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.
Volvo purchase: an exceptional Chinese deal?
Zhejiang Geely Holding Group’s acquisition of Volvo from Ford for US$1.8bn means a Chinese carmaker has finally succeeded in reaching agreement to buy a Western marque. Ford originally put the Swedish brand up for sale nearly three years ago, as GM looked for a buyer for its notoriously gas-hungry Hummer.
Sichuan Tengzhong Heavy Industrial Machinery, advised by Credit Suisse, agreed to buy Hummer last June but that deal was later shelved. Similarly Beijing Automotive Industry Holding Co pulled out of a possible purchase of GM’s Swedish asset Saab. That deal had been fronted by smaller Swedish luxury carmaker Koenigsegg.
At the time, advisers murmured that these deals had been killed by the Chinese authorities baulking at allowing smaller vehicle makers in the unconsolidated Chinese market buying tired Western consumer brands. These would have needed significant investment to be restructured.
Geely, which is backed by a Goldman Sachs private equity fund, is in a different league. Its move, principally funded by US$1.6bn cash, looks credible and Volvo is in better shape and might need less effort to turnaround, fuelled by rampant Chinese demand, than other autos on the block. One estimate says China’s will post 12% annualised GDP growth this quarter.
That said, the Chinese state itself, although backing private company Geely’s deal, still seems more focused on easier asset deals. On the same day state oil company Sinopec has splashed out US$2.5bn on African assets, this time offshore from Angola. Ironically these were owned by Petrochina.
This is Sinopec’s first purchase of overseas upstream assets, although it did agree to buy Addax Petroleum, which has assets in northern Iraq, for US$9bn last June. It has plans for further deals.
Such transactions, in more welcoming areas of the world are easier to pull off. But asset deals elsewhere are harder to complete. Take Chinalco’s aborted purchase of certain Rio Tinto assets.
If it isn’t obvious by now, it should be. China is about to become, and will be the next/future global power on this planet. If the Government can keep their citizens (and provinces) together they will be the predominate Nation in the not to far future. They know that we will sell our grandmothers if the price is right!
DealZone Daily
Time Warner is considering making a second-round bid of up to $1.5 billion for Hollywood studio Metro-Goldwyn-Mayer, a source tells us. The March 19 deadline for the bids for MGM — whose film library includes the James Bond and Pink Panther franchises — may well be extended.
Shares in Arrow Energy have been suspended — the suspicion is that Royal Dutch Shell and Petrochina will sweeten their joint $3 billion offer for the Australian gas producer. Read the Reuters story here.
And as I am writing this, London-listed Gulfsands Petroleum is saying that it has rejected a preliminary takeover approach. The suitor is Indian, it has also said, but it’s not ONGC. To be continued.
For all other news on deals from Reuters, click here. In rival media:
Zhejiang Geely Holding Group chairman Li Shufu indicated talks to buy Ford’s Volvo car unit had hit a snag due to problems at Ford, but continues to expect to complete the deal, says a story in the Wall Street Journal.
Takeover target Arriva is refusing to open its books to Deutsche Bahn unless the German firm increases its almost 1.4 billion pounds ($2.1 billion) bid for the train and bus operator, according to UK newspaper The Times.
India’s second-largest listed developer Unitech is looking to spin off non-core businesses that include power, hotels, telecom and special economic zones, the DNA Money newspaper reports.
DealZone Daily
Cadbury posts its final defence against Kraft’s hostile takeover, but a muted share price reaction shows it is not changing market views about the deal much. Ferrero, the Italian chocolate maker, is “very close” to taking a decision on whether to launch a counterbid together with U.S. group Hershey, a source close to the operation tells Reuters. Italy’s Il Messagero reported earlier Ferrero was securing a $4.5 billion syndicated loan.
General Motors repeats it is closing down Saab, because it has not yet received a credible bid. Dutch group Spyker meanwhile, says it remains hopeful that a deal can be reached.
And in other media:
Ford remains open to talks with potential bidders for its Volvo cars unit, despite a commercial agreement on a sale with China’s Zhejiang Geely, Sweden’s Dagens Industri says.
Fortis Holding’s special purpose vehicle Royal Park Investments — set up to hold the toxic assets of Fortis Bank, has raised 4.3 billion euros, according to Belgian newspaper De Tijd.
Corus Entertainment Inc, Shaw Communications Inc, Fairfax Financial Holdings Ltd, and Jim Pattison Group are considering investing in debt-laden media company Canwest global Communications Group, the Globe and Mail newspaper reports late on Monday.
Bank of America is in talks with New York attorney general Andrew Cuomo’s office to settle a probe on bonuses paid to Merrill Lynch executives, the New York Times reports.
DealZone Daily
Wednesday’s highlights:
Ford Motor Co (F.N) and China’s Geely are set to report progress as soon as Wednesday in talks to sell Ford’s Volvo unit to the Chinese automaker, two people with direct knowledge of the matter say.
