Aston Martin announced its Q3 2020 results this week. The release was pulled forward by 10 days to coincide with an announcement of a new strategic technology agreement with Mercedes-Benz and new financing. Management also started to articulate Aston Martin’s 2025 goals and strategy. Needless to say, there is a lot to unpack here. We basically have hope for the future, the financial reality of today, and the hangover from a tawdry past.
Starting with the hope for the future, Lawrence Stroll, the Executive Chairman, announced a 2024/25 target of £2 billion in revenue and £500 million in EBITDA. As reference, Aston Martin’s best year historically was 2018 when it delivered £1.1 billion in revenue and £247 million of EBITDA. Achieving these goals very much depends on the new strategic technology agreement with Mercedes-Benz. Simplistically, Aston Martin gets the right to buy powertrains, software, and components from Mercedes-Benz through to 2027. This will allow Aston to quickly facelift the current line of uncompetitive front engine cars and saves Aston the enormous, unaffordable, costs of developing these technologies in house. In return, Mercedes Benz gets a 20% shareholding in Aston Martin and two board seats. At Aston Martin’s current market cap, this 20% is worth £200 million. However, Aston Martin has promised Mercedes Benz a minimum share price of 62p (vs. today’s 51p) which would imply that Aston would need to make an additional cash payment to Mercedes of roughly £40 million if the share price does not rise above 62p in the next several years. This is a no-lose deal for Mercedes with a billion £ upside if Aston is able to recover and deliver the ambitious goals Lawrence Stroll set for 2025. Assuming Aston hits the goals Stroll has laid out, and the market gives Aston even just 50% of Ferrari’s Price/EBITDA ratio, that would give Aston a market cap of £9 billion and Mercedes 20% being worth £1.8 billion. While this seems like a very steep price to pay for the right to buy parts, the reality is Aston’s negotiation position was only slightly better than Richard III’s at the end of the Battle of Bosworth. Aston badly needs the technology to survive and does not have the financial resources, or internal capabilities, to develop it themselves. In addition, the number of companies Aston could realistically turn to for this type of deal consisted of a list of one. Even more interesting will be to see what happens when the current deal expires in 2027.
Moving on to the financial reality of Aston today, this has basically been addressed by kicking the can down the road until 2025/2026 through a £1.3 billion debt and equity package (£125 million via new share placement, £840 of 1st lien notes and £260 million of 2nd lien notes). These funds will be used to retire the current debt coming due in 2022 and provide an additional £200 million of liquidity. This funding is not coming cheap, the £260 million of second lien notes carry a 13.5% coupon which puts them firmly in the “junk” category. This also represents yet another increase in the number of issued shares. In January 2020 the number of shares was 228 million and by the end of the year the number will have increased 9X to 1.824 billion. The initial shareholders haven’t just been diluted, they have been drowned, which does sum up Aston’s last two years.
Which brings us to the hangover from a tawdry past and Aston’s Q3 results. There are still ugly but a bit less ugly than Q1 and Q2. On a quarter to quarter basis, revenue more than doubled to £124 million and the EBITDA loss dropped by just under half to £28.6 million. Revenue and car units sold are now at 40% of 2019 YTD. Looking at a few areas of interest in a bit more detail:
To say Stroll, Moers, and their teams have their work cut out for them is the understatement of the century. The new Mercedes Benz technical partnership gives Aston Martin access to the technology it needs to be able to relaunch the current line up and deliver the next generation of cars. It also allows Mercedes to “rent” Aston before they decide to “buy”. The lack of transparency on the DBX order book is highly concerning, but the plans for the relaunch/facelift of the current line starting in the back half of next year is reason for hope. Financially Aston is a long way from being out of the woods, but they have bought themselves a few extra years at a fairly steep price. There is likely more pain for the organization as a restructuring is in store to address the excess manufacturing capacity. I do give Stroll and his new management team high marks for getting the deal with Mercedes done and the financing in place while standing in the middle of a massive turd of a situation. While the confidence and vision are refreshing, it’s going to take flawless execution to get them out of what is still one big odious mess.
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