Why McLaren deems its £200m gamble a necessary strategy

Got a spare £200m lying around? If so, 
the McLaren Technology Centre could be yours. 
The company has appointed a property agent to market it, although it has no intention to leave 
its home of the past 17 years.

McLaren, which was forced to make 1200 positions redundant and borrow £150m from the Bank of Bahrain earlier this year, urgently needs 
to shore up its balance sheet and reduce its debts. The MTC was valued at £200m on its most recent set of accounts. If a sale goes through, McLaren will in effect become a tenant.

"We're going to do a traditional sale and lease back," says CEO Zak Brown. "I think the majority of companies in this world don't actually own the real estate they are tenants of. We've got a lot of cash tied up in that building, and that's not a very productive use of funds when you're looking to invest in your business.

"So, we'll ultimately sell it to someone, and will then do an extremely long-term lease. We'll use that money to help us grow our business. It's a pretty typical financial restructuring exercise."

Brown is correct that so-called leaseback arrangements are increasingly common, and the impetus has grown worldwide during the coronavirus pandemic as companies struggle to obtain financing by traditional routes.

Leasebacks enable a company to turn capital locked up in bricks and mortar into cash which can be deployed immediately, and remove borrowings leveraged on properties from the balance sheet. But they are not without pitfalls.

Chief among these is that the company no longer owns the property, so it won't benefit from any increase in its market value. Neither will the value of the property form part of the value of the company. And, while the rental payments are tax-deductible, the company is still paying rent.

These leases are often described as 'quasi debt'. When the high street retail chain Woolworths collapsed in 2008, those close to the business pointed the finger at a decision to sell and lease back 182 shops in 2001, which raised £614m but saddled the company with an ongoing lease burden.

It is claimed (in the Financial Times) that within seven years the annual rent bill rose from £70m to £160m.

Also, when a company is financially troubled it is unlikely to achieve the book cost of its assets in any sale. McLaren spent an estimated £300m building the MTC and another £50m on the adjoining car factory - and it will be fortunate to realise the £200m value it current places on the campus.

Brown insists that the growth trajectory of the company will unlock revenues which will outweigh the rent costs. He also suggests desperation for cash is not McLaren's reason for selling.

For McLaren the next step is not only to realise the right valuation for its property, but also to ensure the lease is favourable. Specialised facilities - i.e. factories rather than offices - are considered riskier investments because it's harder for the landlord to find new tenants if the current one vacates

"We're fine financially from a cashflow standpoint," he insists. "Obviously when COVID hit and that turned off our Formula 1 business, our automotive business and to a certain extent our technology business, that consumed an immediate amount of cash.

"We've now done that [via the Bank of Bahrain loan]. And we've now got plenty of runway to be able to make sound business decisions - and I think the sale leaseback is a very good decision.

"The growth that we're going to be able to generate from our business by taking those resources and putting them into the business, we should be able to multiply that money we're getting because it will drive our business to the next level. So I do think it's the right decision."

For McLaren the next step is not only to realise the right valuation for its property, but also to ensure the lease is favourable. Specialised facilities - i.e. factories rather than offices - are considered riskier investments because it's harder for the landlord to find new tenants if the current one vacates. And the McLaren campus is the very definition of specialised. The site itself is a valuable asset, but one with little room for development.

When McLaren acquired the land - a derelict farm with a miniature railway adjoining - it had to undertake a complex series of mitigations in order to build on it, including substantial landscaping and the opening up of 
some of the land for public access. Upon completion, a restrictive covenant was placed upon it, limiting further development.

When former boss Ron Dennis decided to expand the Automotive business and construct another factory on site, locals objected, and the company had to undertake further mitigations.

The building itself is partially underground (beneath the water table, in fact) and screened from view; McLaren also bought 
a defunct mushroom farm nearby and turned it over to the Horsell Common Protection Society.

Subsequent applications to extend the MTC and build a new site for McLaren Applied Technologies on the other side of the road have been blocked. McLaren even went so far as to propose that the sites be connected by a hidden underground transport system, dubbed the "Ronorail" by insiders.

Will potential investors bite? If so, it will mean a new era for the team and put further distance between its past and present. For what is this place if not the house that Ron built?