- A major rights issue to ponder
- Spoiler: one to avoid
- Lots of idea-generating content…
What’s the most you can lose on an investment? While arithmetic suggests the answer is “100 per cent”, long-term shareholders in Aston Martin Lagonda Global (AML) could soon find out if this is indeed the limit.
On Monday, almost four years after it went public, the luxury car manufacturer announced details of a long-trailed fundraise, largely underpinned by a four-for-one rights issue.
As far as capital injections go, it’s a big one. Although the new shares have been priced at 103p – a 79 per cent discount to last Friday’s trading close – gross proceeds from the sale will exceed Aston Martin’s market value. Throw in another £78mn subscription from Saudi Arabia’s Public Investment Fund, which is paying 88 per cent above the theoretical ex-rights price of 178p for a 16.7 per cent stake, deduct bankers’ fees, and the balance sheet will be £629mn stronger.
A vote of confidence, you might think. That is, until you note that between the October 2018 listing and this cash call, Aston Martin raised £2.2bn from debt and equity investors. Talk of an optimal capital structure, and the implication that fresh funds will finally strike the perfect balance between safe leverage and bullish spending plans, fails to account for years of rudderless planning.
That mismanagement is reflected in shares that are now worth 96 per cent less than at IPO.
Of course, the pandemic didn’t help, nor did a market which initially valued the company at 57 times net profits for the year to June 2018. But Aston Martin’s original and greatest public market sin was its failure to issue new equity when it listed. Although new investors acquired more than £1bn-worth of shares on admission, this merely allowed selling shareholders to cash out.
The company, by contrast, was left with little more than an overvalued share premium account and expectations of persistently accommodative debt markets. But with annual interest payments heading towards £200mn after net debt reached £1.3bn this June, creditors are now tapped out.
Hence the latest plot. Assuming all goes to plan, the equity raise will “serve to further support” an ageing goal for annual Ebitda to hit £500mn “by 2024/2025”, almost a fifth above the total adjusted Ebitda recorded between 2018 and 2021.
By now, investors should be wary of non-standard profit figures. If analysts’ forecasts for a free cash outflow of £143mn this year prove prescient, the company will have sent £590mn to money heaven since the start of 2019. Net losses are on course to hit £1bn over the same period. Given the context, assurance that the raise “strongly positions [the group] for positive free cash flow generation from 2024” requires a leap of faith.
Then again, Aston Martin can perhaps rely more than most on its benefactors’ hopes. Its investment case – a storied brand, premium products, and access to a customer base whose price insensitivity should underwrite profit margins and fat capital budgets – has an allure. Similar business models have worked well for shareholders in luxury fashion stocks such as LVMH (FR:MC) and Hermes (FR:RMS), while Ferrari (US:RACE) has shown that the feat is possible in the high-end automotive sector.
Still, 'hopes' might not quite be the word. Exclude Mercedes Benz (DE:MBG), whose commitment to the rights issue should be seen in the context of its ongoing technology partnership with the company, and two-fifths of the shares will soon be in the hands of Aston Martin’s billionaire chairman and a sovereign wealth fund known for showcase investments and bottomless liquidity.
To everyone else, the rights issue presents much more of a bind, especially given limited evidence to suggest things will be different on Aston Martin’s second lap.
For those still unsure whether to waive their rights, write off sunk costs and sell, it’s worth revisiting the company’s pre-IPO finances. While former chief executive Andy Palmer was hailed for executing a corporate turnaround, Aston was burning through cash faster than its SUVs consume fuel, necessitating equity injections of £100mn in both 2015 and 2016 to keep the leveraged show going.
“This is my second life,” quips the company’s most famous fan in You Only Live Twice. In the real world, charmed existences eventually run out of road.
