from Breakingviews:
Investors shouldn’t get too sweet on dolled-up GM
The impressive third-quarter showing from General Motors shouldn't wow prospective investors too much. Sure, the automaker's $2 billion profit beat Ford's. It even eked out a slightly better pre-tax margin than its rival. But GM's last set of earnings before next week's initial public offering aren't as flattering as they look.
The company stuffed its dealers with 10 percent more inventory than it did at the end of June. There's nothing inherently wrong with that. Car sellers have kept fewer vehicles on lots over the past couple of years. Demand was lacking, as was financing. But in GM's case, many dealers also held stocks down in case the Motown manufacturer cut them loose in its restructuring. Rebuilding those levels now makes sense as the 2011 season approaches and sales pick up.
GM also sharply curtailed less profitable fleet business from 34 percent of sales to 26 percent, the low end of the range GM expects for the year. And it churned out more trucks than in recent periods. At 27 percent, full-size pick-ups accounted for a fifth more of U.S. production than in the second quarter. That's fine if buyers are there: margins are higher on these and SUVs. It helped GM rake in more cash in the United States in the three months to September even though vehicle sales actually fell almost 8 percent.
It all paints a pretty picture. But it's unlikely that notably less profitable compact cars will remain a paltry 1.2 percent of U.S. production, as they were in the third quarter -- some 80 percent lower than in the second quarter. When the trend reverts, margins will drop.
It's perfectly natural to get all dolled up ahead of a big event. Companies facing hostile takeovers often experience a sudden burst of revenue as they push out more product to showcase their value. Cadbury and Potash are two recent examples. The myriad banks advising the U.S. Treasury and GM on the IPO know the drill all too well. JPMorgan, for one, made excellent use of it in the one quarter it managed to hit its 20 percent return on equity target back in 2000 by selling to Chase.
GM's third-quarter results might not be quite so contrived. And the company is certainly in healthier shape than it has been for years. But such make-up cannot be applied every quarter.
Deals wrap: Cutting the deal in half
Wal-Mart may scale back its bid for Massmart and take a 50 percent stake, rather than a full buyout, Massmart said in a statement. Wal-Mart has been under increasing fire from shareholders to revive its ailing U.S. stores, and some analysts have said it should concentrate on fixing its business at home before spending big on expansion. *View article
Private equity firm Blackstone Group reported a rise in quarterly earnings and said the value of its investment funds grew. *View article
With the U.S. car industry in a slow, fragile recovery from a punishing downturn, auto parts makers are reluctant to pull the trigger on deals, delaying a long-predicted wave of consolidation in the sector, write Soyoung Kim and Deepa Seetharaman. *View article
BHP Billiton dismissed a newspaper report that Canada’s federal government was leaning toward blocking its $39 billion hostile takeover bid for Potash Corp *View article *View quarterly results from Potash
Italian utility Enel has dropped the minimum price for the initial public offering of its renewable energy unit to attract enough investors to Europe’s biggest listing in three years, financial sources said. *View article
DealZone Daily
The Dubai government unveiled plans to recapitalise its indebted Dubai World flagship and repay Nakheel bonds in full, injecting what it said was $9.5 billion in new funding, but without new aid from Abu Dhabi. Read the Reuters story here.
Bharti Airtel looked set to wrap up its $9 billion deal to buy most of Kuwaiti telecom group Zain’s African assets, giving India’s top mobile operator a foothold in the frontier market after two failed attempts to buy South Africa’s MTN. Read the Reuters story here.
For more on these and the rest of the latest deal-related news from Reuters, click here.
In M&A and corporate finance news reported by other media on Wednesday:
German carmaker Daimler AG and France’s Renault are close to deciding on a wide-ranging strategic partnership that would include a swap of small equity stakes, the Financial Times said, citing unnamed sources close to the situation.
from Environment Forum:
GM, Chrysler cleared executive decks in 2009
When 2009 began, both General Motors and Chrysler were sliding toward bankruptcy. As the year ends, both companies have survived to fight another day.
The same can't be said for their senior executives.
Of the top 10 executives at GM's glass-towered Detroit headquarters in January, only one -- Bob Lutz -- remains. At Chrysler, only two of the 10 highest-ranking executives are still in Auburn Hills.
At GM, the churn took a dramatic toll at the vice president level. Of the 55 top executives, including vice presidents and divisional leaders, who were at GM at the start of the year, 26 have left the automaker. Of the remainder, few remain in the same positions they held, according to a Reuters tally.
The sweep was made near complete on Dec. 1 when the board at General Motors Co parted company with former chief executive Fritz Henderson after he had the post for only eight months.
Only at Ford did any of the former Big Three -- now called the Detroit Three -- automakers kept the slate of top executives pretty much intact. Only two of Ford's top 10 executives have left; both retired.
Of course, Ford did not declare bankruptcy to save itself as GM and Chrysler did this year with funding from the Obama administration.
