally, it is worth mentioning that the company’s net debt will be cut in half once the new equity is issued. That, too, should have a tremendously positive effect on future financing conditions.
Costly Plans Postponed
Improved financing conditions are not the only way Aston Martin will save money. The company, furthermore, cut back on some of its many planned developments. The electric Rapide-E will not be built at all and the relaunch of the Lagonda brand has been postponed until 2025. The development of battery powered vehicles is fairly costly. On top of that, it is hard to turn a profit on such vehicles without selling them in sufficient quantities. And it is the nature of niche luxury brands like Aston Martin (let alone a formerly dormant one like Lagonda) to not sell large quantities. Thus, postponing electrification plans will surely save the company a good deal of money.
2019 Lagonda concept; source: Aston Martin
Given that the company remains committed to the development of mid-engine sports cars (including an all new V6 power unit), this appears to be a financially prudent decision. And of course, ramping up the production of the DBX SUV is not a particularly cheap undertaking, either. In the short to medium term, the DBX will be the model on which the company’s future depends business wise.
Aston Martin DBX; source: Aston Martin
A Buyout Still A Possibility?
While as of now there is no indication of any such interest, I believe that there is still the possibility of Aston Martin being privatized. In the past, Mr. Stroll primarily invested in private companies. He and his respective partners later took the companies public in some cases, most recently Michael Kors – now Capri Holdings Ltd. (CPRI). And, arguably, it would make some sense to turn around Aston Martin without pressure from public markets and the necessity of quarterly releases.
Furthermore, Investindustrial will participate in the capital raise, taking up 100 percent of its rights. The Kuwaiti Adeem/Primewagon group of shareholders, on the other hand, has agreed to take up at least 50 percent of its rights. The Kuwaitis might hence reduce their relative stake, while Investindustrial would maintain its percentage of ownership. Together, the consortium led by Lawrence Stroll and Investindustrial will own more than half of Aston Martin.
This is significant, as the privatization and subsequent turnaround of companies is Investindustrial’s core business. Therefore, I believe that a buyout remains a possibility in the medium to long run. Naturally, such a transaction would benefit shareholders, as it would most likely include a premium on the share price.
Lawrence Stroll’s emergence as a new major shareholder and the capital raise provide a much needed relief to Aston Martin. First of all, the debt burden will be reduced significantly. Yet, it does not stop there. Increased cost discipline and a more realistic model pipeline will surely contribute to improvements. Nonetheless, Aston Martin shares remain a risky investment. The company’s financial health will improve greatly, but it will inevitably deteriorate again if there are no similar improvements operationally. Especially, the new DBX is crucial in that regard. Any investment in the company will thus be a bet on that model’s success.
To justify a valuation as a luxury company rather than a mere carmaker, Aston Martin will have to prove that it can achieve sustainable profitability at margins significantly above those of regular carmakers. If it fails to do so, I see little upside in terms of valuation. In the short to medium term, I believe that the possibility of a buyout has the potential to be an upside catalyst.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: All research contained in this article was done with the utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his or her own due diligence and research.