You may have heard the rumours which kicked-off a few weeks ago that Aston Martin was up for sale. I forget who started them, but it didn’t take long for the usual speculation to deduce this last great bastion of British performance motoring was to be snatched up by Indian tractor maker Mahindra and ruined.
Cue the wringing of hands and endless interweb discussion about the loss of another national treasure.
The problem with such rumours is they come to light from seemingly nowhere and like a localised tornado, whip up a frenzy of debate before any facts are available to examine.
Aston’s Liquidity Woes
Yesterday, credit rating agency Moody’s raised further concerns over the future of Aston Martin, when it warned that it was reviewing the possibility of downgrading their credit rating below its present B3 level – well into junk bond territory.
This comes after the company’s third-quarter revenues showed a 20 per cent decline from a year ago, which at £305 million is on a par with the company’s current level of debt. Concerns have also been expressed over the company’s ability to pay a £14 million bond payment due in January.
While the implications could be serious for Aston Martin and its employees, this is precisely why it’s been so actively seeking an injection of new equity capital. Moody’s have said that if Aston are able to improve their liquidity profile during the next couple of weeks it could have “a material positive impact on Aston Martin’s liquidity profile” (i.e. move it towards being a recommended corporate bond again).
A company’s credit rating affects the availability and cost of capital they borrow, and with Aston Martin’s earnings being significantly down and cash-in-hand being so low, it’s hardly surprising they’d be a poor choice for further lending.
Following the comment by @Tat_tat, we’ve responded to this news update in the discussion below.
Most of the people who know such facts are bound by NDAs and other such legalities, while even the company’s corporate communicators have to tread a fine line, or risk prejudicing related discussions. None of these are good (or helpful) things to do when running such a business, hence until yesterday there has been relative silence.
In reality, plenty of people have known that Aston Martin is seeking capital from the investment markets, and has been actively doing so for much of last year. Also, far from this being a ‘problem’, it is merely the consequence of reaching a point in their business plan where the next step-up is a significant one (and requires an injection of more shareholder capital).
In Aston Martin’s case, powertrains are the next big step they face, together with scaling their business model to take advantage of the growth in the BRIC (Brazil, Russia, India and China) and other high-growth nations.
Up until recently investors haven’t exactly been tripping over themselves to finance a specialist automotive business (Lotus take note), hence the time it has taken Aston Martin to find possible suitors. But yesterday an Aston Martin spokesperson told Reuters that “..it is in ‘advanced’ talks with potential investors over an injection of capital into the business.”
The aforementioned tractor-maker, Mahindra and Mahindra is one of those interested parties, as is Italian private equity fund Investindustrial. But no doubt other names might pop into the frame, as they tend to when the competitive market starts to work (rather like when bidders surface near the end of an eBay auction).
Kuwaiti investment house Investment Dar, who together with Adeem Investment bought the brand from Ford five years ago is looking to dilute its shareholding and offer between 40% and 50% of stock to raise the capital. It’s thought this will raise around $400m (£250m) – coincidentally a similar amount to that raised by the former-CEO of Lotus, Dany Bahar, to fuel his New Era plan.
Aston Martin also need significant investment capital to fuel the development of new products, hybrid powertrains and the expansion of its range beyond the 4,200 cars it sold in 2011. Basic economies of scale make this a precursor to future growth, as the global car makers get bigger and more efficient, so to do the obstacles for smaller car makers, especially those which feature bespoke components.
Aston Martin faces two options in this respect, either get bigger or form a partnership with someone who is.
Extra capital may not be enough, since growing its sales is dependent on a number of factors outside its direct control. Mumbai’s Mahindra and Mahindra is the world’s biggest tractor maker, but as far as I know there aren’t many (if any) common suppliers or components between a luxury sports car maker and one who builds tractors and SUVs.
This may be seen as a limitation with Mahindra and Mahindra’s offer, but it would still seem to make more sense than Italy’s InvestIndustrial bid.
The other potential issue comes from Mahindra and Mahindra’s reason for bidding. The company’s Chairman and MD, Anand Mahindra (@anandmahindra), holds a long-standing ambition to become a global automotive player, expanding outside India and breaking into the US and European markets. Owning a significant chunk of Aston Martin would help raise the group’s international profile – rather like a Black American Express card – and perhaps rub off on the company’s existing products.
Mahindra has tried similar strategies in recent years, acquiring South Korea’s Ssangyong Motors last year for $460 million after being outbid in 2008 when rival Tata paid $2.3 billion for Jaguar Land Rover. And earlier this year he expressed an interest in buying Swedish carmaker Saab Automobile, but lost out to a Chinese consortium.
So the case for Mahindra would appear to be one of prestige, with the current offer on the table valuing Aston Martin at around $1.1 billion – or a 40% gain on the amount paid by Investment Dar in 2007 – some perceive the stock as expensive, but it would be well within the means of Mahindra.
Mahindra normally focuses on buying ‘distressed stock’ which can be cleaned up quickly and harvested for value, but Aston Martin doesn’t fit that profile – it’s an efficiently run business, able to develop new cars more cheaply than its rivals (predominantly due to the Russian Doll effect of its aluminium VH platform) – but it needs investment from someone who understands the premium car market and can provide engineering solutions to match the likes of Porsche and Mercedes.
The question is, does Anand Mahindra have what it takes to see Aston’s strategy through? He’s seen how successful it can be for his friend and mentor Ratan Tata, and after overtaking Tata Motors in their home market he would now like to emulate him on the global stage. But is it this in Aston Martin’s best interests?
Judging by Jaguar Land Rover’s improving fortunes, It’s easy to draw parallels about the role Mahindra could play in financing Aston Martin’s next big push, and while the infusion of capital would be welcome in the short-term, in the medium-term Aston also needs a technology partner who can help modernise their range and provide the means to scale up to more profitable levels.