Keeping score: autos M&A, U.S. property, Spanish loans
Highlights from this week’s Thomson Reuters Investment Banking scorecard:
· AUTOMOTIVE STAKES TOTAL $11.2 BILLION Powered by Germany’s Volkswagen AG, the volume of minority stake purchases in automotive manufacturers totals $11.2 billion for year-to-date 2009, the biggest year on record. In this week’s biggest deal, Volkswagen secured a 19.9% stake in Japanese automobile maker, Suzuki Motor Corp, valued at $2.5 billion. Volkswagen’s 49.9% stake in German rival, Porsche was valued at $5.8 billion and completed on December 7th. Year-to-date, worldwide M&A activity in the industrials sector totals $244.3 billion, a 9% increase over last year at this time.
· US REAL ESTATE M&A DOWN 60% OVER 2008 Simon Property Group’s $2.3 billion acquisition of Baltimore-based Prime Outlets Acquisition Co LLC, an owner and operator of shopping centers, ranks as the biggest US-based real estate transaction since Boston Properties Inc acquired New York’s General Motors Building and other properties from Macklowe Properties for $3.9 billion in May 2008. US real estate mergers and acquisitions, which account for just 2% of overall US M&A, total $12.5 billion for year-to-date 2009, a 60% decline from 2008.
· LENDING IN SPAIN MORE THAN DOUBLES Spain’s Urbaser SA, a waste management company, closed a $1.1 billion term loan from a syndicate of banks this week, brining the volume of syndicated lending in Spain to $66.2 billion, more than double last year’s total. Borrowers in the energy & power and industrials sectors comprise 83% of overall syndicated loans in Spain this year, with multi-billion dollar borrowings from utilities such as Gas Natural ($29 billion) and Iberdrola SA ($6.8 billion) and infrastructure concern Grupo Ferrovial SA ($4.6 billion).
General Motors staff has IPO dreams
Ever wonder how General Motors is holding onto its top talent?
After a traumatic bankruptcy and series of federal bailouts, the company still owes billions of dollars to the U.S. and Canadian governments. It lost $1.2 billion in its latest quarter, and only sees a slight uptick in auto sales next year.
The days of banner-year profits and bonuses must seem far off for GM’s executives and finance staff. GM’s Chairman has already said pay caps imposed on companies by the U.S. government’s pay czar make it tough to hire executives.
While other job opportunities are obviously limited in Detroit, and they may have nowhere better to go in the industry, the company’s plans for a 2010 IPO has emerged as a key staff retention tool, one of its top executives said on Tuesday.
In comments to the Financial Executives International Current Financial Reporting Issues conference in New York, Nick Cyprus, vice president, controller and chief accounting officer at GM said:
“I have a tool that my peers don’t have. We have an IPO coming up in the next half-a-year to a year or whatever it takes. That’s a great tool, too. Getting the experience of taking General Motors public again is not only a great tool from an experience perspective and resume builder, but it’s also a great experience in that if things work out well there are potential wealth opportunities. In essence, the taxpayers get paid back and people who have delivered get an opportunity to make some money.”
GM is planning to arrange a revolving line of credit in preparation for an eventual IPO, which would probably be one of the biggest in 2010 if it is able to keep up with its time schedule.
The GM stock owned by prefereds is GMGM.GT..It jumped $2.05 this week with the news of the up coming and better news for GM..What do you think about GMGM.GT???/
The View From The Dealer Floor
Major automakers don’t sell cars to American consumers; they sell to dealers. And the biggest U.S. dealership chain by a wide margin is Fort Lauderdale, Florida-based AutoNation, which sold over 440,000 new and used vehicles last year.
So when AutoNation CEO Mike Jackson talks, auto executives listen — or so you would think.
In an interview with Reuters, Jackson said Detroit automakers had largely ignored his warnings over the past decade that the U.S. industry was headed for a crisis.
“I think I was usually able to reach an intellectual agreement on where the industry was headed. Where we disagreed was how much time we had to get there. On that, even I was wrong. Time was up,” Jackson said. Jackson thinks GM and Chrysler can be fixed. But he also thinks Washington should let either or both fail if their current turnaround effort backed by $60 billion in taxpayer funds falters. Here are excerpts from the interview and Jackson’s view of where GM, Chrysler, Ford and their rivals stand now in the marketplace:
Q: Are GM and Chrysler capable of change?
A:I think they had a near-death experience. When you really get down to the point where we either get this done or we won’t exist anymore, then it happens. …My sense is that absolutely Sergio (Marchionne) is providing leadership at Chrysler and (Fritz) Henderson at GM. It’s under way, and it’s going to happen. Q: You’re looking to buy Ford and GM dealerships. Why is that?
A: We always bet on the biggest, broadest brands. Now we’ll take a look if the pricing and the opportunities are right. We love Chevy and we love Ford. Those are the brands that will succeed in the future. Those are the brands that are going to get the majority of the product and marketing dollars from those companies. They’re also the broadest brands. You can sell everything from Chevy from a Corvette to an Aveo. It’s unbelievable how well accepted and how approachable those brands are for the American consumer.
Come on.
Gone are the days of planned obsolescence where you traded out before the cost of maintenance hit you. Not that long ago warranties for 3y/30k miles were replaced with 10/100. The paint doesn’t even chip anymore.
The secondary warranty market just exacerbates the ever increasing spread between when an auto is replaced for new.
