A Few Thoughts: McLaren’s Recapitalization & the Looming Battle for Control of Aston Martin

I thought I would share a few thoughts and observations on the current situation at two of my favorite British Supercar Manufacturers.  One seems to be quietly headed back on the right track and the other, well theirs’s less drama in the Kardashian household.

 

McLaren’s Recapitalization

McLaren has been liquidity challenged since COVID put a giant fork in the business.  Over the past several years, McLaren has restructured, reduced headcount, sold its headquarters, restructured its debt, divested its McLaren Applied consulting business, and required several cash infusions by its major private shareholders.  All of these maneuverings have enabled McLaren to keep the lights on while they sort through a plethora of challenges of which the Artura launch has been one of the most significant in the last 18 months.  While the Artura delay has been a drag on McLaren’s finances for the past year and a half, at the same time they have continued to deliver class leading excellence in terms of the 765LT and Elva along with improving quality on the base 720S & GT models.  On the Artura, I give McLaren enormous credit for not delivering a car that wasn’t ready (unlike a certain competitor located just south of Birmingham) and taking the time to get it right. 

The latest setback on the Artura was highlighted in McLaren’s Q3 2022 results:

 

After 30 September 2022 the Group identified certain technical upgrades that are required to ensure Artura customers enjoy optimum long-term performance. These upgrades are resulting in delays to wholesale shipments and customer deliveries. This has had an associated impact on group liquidity. In order to help manage through this issue, the Group’s lead shareholder has committed to bolster liquidity by a further £100m. The Group is in active discussions with key shareholders regarding a broader recapitalisation of the Group. It is anticipated that a transaction will be agreed and announced in the first quarter of 2023. Lazard & Co. Ltd is advising the group on the recapitalisation.

 

The £100 million to cover the liquidity issues from the latest delay on the Artura was supplied by McLaren’s largest and controlling shareholder, Mumtalakat Holding (Bahrain’s sovereign wealth fund).  In return for the £100 million, Mumtalakat did take control of part of McLaren’s heritage car collection.  While the sale of the heritage car collection has raised quite a few eyebrows, I think it needs to be kept in perspective.  Firstly, as McLaren’s largest shareholder, Mumtalakat already effectively controls the heritage collection.  Secondly, the cars will not be disappearing off of the boulevard at the McLaren Technology Center.  Thirdly, I would not be surprised if at some point, when McLaren’s finances are in better shape, if formal ownership is transferred back to McLaren. 

 

In terms of the recapitalization McLaren is looking to raise in the neighborhood of at least £250 million.  The majority is likely to come from existing shareholders Bahrain’s sovereign wealth fund Mumtalakat Holding, Saudi Arabia’s Public Investment Fund (PIF), and Ares Management.  I do believe this recapitalization has been planned for quite some time and would have been a key criteria for new CEO Michael Leiters to accept the role.  Given the deep pockets of its key shareholders, I do believe McLaren will get the funding needed to support Leiters’ long term business plan.  For the last couple of years, McLaren has been making good long term strategic decisions and is getting its house in-order, hence I am quite bullish on its future.

Battle for Control of Aston Martin (AML)

A funny thing happened at Aston Martin when it kicked off its latest £653 million Equity Raise (see: AML’s 2022 Equity Raise).  An uninvited guest (Geely) showed up at the party, and what had been a clubby Board of Directors with most members being Stroll appointees (the polite term) suddenly got more independent when Stroll had to give PIF two Board seats in return for their investment.  Since the Equity Raise closed, Stroll’s Yew Tree Consortium has been busy buying up shares, increasing its stake from 18% to 28%.  The question is why?

 

Prior to this latest Equity Raise, AML had three major shareholders, Lawrence Stroll/Yew Tree, Invesco (a Global Investment Firm), and Mercedes Benz.  Coming out of the Equity Raise, the major shareholders of AML were supposed to be:

 

  • Stroll/Yew Tree with 18.3%
  • Public Investment Fund (PIF) at 16.7%
  • Mercedes Benz at 9.7%

 

(We will ignore Invesco as they have no operational interest in AML).  Instead, today the percentages are:

 

  • Stroll/Yew Tree: 28.4%
  • PIF: 18.7%
  • Mercedes Benz: 9.7%
  • Geely: 7.6%

 

And if Stroll/Yew Tree acquires another 1.59%, they will be required to make a tender offer to acquire all of AML and take it private.  All in this is a situation that Machiavelli would love.  Looking at the major players and their potential motivations in reverse order:

 

