(Update: This piece was written, as several commenters have pointed out, before GM clinched a sale of Saab to Spyker on January 26.)
By Quentin Carruthers
(Acquisitions Monthly) Automakers face a demand slump in Europe and the longer-term challenge of addressing climate change. Both pressures are expected to lead to further restructuring, consolidation and M&A activity.
The North American International Auto Show, held each January in Detroit, Michigan, is just coming to an end. Detroit is the hometown of America’s “Big Three” automobile makers – Ford, General Motors, and Chrysler – and the show constitutes one of the most important events in the industry’s calendar.
Touring the floor with a group of her fellow Congressmen was Nancy Pelosi, Speaker of the House of Representatives, who told reporters: “We came to listen, to learn, to observe, to measure, to judge what has happened to the investment that we made.”
US state investment includes US$60bn of government loans to support automotive assemblers, in return for control of GM and a minority stake in Chrysler, both of which came out of Chapter 11 bankruptcy proceedings in mid-2009. A further US$3.5bn has been used to support parts suppliers, and US$3bn to support car retailers.
Total state support equates to a loan of more than US$50,000 for each job in the manufacturing side of the industry, as calculated by Philip Wylie, director and automotives leader at restructuring adviser Houlihan Lokey.
Pelosi and the Congressmen left Detroit happy, with Pelosi saying: “We’ve been impressed. We have confidence in what has been accomplished.” One of her fellow Congressman even compared the visit to being in candy shop, so impressed was he by the consumer objects on display.
US disposals
However impressive the displays were in Detroit, the main accomplishment of US automakers and their suppliers is to have become leaner through restructurings and capacity reductions.
In the process, overseas disposals by the US automakers include the sale of Ford’s Swedish car brand Volvo to the Chinese and state-backed company Geely for US$2bn, a deal expected to close by the end of the second quarter of 2010. For the Chinese, Volvo presents a brand that can help realise their global ambitions, although Volvo is not expected to lose its “Swedishness”, as R&D will stay in Sweden.
Sweden’s other major car brand, Saab, is unlikely to make it through the crisis, and is probably will be shut down by GM, despite a handful of late rescue offers. But GM Europe has decided to retain Opel, after almost selling it to a consortium led by Canadian car parts maker Magna, a deal supported by the German government. In one of its first steps to restructure Opel, GM has announced the closure of the Astra-making factory in Antwerp, Belgium, with the loss of 2,600 jobs.
Chrysler, the third of Detroit’s Big Three, has tied up with small car specialist Fiat. The Italian automaker has a 20% stake in Chrysler, conditionally rising to 35%, with no majority stake in Chrysler allowed until US taxpayers are fully repaid.
Despite the phenomenal success of Fiat’s latest 500 model, deal detractors remain – one state funding adviser, who has significant auto sector experience, doubts not just whether Chrysler can be made to work (even Cerberus, the hard-line private equity house, did not manage to turn it around, after taking the struggling company off Daimler’s hands), but he also wonders whether Fiat itself will survive.
Nevertheless, Fiat has positioned itself as a consolidator – a complete role reversal from 2004, when GM paid compensation in order to avoid acquiring Fiat’s loss-making auto division after the Italians exercised a put option agreed under a strategic alliance.
Now Fiat is seen as a possible acquirer of Opel, should GM Europe’s restructuring falter, and the possible combined Fiat-Opel business would be the second largest player in Europe behind Volkswagen. Then again, the same doubter sees Opel as doomed anyway.
Scrappage delays restructuring
The Detroit show has not convinced everyone that the industry at large has turned a corner.
Eric Heymann, an analyst at Deutsche Bank Research, says: “Considering that in the last two years or so the global automotive industry found itself in its deepest crisis ever, the current mood in the sector – as reflected at the Detroit Motor Show for example – is astonishingly optimistic. There is justification for this on account of the recovery of individual markets, but the continued global overcapacity remains a virulent fundamental problem for the sector.”
The US is one market that seems better positioned for 2010, having taken more pain upfront: its automakers have made deep capacity cuts of around 30% to 40%, and they have not relied so heavily on the “cash for clunkers” demand stimulus.
New car sales in the US are forecast to grow by about 10% in 2010. The BRIC markets (Brazil, Russia, India and China) are also forecast to grow by between 6% and 10%, even though China – through a range of stimuli – saw explosive growth in 2009 of more than 50% in new sales to over 10m units, becoming the world’s largest light vehicle market for the foreseeable future.
Overcapacity is a particular problem in Europe, because of the short-term “pull-forward” effect of demand stimuli. Germany led the way with scrappage incentives worth up to €5bn, followed by the UK, France and Spain.