People got used to 2 year leases but the days of $79 a month (1997) are over. Not that long ago a BWM was $400 a month, now it’s a Corolla and a 48 month lease -not that you can get approved for credit on either.
Face it, the market has changed and it’s due to more than a economic downturn.
GM driving uphill with new ads
Once upon a time, when $1 million was big money, General Motors spent millions on an advertising campaign on three U.S. television networks featuring the sing-along slogan, “Baseball, hot dogs, apple pie and Chevrolet.”
Powered by the link between Chevrolet and other American loves, GM’s share of U.S. auto sales was 35 percent in 1980. In 2009, GM’s share of the American auto market is a mere 19 percent, as it struggles with a backlash from an unpopular federal bailout and bankruptcy.
Chevrolet is hardly as American as apple pie anymore, but Chevrolet and GM will soon launch an aggressive marketing campaign to change deep-set perceptions of American consumers that GM cars and truck are inferior to imports like Toyota and Honda. The campaign, which will feature new company chairman Ed Whitacre and the slogan, “May the best car win,” will challenge notions of inferior products and will be waged on a myriad of television networks and print publications, but will also employ the Internet.
It will be an uphill battle. Perceptions are hard to change.
“This has been a problem for a long time for GM,” said David Cole, who heads the Ann Arbor, Michigan-based Center for Automotive Research. “It’s always the case that perception lags reality — no matter which direction you are heading in. The Japanese companies faced this for years.”
In the early 1970s, the mention of a Japanese car including today’s global sales leader Toyota and of the highly rated Honda , brought snickers from Americans. “Made in Japan,” was a punchline for jokes by American comedians, which reinforced the perception of poor quality.
But within a couple of decades, helped by sharp increases in U.S. gasoline prices in 1973 and 1981, Japanese cars became known for quality and for producing models that got great gas mileage.
Your ads comparing a select group of cars to Toyota is offensive and misleading. Why did you leave out the Prius. There is a reason that Toyota is rated the highest mileage fleet in the industry and you are destroying your own credibility by implying that you have a better rating than Toyota. Try being honest, if you know how. People will accept this approach better than your current transparently deceptive ads.
Road to fortune or highway to hell?
That will ultimately be the question asked about what kind of a future the German carmaker Opel faces.
Parent General Motors said on Thursday that it indeed wanted to sell a majority stake in the unit to Canadian auto parts group Magna and Russia’s Sberbank, a decision long favoured by the German government under Chancellor Angela Merkel.
With about two weeks to go until a general election in Europe’s biggest economy, this would clearly be a political victory — but the question remains whether it will also be an economic one.
Merkel said that GM’s recommendation — which would see Magna’s Brussels-listed rival bidder RHJ International losing out in the battle that has dragged on for months — is going to be tied to conditions.
Although she said that those conditions would be manageable and negotiable, doubts remain about whether this will be the new beginning the company is hoping for.
“The most meaningful choice would have been a global company that produces several millions of cars (per year), such as GM or a Chinese producer. Magna is not a producer of cars in the classic sense, and I could imagine that some other producers could be upset about the decision. As a consequence, Opel may lose some contracts,” said NordLB analyst Frank Schwope.
“This seems to be a political decision rather than an economical one.”
My other car is in limbo
Just a week after launching the cash-for-clunkers rebate program, policymakers and auto executives are left sorting through the chaos caused by the program’s runaway success.
As of Friday, there was no knowing how much longer funding for the program will last. The Obama administration has reassured car shoppers and dealers that any trade-ins over the weekend will be honored at rebates for up to $4,500. Meanwhile, the U.S. House rushed to triple funding for the program, adding another $2 billion in a bill that heads to the Senate where it could face tougher scrutiny.U.S. car sales for July, set to be released on Monday, are expected to show a turbocharged boost from the government program, a sleeper success in a string of policy steps aimed at stabilizing the U.S. auto industry that has included government-sponsored bankruptcies at GM and Chrysler.Before the rush of clunker trade-ins, analysts had been looking for industry-wide July auto sales to top 10 million units, the highest rate of 2009 and an encouraging sign the market has turned the corner. Investors have discounted some of that recovery. Shares in AutoNation, the No. 1 dealership group, have gained 48 percent since the start of the second quarter. Shares in the No. 2 dealership group, Penske Automotive Group, have more than doubled.With inventories tight, automakers also stand to gain as production — and revenues — increase in the second half. July sales data will help sort the winners from the losers, but the early anecdotal evidence suggests that the some of the biggest gains have gone to the automakers that were already outperforming. Hyundai says about 18 percent of its sales in the month of July included a cash-for-clunker backed trade-in. Ford, which is seeking to distance itself from the rest of Detroit, reports that cash-for-clunker trade-ins were boosting sales of smaller, more fuel-efficient cars as opposed to crossovers and trucks. That is also the area where Ford’s product line-up is seen as giving it an edge against GM and Chrysler.
Wouldn’t go as far to say that cash for clunkers was a success. It seemed like a way to trick consumers into spending money.
Of course GM worked on the numbers to make the IPO look attractive. Let the buyer beware.