McLaren Supercars Have Some Very Wealthy Superfans

(Bloomberg Opinion) -- It says something about McLaren Group’s unfortunate predicament that some of the defining moments in its recent history have happened in a courtroom, rather than on the racetrack.

McLaren’s lawyers filed a petition in June warning that the company would run out of money if bondholders prevented it from mortgaging trophy assets, including its Norman Foster-designed British headquarters.

The pandemic forced the prestige carmaker to down tools, shutter showrooms and cut one quarter of the workforce. It also lay bare the fragility of its debt-heavy balance sheet. McLaren’s Bahraini owners subsequently arranged a 150 million-pound ($201 million) unsecured loan and bondholders were persuaded to allow a sale and leaseback of the extravagant lakeside HQ.

On Sunday McLaren announced the sale of a 185 million-pound stake in its Formula 1 racing team, which should stop it becoming a further drain on the company. Still, the manufacturer isn’t out of the woods: It lost 250 million pounds in the first nine months of 2020, and held less than 40 million pounds of cash at the end of September.

McLaren hopes to raise up to 500 million pounds of equity next year so that bondholders agree to refinance more than 600 million pounds of borrowings that come due in 2022.

Finding someone to stump up that kind of money won’t be straightforward because McLaren has already burned a hole in the pockets of its wealthy owners, who put in 300 million pounds in March. Bahrain sovereign wealth fund Mumtalakat is the majority owner; TAG Group Ltd. and Canadian businessman Michael Latifi have sizable stakes. While help might arrive from another rich benefactor or private equity, a tech company might be a more useful partner and more tolerant of McLaren’s cash burn.

The company’s debts stem partly from another bruising legal battle. In 2016 its former boss Ron Dennis fell out with fellow shareholders. He was ousted and McLaren borrowed money to buy out his stake in a broader restructuring. In hindsight, this 275 million-pound dividend recapitalization was unwise.

McLaren has an enviable racing history and has produced some of the world’s most desirable cars, including the F1, P1, Speedtail and open-top Elva. These vehicles can cost more than $1 million. But without a larger automotive parent to lean on, McLaren has to strain to fund the massive investments needed to stay competitive in luxury autos and racing. Last year it produced fewer than 5,000 vehicles, all of which were built using variations of the same carbon-fiber chassis (some carp that this makes McLarens look similar).

A merger and listing via a special purpose acquisition company is being considered, according to the Financial Times, but this might be a tough sell given McLaren’s financial difficulties.

A SPAC couldn’t easily capitalize on investor excitement for electric-vehicle companies because McLaren doesn’t plan to offer one for several years. McLaren’s customers are often enthusiasts who still want a combustion engine, although the company is launching a hybrid supercar, the Artura, next year.

Being tied to a growling gasoline engine isn’t necessarily a bar to a stonking valuation. Ferrari NV is worth a princely 34 billion euros. But the more relevant McLaren comparison is with Aston Martin Lagonda Holdings Plc, whose 2018 public listing was a disaster.

McLaren shares many frailties with Aston Martin. Both have large debts, capitalize lots of development costs (which can flatter reported earnings) and have struggled to balance supply and demand for their vehicles, leading to overstocked dealerships. They also rely on customers paying deposits in advance. One reason McLaren is burning cash is because these deposits have dried up.

Aston Martin does at least have a broader product range, including a new SUV. It was bailed out first by billionaire fashion mogul Lawrence Stroll and then by Germany’s Daimler AG, which will provide new technology in return for more equity.

Could McLaren engineer a similar deal? Most of the big automakers are tightening their belts and probably aren’t looking to add trophy brands. 

California might be more fruitful for the tech-rich McLaren. In 2016 Apple Inc. looked at buying a stake in the carmaker. The two companies share an affinity for engineering and good design. While the iPhone maker has since pivoted toward autonomous driving systems, rather than building a car, I wouldn’t entirely rule out a rematch.  

Tesla Inc. is developing an all-electric supercar, the second-generation Roadster, and arguably has no need of McLaren’s gas-powered lineup. Still, its galloping share price is a license to print money. Elon Musk is open to mergers and he’s a big McLaren fan. Here he is proudly taking delivery of a McLaren F1 in 1999 after his first big payday.

Stranger things have happened.

McLaren says dealership stocks are now 50% lower than at the beginning of the year.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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