However, while a European domestic demand slump of more than 6% may hit hardest in Germany, German manufacturers and suppliers are themselves less exposed to the problem, due to their concentration on premium cars (less influenced by scrappage schemes than volume manufacturers such as the French automakers) and their 70% level of exports.
Deutsche Bank’s autos analyst Heymann notes that so far, significant capacity adjustments have only been made in the US, while new factories are being built in Asia and also in the US.
“Supply overhangs will thus persist,” he says. “The paring back that needs to occur has been prevented by subsidies. The next storm in the sector is therefore inevitable and will – if politicians allow it – also claim casualties.”
European consolidation
In the German market, the financial crisis has reversed the tables on one unlikely, liquidity-fueled deal – VW is acquiring its former and much smaller (but faster) assailant Porsche in a €12.4bn staggered deal that takes VW’s holding in Porsche to 49.9%, as at the end of 2009, concluding in a full takeover by 2011. The dog is now wagging the tail.
The other merger saga in which VW keeps a controlling and watchful interest – the possibility of a German-Swedish combination between MAN (owned 29.9% by VW) and Scania (owned 49.29% by VW, with 71.8% voting rights) – has yet to resolve itself, but a combination of the two truckmakers with VW’s own truck unit would create Europe’s largest truckmaker ahead of Volvo and Daimler.
Within Germany’s premium car market, Daimler – maker of Mercedes – could do worse than merge with BMW (the world’s leading premium car maker) – but the view here is that the customers would not want that, even if synergies of scale might be found.
In considering likely reactions to a possible merger of Fiat and Opel, Christophe Boulanger, autos analyst at Calyon, argues that the mass-market car-makers most affected would be Ford Europe, Renault and Peugeot, (same segment, similar scale) and each would have to respond.
However, Ford Europe’s scope for further alliances is limited by its strategy of globalised platforms, while Renault Nissan’s main option is to keep pushing along with the integration of its 10-year alliance (now moving from soft to “hard” synergies).
Peugeot, observes Boulanger, is “the odd man out”, resulting from the Peugeot family’s tight control over the group, but he notes: “In essence, the family is not opposed to a deal to accelerate the company’s globalisation and to achieve critical size, even if this implies a certain dilution of its 30% stake (45% voting rights) provided that it remains the group’s core shareholder.”
The most obvious partners – either for project-by-project co-operation or a strategic deal – are deemed to be the car-makers already in co-operation with the group, namely Ford (improbable), BMW (unlikely), Fiat (most logical) and Mitsubishi (easiest solution).
From hybrid to zero
A seasoned visitor to the Detroit motor show, Calum MacRae, automotives analyst at PricewaterhouseCoopers, describes what he saw there: “You can see the cost pressures,” he says. “The car-makers have hunkered down. There’s less of the glitz and glamour and outrageous concept cars. What you see is what will be produced.”
In particular, MacRae was struck by the concerted display of new power trains – US makers showing off smaller engines, down to 1.4 litre in size, in response to changes in legislation and the tightening of corporate fleet rules. The biggest product push at Detroit was for the new Ford Focus, normally launched in Europe where it sells three times as many models, but now being unveiled for the first time in the US.
And down “Electric Avenue”, as the show had it signposted, one car to catch the eye was the Nissan “Leaf”. First unveiled in Yokohama, Japan on August 1, the Leaf stakes a claim as “the world’s first electric car designed for affordability and real-world requirements”.
It is a zero-emissions car, as opposed to a hybrid car (such as Toyota’s pioneering Prius), which rivals view as a distraction from the real technology of the future but nothing is certain yet, as regards the technology of the future.
MacRae says: “There will be a lot of companies breathing a sigh of relief on getting through to 2010 – suppliers, retailers, OEMs. Now they need to position themselves to compete, and they are asking themselves if they have the right technology, the right scale, and if they are aligned in the right markets.”
Success, he says, “will likely be defined by an entity’s ability to fill voids in future technology portfolios, enhance regional coverage, and address scale issues”. Increased M&A is likely to ensue and, with capital still scarce, joint ventures.
Calyon analyst Christophe Boulanger takes it a step further, saying that the auto industry’s challenge to clean up its act is more exciting than anything it has seen since the turn of the 20th century, and that consolidation is the key to survival amid a coming wave of M&A.
-Read more from Acquisitions Monthly here.
There’s an art to financing a deal and Kraft and Berkshire Hathaway ’s brushstrokes are showing. Kraft launched a $9.5 billion debt sale to help finance its acquisition of Cadbury, and Berkshire announced a bond sale of up to $8 billion to help pay for its acquisition of Burlington Northern Sante Fe.
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