McLaren sells the farm

Twenty years ago, Mizens Farm, just outside Woking in Surrey, was an 84-acre arable farm, which had a lot of greenhouses and a minaiture railway and associated infrastructure. McLaren was looking to buy land for a new headquarters and having given up on the idea of moving to Lydden Hill in Kent, after establishing that its employees were not interested in moving, the team did a deal to buy Mizens Farm. As part of that deal McLaren agreed to relocate the railway. Once all that was done and the planning processes completed, the team built its iconic McLaren Technology Centre, designed by Norman Foster. It was an F1 factory like no other – and it still is. Since then the company has grown and established itself as a global supercar company, which was not reliant on F1 for its survival. In fact, today, the team provides only 12 percent of the company’s revenues.

McLaren is doing well in Formula 1 this season but the company as a whole has been facing a lot of challenges since the start of the global pandemic a year ago. This is reflected in the sales of the McLaren supercars. The company sold 4,806 cars in 2018, 4,662 in 2019 and it expects to announce around 2,700 sales in 2020, when the full-year results come out in June. This means that revenues have dropped significantly and that means that the company, which has considerable debts (in the region of $700 million) has been facing a liquidity crunch. There was a cash injection last year of $370 million from the shareholders but more was required and this is why it was decided that 33 percent of the shares in McLaren Racing would be sold to a US consortium, in a deal that runs until the end of 2022. This will raise $240 million when completed. The buyers are MSP Sports Capital, run by investor Jeff Moorad and including Jahm Najafi, who became the vice-chairman of the team as a result.

But it seems that this was still not enough and with other sources of financing become less available and more expensive, a sale and leaseback of the McLaren headquarters became the most sensible thing to do.  The deal includes three buildings: the original McLaren Technology Centre, the McLaren Production Centre and the underground McLaren Thought Leadership Centre. A sale and lease back converts a company’s property assets into capital, without the company losing control of the building.  It avoids additional debt costs and rental payments are tax-deductible. It also removes debts secured on the property from the balance sheet and so improves the company’s debt-to-equity ratio, which makes it easier to borrow. The deal is worth about $240 million  for McLaren with a real estate investment company from New York called Global Net Lease agreeing to a 20-year triple-net lease, which means that the tenant agrees to pay all the expenses. The deal will also, no doubt, include a buy-back clause that will enable McLaren to take control again at some point, or perhaps to extend the lease for a further period of time.

Sale and lease back is something that has been used by a number of big British companies in recent times with firms like BP, Waitrose, Sainsbury’s and Next all improving their balance sheets by selling their real estate but leasing it back. The deal also means that if McLaren has expanded significantly in 20 years from now, it could move to new premises better-suited for its needs in the future.

For an investment firm, such a deal means that there is a  guaranteed income stream which means that it is easier to find investors who are happy to get involved.