Geely

Geely has had an interest in acquiring Aston Martin for quite some time.  Acquiring Aston Martin would add a complementary premium luxury brand to its extensive portfolio which includes Geely, Smart, Lotus, Polestar, & Volvo.  Geely was involved in talks with AML at the same time Stroll first bought in in 2020 and most recently made an unsolicited £1.3 bil. offer via their Atlas Consortium at the same time this year’s £653 million Equity Raise was announced.  Stroll rejected that offer as he claimed it vastly underestimated the value of AML.  Can’t say I agree with Lawrence on this one given AMLs debt load and payables volcano.  Geely is known to be patient and is unlikely to take their eye off the prize if they truly want AML.  To make matters even a bit more interesting Geely has a 9.7% stake in Mercedes-Benz’s parent company Daimler.  Geely has never demonstrated any interest in Formula 1 (or to my knowledge in subsidizing Lance Stroll’s Formula 1 career) and would likely immediately cut ties to Stroll’s privately owned the Aston Martin F1 Team (AMR GP) if they took control of AML.

Mercedes Benz

Mercedes is both Aston Martin’s largest supplier and as a result its largest creditor.  Mercedes has had multiple opportunities to take over AML and shied away each time. Within Mercedes, an AML takeover is viewed as an unnecessary distraction.  However, as AML’s largest creditor, Mercedes does have a vested interest that lights stay on in Gaydon (I have to believe that AML’s outstanding Payables are a growing issue across all of AMLs suppliers and it is putting increasing negative financial pressure on all of them).  To date Mercedes has also likely tolerated the highly incestuous AML-AMR GP relationship as they are also a large creditor on the other side as well as they are AMR GP’s engine supplier (more details: AML’s Q3 2022). 

I’ve seen two recent reports on Mercedes’ current shareholding in AML, the 1st has it at the 9.7% which was listed in all the 2022 Equity Raise documents.  The second from Market Screener has it currently at 1.95%.  If this latter number is accurate, you don’t need to be Pythagoras to figure out where Geely’s stake came from. Market Screener also has Invesco’s holding current at 1.91% (down from 10% earlier in the year) which could be an alternative source for Geely’s shares.  Just to make things more interesting, AML owes Mercedes another large block of shares (per page 207 of the Equity Raise Prospectus equal to £140 million in value) by July 2024 as part of the technology transfer agreement Stroll signed in 2020.  If and when Mercedes finally wants to give Stroll the Anne Boleyn treatment, which I can definitely see happening sometime after that 2ndblock of shares is delivered, I would not be surprised if there is a private share swap between Daimler (Mercedes Benz’s parent company) and Geely. 

PIF

PIF arriving on the scene has added yet another layer of intrigue. They are quickly becoming the Habsburgs (key difference is PIF uses cash where the Habsburgs used marriage) of the supercar industry with a finger in lots of different pots.  PIF now has significant holdings in McLaren, AML, & Pagani along with electric car maker Lucid.  PIF dropping £174 million in Stroll’s tin AML cup is pocket change for the Saudis.  To put it in perspective, a PIF Affiliate just threw Lucid another $900 million lifeline to get it through 2023.  So why are the Saudis helping keep Stroll’s AML afloat?  It goes back to F1, Amarco, (the Saudi Oil Company) became a “strategic partner” of AMR GP in 2022.  Aramco basically ended up with AMR GP as all the other leading F1 teams already had sponsorship deals with other oil companies.  Aramco’s interest in F1 ties in with the Saudi’s now hosting a Formula 1 race at Jeddah Corniche Circuit (since 2021) and a major push to open the Kingdom up to tourism and modernize its image.  Whether the Saudis have a grand plan to eventually take over and merge all their automotive holdings is anyone’s guess but I would not be surprised to see either AML or McLaren using Lucid technology for their EV supercars.

Stroll/Yew Tree

The Stroll/Yew Tree Group needs to control AML but likely has zero interest in owning it outright as that would mean taking on responsibility for its debt mountain.  One of the largest, if not the largest, beneficiary of Stroll’s control of AML has been his privately owned race team, AMR GP (formerly Racing Point) that his son, Lance drives for.  On top of the £21 million annual sponsorship fee AML pays AMR GP, Stroll/AML awarded AMR GP a ten year royalty free right to use the Aston Martin brand, per page 210 of the latest Equity Raise Prospectus:

 

On 27 February 2020, AML Limited and AMR GP Limited (formerly Racing Point UK Limited) (AMRGP) entered into a sponsorship agreement, as amended on 13 March 2020 and amended and restated on 24 May 2022 (the F1TM Sponsorship Agreement), pursuant to which AML Limited granted AMR GP the worldwide, royalty-free right to use the “Aston Martin” name, logo and branding (the AML Branding) in respect of Formula 1TM participation for an initial 10-year term starting on 1 January 2021, with the possibility for AML Limited to extend the term for additional five year periods up to the end of 2050, at the Board’s discretion, and with the possibility to extend for a further five years by mutual agreement between AML Limited and AMR GP (the Branding Arrangements).

