M&A with M and Q

Bond in driving seat in Aston Martin investment

Aston Martin is getting a welcome boost from a £150-million ($241-million) capital injection. The cash from Investindustrial, the buyout shop that turned round Ducati, should lift research and growth at James Bond’s favourite car maker. But perhaps appropriately, Aston Martin’s bondholders seem the biggest immediate winners.

The Italian private equity firm is not buying in on the cheap. Its 37.5 per cent stake in new shares values Aston Martin’s enlarged equity at £400 million, while debt stands at £380 million. That equates to an enterprise value of almost twice sales and roughly 11 times Ebitda, assuming earnings before deductions hit £70 million this year – two multiples that would be the stuff of fantasy to most big car makers.

But the road map from here is at least clear, if not straightforward. Aston’s plans to funnel £500 million into research and development over the next five years or so should help keep the range fresh. That may include plugging an obvious gap: SUVs. Porsche proved with the Cayenne that the same luxury marque can credibly produce both two-seaters and Chelsea tractors.

Befriending a big auto maker, beyond Aston’s extended engine pact with Ford, is a must, too. Even with fresh cash, developing new platforms and engines alone is tough, especially as emissions standards tighten. Mercedes would be ideal.

And Aston Martin must get bigger in China, which will account for just 5 per cent of 2012 sales, Bernstein estimates.

If Investindustrial can repeat its success with Ducati, it will spare the blushes of the current Kuwaiti owners, led by The Investment Dar. So far, their five-year bet has gone backwards. Bringing in outside capital and expertise is embarrassing for such a prestigious investment.

For now, though, the clearest winners are Aston Martin’s bondholders. The junk securities were sold in June last year, just before the high-yield market flipped from mania to depression. By last December they were trading at little over 60 per cent of face value and yielding more than 20 per cent.

They have recently roared back towards par. Anyone who bought at the low, collected the coupon payments and sold out now would have made nearly 80 per cent in a year. In a low-yield world returns like that deserve a Martini or two.