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A billionaire investor wants a stake in Aston Martin, but I would stay clear

In December 2019, shares in Aston Martin (LSE: AML) were lifted by rumours that Lawrence Stroll, the billionaire owner of the Racing Point Formula 1 team, was planning to take a stake in the troubled luxury car maker.

Nothing happened, and an alarming trading update, released in early January 2020, helped pare back any gains made in December. However, last Friday Aston told investors that a consortium led by Stroll is indeed looking to take a significant stake.

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The consortium is offering to pay £182m for 45.6m million new shares priced at 400p each. Total shares outstanding would rise from 228,002,890 before the placing of new shares, to 273,602,890 after. The consortium would end up with a 16.7% stake in the company.

Two of Aston’s largest current shareholders have already indicated they will vote in favour of the consortium coming aboard. 

What’s at stake?

Aston is also looking to raise an additional £318m through a rights issue after the publication of preliminary results for the 2019 financial year. This means that existing shareholders will get the chance to purchase new shares.

The two largest existing shareholders have indicated they will take 50% and 100% of their rights. The consortium intends to exercise 100% of its rights at an estimated cost of £53m, which would take its total equity investment up to £253m. Whether obtained in the rights issue or later, the consortium plans to work towards holding a stake of 20% or more.

A £55.5m short-term loan is also coming Aston’s way as part of the consortium’s investment. The loan will support liquidity in the short term but has to be paid back with the proceeds of the placement, which is a strong incentive to get the placement done.

Any existing shareholder that does not take up their full allocation in the rights issue will see their stakes diluted by more than the 10% incurred as a result of the placement. Measures such as earnings and dividends per share decrease as new shares are issued. But Aston had little choice. 

Debt levels would have topped £1bn as the company drew down on an additional £100m, unlocked by meeting DBX order targets. The DBX, Aston’s first SUV, is crucial to the company’s success, but delivering it in numbers is proving costly.

The consortium’s equity stake and subsequent rights issue would mean that Aston could carry one without additional debt (for the time being at least). The balance sheet will look less horrifying, and there will be funds for delivering DBX‘s against orders.

Who’s in the driving seat?

Stroll will become the executive chair of the board, and the consortium can appoint an additional board member as long as its stake is sufficient. Aston itself recognises that its board composition will not be fully compliant with UK corporate governance codes.

Stroll will also be able to rebrand his racing team as the Aston Martin F1 team. Aston will no longer sponsor the Red Bull Racing F1 team, and the technology partnership will be ending. This will likely get messy.

Stroll, as Aston points out, has a wealth of experience in cars and luxury brands. Together with a large chunk of equity investment, this may get Aston back on track. But who’s track precisely? I will avoid Aston until this question gets an answer.

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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.