Additionally, in interviews Stroll’s has explicitly stated that Aston Martin Racing GP was able to sign “hundreds and hundreds of millions of dollars of sponsorship” off the back of the name change from Racing Point to Aston Martin Racing GP.  If Stroll/Yew Tree loses control of AML, all this likely goes away.  While the Aston Martin name may help attract sponsors to AMR GP, strip it away and you have a F1 team that has finished 7thtwo years in a row and who’s longest tenured driver (and owner’s son) has finished 11th in 2020, 13th in 2021, and 15th in 2022 showing consistent progress backwards.  Without the Aston Martin brand, AMR GP is not exactly a magnet for sponsorship dollars.  Basically, they are another “Haas” but without benefit of having a global celebrity as the Team Principal.  To top it all off, I have heard that work on AMR GPs new £200 mil. headquarters at Silverstone has stopped as construction crews have walked off the site due to payment issues.  I haven’t been able to confirm this but the source it came from is normally right.  If so, it would appear that the money problems extend to both sides of Stroll’s automotive empire.  Net net, Stroll needs to keep control of AML to be able to continue supporting his AMR GP racing team.  Hence likely why Stroll/Yew Tree has been madly buying up AMLs heavily depressed shares in the last several months.

In summary, in Geely you have an unwelcome shareholder that clearly wants to own AML and has the capabilities to turn the business around.  Mercedes has zero interest in control but due to the size of its shareholding, can play the kingmaker if it so desires.  What PIFs long term plan is, is hard to tell but they can go a number of different directions and I believe a lot of it will depend on how their relationship with Stroll develops.  For Stroll Sr., losing control will simply not end well and has ramifications that extend beyond AML.  Somewhere Machiavelli is smiling.

Next up, the 2022 SSO Awards……

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December 2022

 

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19 Thoughts on A Few Thoughts: McLaren’s Recapitalization & the Looming Battle for Control of Aston Martin
    tim
    28 Dec 2022
     6:11pm

    It’s way off topic, and not really supercar-ish, but what are your thoughts on Tesla’s share price falling off the proverbial cliff?

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      John
      29 Dec 2022
       12:57pm

      Tesla was always over valued. They got the jump on the general automotive market by being one of the first competent EV cars on offer, but every other marque knew how to build cars better, and for less. When they learned how to do an effective EV powertrain the days of Tesla were numbered.

      Every automotive company is being forced by EU and US regulation down the EV path. Yet we still have questions over battery technology, and more importantly, affordability. If the developed world can’t yet afford EVs, how will the developing world? We should be spending far more time looking at synthetic fuels, fuels which will use existing infrastructure but have the promise of being genuinely carbon neutral rather than greenwashing as EVs do today.

      Now Musk is using Tesla shares to fund his playing around with Twitter. He’s already done some questionable actions with Twitter, not even thinking of the layoffs but letting the extremists back in. Letting Twitter be their platform again. Probably not a good idea. Worse, telling those left at Twitter they’ve got to enslave themselves to the company. There’s a reason we don’t have Victorian work houses any longer!

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      Gary
      29 Dec 2022
       2:44pm

      For Tesla’s share price to accurately reflect their future sales and profitability EVERY OTHER car manufacturer would have to go out of business. That does not sound anything like reality, therefore Tesla’s share price was unrealistic also.

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    Ghini
    29 Dec 2022
     8:22am

    It surprises me you stay so positive about McLarens situation. Why was it Covid that put a fork in their liquidity?? They simply can not sell enough cars! Not just Artura, the other models also do not sell..
    The Artura already had a big negative mark on it, now its even bigger so who is going to buy it now? It had a delay before the introduction, then the introduction went all wrong, there were problems, they said they fixed it, they started production, more problems, more delays and now they needed 100M cash to stay alive and update the car again because otherwise it would give more problems in the future. Sh*tshow!
    If this was an AML car you would be all over it but because you own several McLarens and like them you stay positive? Did you order an Artura already? Or are you holding off like the rest of potential buyers?
    Also naming the Elva class leading?? Did you forget they had to put the fugliest wind defflector on the hood to make it work?? And that they could not sell enough they had to put a windscreen on it, making it basically just like their other models? How many of those did they sell?
    I’m sorry SSO, I’ve always enjoyed these post but this part on McLaren.. Its just way to biased and lacking an honest reality check on McLarens situation.

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    Ghini
    29 Dec 2022
     8:46am

    Interesting take on the AML percentages. But some things do not add up. Geely was at 7.6% while MB still held their shares. The Geely holding was disclosed, acknowledged by AML etc and nothing changed on the MB holding. So the MB shares did not move to Geely at that point.
    It is interesting that Marketscreener shows those percentages at MB and Invesco. But it surprises me no other websites shows or talks about those changes. By now that would have hit the news because it would be news. What also makes me wonder if it is correct is that Marketscreener does not show up to date percentages on Strolls account. MS shows 26% while it is 28.43%.

