Categories
M&A Deals

Aston Martin — now 20% Mercedes

The large German-based automotive group, Daimler AG, recently increased its stake in the iconic British luxury car manufacturer Aston Martin Lagonda to 20%. Today we take a look under the hood of the deal, investigating the background and motivation, and discerning what the two companies realistically are set to gain, moving forward in the ever-changing automotive landscape.

Background

Despite winning some of the most iconic races in motorsport, including the 24 Hours of LeMans and being James Bond’s car of choice — the racing and Hollywood pedigree of Aston Martin has not always been reflected in the brand’s financial record, going bankrupt seven times since its formation in 1913. In the luxury sports car market, the era of large-displacement, loud, fuel-guzzling cars is waning and is rapidly being replaced by the introduction of smoother, quieter and more fashionable electric alternatives, with offerings now from Tesla, Porsche and BMW showing increasing popularity. Having epitomised the romantic image of comfort, speed and form over fuel economy, sensibility and function, Aston Martin is finding itself under pressure to adapt quickly to new customer demands and align itself with the modern era of personal motoring. This change, of course, has been exacerbated by government policy restricting CO2 emission and decibel level on new car sales, rapidly outdating Aston Martin’s iconic 6L V12 configuration and sound.

In 2013, Daimler — one of the world’s largest automotive conglomerations, recognised for its ownership of Mercedes Benz and Smart cars — purchased a 5% stake in the luxury British car manufacturer, and worked to develop the company’s most recent generation of V6 and V12 engines for the then-new DB11. Subsequently in 2018, Aston Martin suffered a remarkably disappointing IPO, when, upon taking the company public, investors balked at a valuation that put the smaller U.K luxury carmaker on a par with the larger Italian competitor, Ferrari NV. The stock dropped 4.8% during the first day of trading and the brand has been haemorrhaging cash ever since, leaving the shares down 94% by the time ex CEO Andy Palmer left in May 2020. His replacement Tobias Moers, himself coming from Mercedes’ high-performance division, AMG, now looks to Daimler to turn the struggling British manufacturer around. The result of this poor performance following the IPO saw Daimler’s initial equity participation at the time of 5% diluted to 2.6% by October 2020.

The unfortunate state of Aston Martin’s financial affairs is exemplified by the recent double-digit interest payments on 30th October 2020, for a loan of more than £1bn, which came as part of a refinancing package included in a £125m equity raise earlier in the year. The fundraising highlights the cash-flow issues currently faced by the British manufacturer which have been exacerbated further by the shock of the coronavirus pandemic and subsequent falling demand in luxury car sales. The ensuing bonds are rated triple-C by the rating agency S&P, the lowest possible rating, reflecting the company’s mounting debt pile and current inability to return profit.

The deal

The first step to the deal followed Aston Martin’s approach to Daimler and request for access to cutting-edge engine and powertrain technologies, particularly technologies revolving around Daimler’s electric vehicle (EV) division. Mercedes-Benz AG subsequently agreed to give access to Aston Martin in exchange for additional new shares in the company, to be allotted by means of contribution in kind. Simply put, a contribution in kind is a capital increase, which is not in the form of cash. Therefore, the deal may be summarised as the purchase of technological material by Aston Martin from Daimler, using shares and not cash, to pay for the new technologies. The contribution in kind structure almost certainly comes as a result of Aston Martin’s current lack of cash flow, and the demand from the critical nature of accessing this sort of forward-looking technology.

The total contribution in kind deal value sits at £286m, achieving a shareholding of 20% for Daimler in return. The deal will be released in several tranches over the course of the next three years, with each share issue tied to the release of various technology packages.

What does Aston Martin gain?

The creation of an EV Aston Martin will be critical in giving the brand a chance to survive the transition from internal combustion (IC) to EV, however, the cost of developing in-house electric-vehicle (EV) technologies is a considerable financial barrier to market for both new and established players. The approach to Daimler comes after a failed collaboration with F1 team Williams, which aimed to develop the RapidE — Aston Martin’s first attempt at an EV offering. The failed project highlighted the significant difficulty and costs for a small manufacturer to develop its own EV technology in-house. Even with a team of highly qualified engineers, the complexity of developing such technologies and the scale of the transformation required in both design and manufacturing capabilities, has been too much for all but the largest players to overcome thus far. Therefore, Aston Martin is relying on the technological input from Daimler, more specifically from their EV division, to accelerate their development of an electric offering to their model line, without the costly exercise of developing the technology for itself. CEO Tobian Moers outlines a vision where the first EV vehicle from Aston Martin will roll off the line in 2025, a milestone almost unattainable both from a time and cost perspective without this assistance from Daimler. Therefore, Aston Martin is using this deal to try and get itself back on track and to regain some relevance in the rapidly changing motoring landscape, to develop and access viable EV technologies, without having to pay for it in cash.

What does Daimler gain?

Well, quite a lot really. Firstly, in three years time, Daimler will have acquired a 20% equity share of Aston Martin (£286m worth of stock), in return for providing much-needed EV technologies. However, a key component of the deal, and one that was actually omitted in Aston Martin’s public announcement, was the share price target of 64p, meaning that Aston Martin will actually have to compensate Daimler for every penny under this target — giving the German automotive giant upside only in return for its EV technology.

Final word

Following the disastrous IPO in 2018, the last two years have seen Aston Martin go from James Bond to junk bond, with mounting debts and a branding that although iconic, finds itself slipping behind modern trends. Coupled with the crippling effect of COVID-19 on both the luxury vehicle market and the economy as a whole, this deal signifies a desperate attempt from the luxury car manufacturer to leverage the EV technology it is purchasing from Daimler to develop a new line of vehicles, capable of turning the company around and driving Aston Martin into a profitable future.

Sources

https://www.daimler.com/investors/reports-news/financial-news/20201027-partnership-aston-martin.html

https://www.ft.com/content/1abfa75b-1d31-455a-9e43-9bfef1d06844

https://www.bloomberg.com/news/articles/2018-10-02/aston-martin-is-said-set-to-price-ipo-at-19-pounds-per-share

https://www.bbc.co.uk/news/business-54712376

https://www.bbc.co.uk/news/business-52804705

https://www.ft.com/content/a0864c3c-6c20-4415-b95d-9eb729f128fa

Leave a Reply

Your email address will not be published. Required fields are marked *