Since our update last weekend, negotiations have moved on a notch – most notably with news that Mahindra & Mahindra may have withdrawn from discussions, while several new players have entered the frame to acquire part or all of the Aston Martin shares owned by Kuwaiti company, Investment Dar.
Let’s quickly recap on the boundaries which define a possible deal.
The Investment Dar (TID) which owns a majority stake in Aston Martin (between 50% – 64%) got into financial trouble during the global economic crisis and in 2010 entered protective administration under Kuwait’s Financial Stability Law.
Despite beginning a process to restructure its $5 billion of debt, TID were delisted from the Kuwaiti Stock Exchange in February this year and have been seeking to appease its forty or so investors by refinancing its long-term debts, optimising the value of its assets and disposing of those with the lowest yield.
Aston Martin is one of these low yield assets, with the added downside of requiring significant investment to secure its economic future. TID’s restructuring plan is scheduled over the next eight and half years, offering little opportunity to increase its investment in an asset with little chance of a medium-term return.
Meanwhile, the Gaydon car maker has been experiencing troubles of its own, with revenues down 20 per cent since this time last year and concerns being raised over its ability to pay the next interest payment (due in January) on its corporate bonds. To add further ignominy to its situation, Moody’s the ratings agency said it is considering downgrading Aston Martin’s credit rating below its present B3 level – well into junk bond territory.
£304 million of Aston Martin bonds were raised in June last year with a maturity in 2018 and include a ‘change of control’ covenant, triggered when any new owner controls more than 50 percent of the company’s voting stock. If this occurs, Aston Martin must redeem bondholders at 101 percent of par value – which would place an added disincentive on any bidder who sought to take over control of the business.
Last week demand for Aston Martin bonds surged as speculation increased of a bidding war. This was good news for TID, as investors see the chance of it paying its debts early, but the deal shape being discussed is 50 percent of the voting rights with a 40 percent equity stake – implying TID wish to retain share in Aston Martin and not cede complete control.
India’s Mahindra & Mahindra, who usurped an earlier bid by London-based InvestIndustrial, seemed to be the leading player up until last weekend, but their interest seems to have cooled after failing to reach agreement on a controlling stake in the business. The Mumbai-based conglomerate has always insisted on full management control in the companies it invests in, rather than merely participating as a portfolio investor. TID’s recent failure as a private equity house will no doubt have coloured Mahindra’s opinion in this regard.
That leaves the original £250m bid from InvestIndustrial for 37.5% of stock (with engineering and infrastructure support from Mercedes-Benz). During the past 24 hours other names have been mentioned including Chinese car maker Geely (owner of Volvo), Toyota, a second as-yet-unknown Chinese company and BMW.
Geely’s CEO, Li Shu Fu, is a fan of Aston Martin, having recently bought a car for his daughter as her wedding present, but he’s looking for ways to accelerate growth of Volvo which has struggled to deliver its promise in China.
Volvo’s cost base remains uncompetitive compared to its peers and acquiring Aston Martin would help spread the investment needed in new infrastructure, as well as provide a boost to the Swedish car maker’s image – which ironically is perceived to be a Chinese brand, and therefore unfashionable in the minds of China’s luxury car buyers.
Chairman Li seems to be losing patience with Volvo, firing its former CEO Stefan Jacoby this year, after sales in China struggled to meet the levels achieved in 2011. The car maker’s profits are also down by 84% in the first half of 2012, and it recently announced a US$11 billion investment in production infrastructure in order to secure a doubling of its sales by 2020.
Geely could perhaps leverage its local government connections, as it did with Volvo, investing its own capital together that provided by cities such as Shanghai, Chengdu and Daqing, but it looked at the business last year and concluded that it couldn’t afford it.
With Volvo and Aston Martin previously from the same stable (Ford’s Premiere Automotive Group), Geely could argue that synergies still exist at a component level, thereby requiring less integration than the InvestIndustrial/Mercedes bid. The two brands share a similar ‘elegant’ design ethos, so there are probably more opportunities to leverage now, than when they sat on Ford’s books.
Information about Toyota and BMW’s interest (if any) in Aston Martin is scarce at the moment, and whether theirs is a defensive or acquisitive play. With the Chinese getting involved, it’s hardly surprising that the world’s largest car maker (Toyota) would have an interest in protecting the position achieved by Lexus, likewise for BMW although less so.
So the table is nearly complete, and all we’re missing is Volkswagen (and perhaps Tata) being mentioned in the same sentence as Aston Martin. Despite the surplus of luxury brands (Porsche, Lamborghini, Bugatti) in VAG’s portfolio I’d be very surprised if they haven’t already taken a look at Aston Martin, but whether these ‘looks’ are the result of genuine interest or merely curiosity we’ll only know in due time.
Aston Martin need one of these players to bring in the investment capital and engineering resources to help it grow. It’s been starved of capital ever since the beginning of TID’s financial woes in 2009, and the longer it delays the further it falls behind. Nevertheless, the investment being discussed only represents a fraction of the billions spent each year by other car companies.
TID desperately needs to cash in some (or all) of its stake in Aston Martin to pay off its debts, but its actions seem hampered by covenants, the terms of its financial restructuring and perhaps a misplaced sense of pride that sees it try to keep one of the ‘crown jewels’ in its portfolio.
There’s a deal to be done and a truck-load of speculation surrounding it, with the expectation that talks will conclude before the end of this week.
Whether it’s InvestIndustrial or one of the other interested parties which gets the nod, they’ll need to have squared the circle and found a solution that meets the differing needs of Aston Martin’s stakeholders.
More news tomorrow (if all goes as expected), and a reflection on the implications for the coolest brand in the car business.