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    John
    29 Dec 2022
     11:15am

    I think it’s PIF who are wanting to spoil everybody’s party! Sticking their foot in everybody’s door.

    Geely definitely want Aston Martin. Thing is, if you were one of the other shareholders and looking at Geely and Stroll who do you think could manage the business better? Stroll who keeps shouting “Brand” everywhere as if he’s selling overpriced handbags to the vain, or one with a track record in rescuing automotive brands and making a success of them?

    Stroll is desperately buying up shares, as reported on the LSE website where he’s got to declare his purchases. Desperate to stop Geely increasing their position on the open market. But he’s reaching the maximum he can before having to offer to buy the whole company, something I’m sure he can’t afford as he’s only a minor billionaire. Not like his Brexiter pal Bamford.

    What happens next? For Stroll to keep increasing his position it has to be via one of his lieutenants. Someone he’s a relationship with. Someone he can trust to buy shares for his pleasure. Who’d be as daft to do that for him? Outside of his Yew Tree consortium?

    Assuming Stroll has reached close to his maximum shareholdings, what can Geely do? Do they need to get a seat at the board first? Or could they offer a sufficient return to those two investment funds to buy them out and increase their shares? Very quickly Geely could be in the position of taking over Aston Martin.

    But there’s still the question of that debt mountain, and that the 2023 cars are destined to fail because Reichman has only ever delivered failure to Aston with his designs. Geely may be better advised to wait and see. Play the long game.

    The one thing I’m sure of is that the business acumen shown by Stroll during his time at Aston Martin absolutely convinces me the company is heading for liquidation. He’s had many opportunities to sack Reichman and didn’t.

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    John
    29 Dec 2022
     11:24am

    The problem with McLaren is how few cars they’ve built in a year. Previously stating 2,500 for the year if I remember correctly. Only they know the breakdown on which models sold and didn’t, but they need a good long look at what their customers liked and didn’t.

    For the future, it seems entirely based upon the Artura. A stalled launch, some awkward reports, but now I believe going in to production. I watched a Harry’s Garage video on the Artura recently, tested on his favourite roads, and do you know what? It was excellent.

    The Artura looks good, and drives with the precision I want from a car. I think they’ve got a hit on their hands.

    Next question, should McLaren do an SUV? Well… Maybe a four seater hatch like Ferrari did? Something that you can use more often on the school run? They do need something to get the numbers up, but unlike all the others, they are a pure sports car company whereas the others really are GT. And the McLaren GT is more like faux GT, a compromised idea from the start.

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    RMD
    29 Dec 2022
     6:39pm

    not so sure whether the GBP 21 mio a year sponsorship of Strolls racing team really makes a difference, in the big picture?

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    Bill
    29 Dec 2022
     7:30pm

    I think you’re being very generous about McLaren. Maybe it’s the ‘ugly bridgesmaid principle’:- next to Aston Martin, they look pretty good. The whole Artura saga is a complete clusterf*ck: I don’t know if it’s over-ambition, arrogance or just plain stupidity of the then-CEO, that lead McLaren to believe they could engineer a complete hybrid sports car from scratch. (“No: we don’t need to buy any of that stuff (that works) off the shelf – I’m sure we’re so clever, we can do it all so much better ourselves”). The results are pretty clear: total carnage with the Artura programme being over a year late, (and counting). But you’re right in saying that at least they’re correct in not releasing it until it’s ready!

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    Ghini
    30 Dec 2022
     8:59am

    If Mercedes and Invesco sold that many shares they should have disclosed it according to the UK law. Geely bought shares days after capital raise and it was all disclosed, and then confirmed by Stroll. At that time no RNS update stating Mercedes nor Invesco sold a big chunk of their holding.
    The Marketscreener percentages that you use are stated like that for two weeks or even more. Even with Christmas delays there should have been an RNS by now and there is not.
    In the past when a large shareholder sold a big chunk of their holding there has always been an RNS, because it is mandatory.
    Besides all the legal sides and history it would have hit the automotive and financial news by now. But there is nothing out there, except Marketscreener and your posts here, on LSE forum and ADVFN forum.
    I am all for looking for information and sharing that but one questionable source is not enough.

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    Penrhyn
    30 Dec 2022
     3:25pm

    Enjoy reading your take SSO.

    AML is without doubt a basket case. Their cars are frankly awful, l used to like them but the latest editions are too big in every direction.
    The best that can happen is that a proper car company comes to their rescue.

    Mclaren l find myself in agreement with you . They have had the sense to hold car deliveries until everything is ironed out. I do not see them going bust anytime soon.

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