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  Vincent Grimaldi de Puget Aston Martin: Stretching 007 to 479 million pounds
by Vincent Grimaldi de Puget
March 26, 2007

After a six-month bidding contest, Ford Motor Company agreed to sell Aston Martin for £479 million (US$ 925 million) to a private equity consortium. Is it worth it? Is buying Aston Martin a vanity purchase or a money-generating investment?

From the investor's viewpoint, the 94-year-old company is also a multifaceted brand. To assess Aston Martin's growth potential and current valuation, it must be compared against three groups: car manufacturers, luxury businesses, and car-racing companies—which show low, moderate, and high margins, respectively. As beauty is in the eye of the beholder, the valuation may also go up if the potential investor strongly benefits from the acquisition's reputation or from a strategic fit.

 
 

Interestingly, strategic investors—whether French, Korean, or even Chinese car manufacturers—did not rush to bid on Aston Martin, although they were among those who could have maximized the value of the small British carmaker.

The auction essentially attracted individual investors and private equity groups. A look at the acquirers summarizes it all: The consortium is led by David Richards, founder of motor-racing company Prodrive, based outside London. He becomes the 12th owner of the exclusive British car manufacturer, founded in 1913.

The consortium is includes Aston Martin collector John Sinders, along with Investment Dar and Adeem Investment Co., two Kuwaiti investment companies. US investment bank Jefferies has acted as M&A advisers to the group, and German bank WestLB has been appointed to arrange £225 million of quasi-debt finance to back the LBO. Incidentally, the transaction must be Shariah-compliant—i.e., in accord with the Koran's opposition to interest and speculation—as the new Kuwaiti shareholders only invest in accordance with Islamic principles. Ford will retain a $77 million stake, which, as we shall see, might have critical implications for Aston Martin's long-term profitability.

Not long ago, Aston Martin was little more than a strong brand without the means of its reputation. The carmaker had a long history rooted in the coaching past of Newport Pagnell, a village in the luscious English countryside midway between London and Coventry. It had won car races—decades ago—and was remotely endorsed by Scottish actor Sean Connery, whose James Bond saved the world while tooling around in a DB5. The company's devoted personnel did not lack enthusiasm for their products, but the company was nevertheless bleeding money. Costs had been cut to the bone. The roofs leaked so badly that it rained in the plant. The company was moribund and had lost such core capabilities as engineering. All the business indicators hit rock bottom—only passion remained high.

As it appears, running a luxury car manufacturer is not easy. Lotus lost £17 million in 2002, £5.2 million in 2003, and £1 million in 2004. British sportscar manufacturer TVR has not made a profit since 2002, when it made £400,000 in profits, up from losses of £1.5 million in 2001. It lost £11.5 million in 2003 and has since largely collapsed. As for Aston Martin Lagonda Limited, it has not made much profit since World War I.

Since Henry Ford's all-black Model T and Alfred P. Sloan's General Motors, car manufacturers have continuously sought a balance between volume and differentiation. The consolidation has been fierce, with a handful of large groups now dominating the worldwide market.

The main problem for the management of Aston Martin (and its competitors) is therefore its small scale, which happens to be fundamental to its luxury status. The restless push for higher volumes, and the bureaucracy necessary to coordinate the complexity inherent to larger car companies, would go against the brand management of an exclusive, custom-made product.

Purchasing, bargaining power, assembling, distributing, servicing, and new product development are all made more difficult because of the small volumes. Besides, the capital expenditures necessary to develop and produce modern automobiles can kill the business if they cannot be reasonably amortized.

In sum, it is economic darwinism that pushes small car manufacturers to join the portfolio of large groups, where they can share purchasing and engineering capabilities: Ferrari and Maserati under the wing of Fiat, Bentley with the Volkswagen Group, and Rolls Royce under the umbrella of BMW. Since 1995, Aston Martin had seen a rebirth of its own, as a wholly owned subsidiary of Ford Motor Company. Aston Martin Lagonda Limited's new owners are now exposed to the traditional vicissitude of running a small volume carmaker, unless they can find contractual arrangements to maintain the previous synergistic benefits.

It is possible for independent luxury car manufacturers to make money, and everybody points to the example of Porsche. Although small—the German carmaker produces about 100,000 cars annually, which is limited but not exclusive—it manages to be the most profitable car company in the world.

Aston Martin made about 7,000 cars last year, compared with fewer than 100 in the early 1990s. Its goal is to increase this volume to 10,000 annually by penetrating new markets, such as Russia, and releasing new models.

Aston Martin's five current models sell for £82,000 to £177,000. Paradoxically, Aston Martin's pricing policy may show a slight discount against key competitors. Therefore, increasing prices may actually fuel profits without jeopardizing the brand equity. The danger would be to seek higher volumes out of stripped versions of existing models. A faux-leather Aston Martin, for example, would be the end of the brand. Some may be tempted to "push the metal" and increase volumes in the short term, which would be myopia as brand equity and long-term profits would then quickly vaporize. As the value of a company consists in its future profits, investors would not get decent exits either.

The real challenge for an independently owned Aston Martin, then, will be to finance the development of new and replacement models out of its 10,000 volume. The Rapide, a four-door sports sedan that will compete with the Porsche Panamera and Maserati Quattroporte, is already in the pipeline and will be testing the new business model.

Valuation is as much art as it is science: A business for sale is only worth what a potential acquirer is ready to put on the table. Considering the difficulties in generating a return on investment (ROI) with high-end luxury car companies, the current price—£479 million ($925 million)—paid for Aston Martin appears to be fair for all parties.

 
   
   Vincent Grimaldi de Puget is a leading brand strategist. He is a partner at GRIFIN PARTNERS, focusing on capital investing and business restructuring, and a visiting professor at US and European business schools.



 
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