Spyker Cars presses ahead with efforts to cut a deal for Saab with General Motors, with talk of possible backing from a Dutch billionaire fanning the Swedish carmaker’s faint hopes of an eleventh-hour reprieve.
Chinese Internet firms are eyeing more spin-off offerings after raising nearly $1.5 billion this year as they bank on strong foreign interest in high growth China plays.
Australia’s Macquarie agrees to acquire the derivatives business of private bank Sal. Oppenheim as a way to boost its presence in Europe, the companies say. Neither gives financial terms, but one source close to the matter said the deal valued the business — which focuses on equity derivatives and structured products — in the double-digit million euro range.
For more on these stories and the rest of the latest deal-related news from Reuters, click here.
And elsewhere:
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.
Money no problem for Geely’s Volvo bid
Goldman Sachs has been known to pick a few winners in its day. The $334 million it plunked into the Chinese automaker Geely in September may prove to be one of its craftiest bets.
Geely, picked as the preferred bidder for Ford’s Volvo unit, is seeking at least $1 billion in loans from Chinese banks to finance a $1.8 billion bid, sources say.
Geely means “lucky” in Chinese. But with the bankers it has lined up, the company probably doesn’t need much in the way of luck. Bank of China, China Construction Bank and Export-Import Bank of China have agreed to extend it loans, our sources tell us. That’s about as mighty a banking syndicate as you can get in the People’s Republic.
“Money is not a problem for Geely,” said one source. “They definitely have strong support from Chinese banks, and there are a number of private equity funds queuing up to invest in Geely.”
Then there is the near-perfect timing for a Chinese automaker, looking for a technology upgrade on the cheap, to be shopping for one of the best known premium brands in the industry. Though Ford and Geely have not disclosed a possible sale price for Volvo, reports suggest it will be much closer to $2 billion than the $6.45 billion Ford paid for Volvo in 1999.
People like me agree that you have a good point about serving the Chinese market. Regardless of any damage Geely may or may not do to the Volvo brand, it is also entirely reasonable to expect Geely to make the most of the technological leap and ultimately offer competitive, quality cars in a global market, just as the Japanese and the South Koreans have done before them.
from Breakingviews:
Safe Volvo a risk bet for China’s Geely
Shares in Geely Automobile have risen some 40 percent in the past month partly on hopes the Chinese carmaker's parent company will buy Volvo. Ford has named Geely as preferred bidder for the Swedish marque. But on this occasion it could be better to travel hopefully than to arrive.
Buying Volvo would be a huge mouthful for Geely. If it goes ahead, Geely and founder Li Shufu will have to write Ford a cheque for $2 billion. But that's just for starters. Volvo lost $1.5 billion last year. Assuming it continued at the same rate during Geely's first year of ownership, the Chinese would pretty quickly be in for $3.5 billion.
By way of comparison, that is almost 20 percent more than Geely Automotive's enterprise value of just $3 billion. And it doesn't include any further investment Geely might make. The long-term plans being talked about in the media suggest the total could hit about $10 billion. Achieving an acceptable return on that would require a dramatic turnaround in Volvo's fortunes.
Staunching the losses won't be easy in the short term. The deal offers few quick fixes. Geely will find it hard to reduce Volvo's costs because it doesn't have any Western operations of its own to integrate. It will depend for the most part upon the supply arrangements that Volvo already has with Ford and others, and these are unlikely to go down in price because of the takeover. Geely has already said that if its offer goes through it will retain Volvo's factories, research centre, trade union agreements and sales network.
Whether the deal works or not depends upon whether Geely can successfully implement what seems to be its longer-term plan. This is to turn Volvo around and transform its own fortunes by taking the Swedish marque into China as a locally-owned brand.
Geely Automotive is currently the smallest of the big Chinese carmakers, producing about 300,000 cars a year, and the most significant purely private sector operator. Like Volvo, which makes a similar number of cars, what Geely lacks is scale.
China is now the world's largest automotive market. According to JD Power sales will reach 8.2 million cars in 2009, and grow to 12 million by 2016. The big opportunity then is to bring Volvo to China, where its S40, S60 and S80 are already positioned as luxury vehicles. A mere 5 percent share of the three segments these models compete in would amount to 300,000 units in 2009, and nearly 400,000 units in 2012.
Ford picks Geely… for now
Whatever reservations Ford may have had about selling Volvo to Geely and potentially exposing all of its competitive secrets to pirate-infested Chinese markets, they appear to have been laid to rest … for now.
The U.S. automaker named a Geely-led consortium as preferred bidder for the money-losing Swedish unit, estimated to be worth about $2 billion. The news is conspicuously coincidental — as many such stories are — with intensely routine negotiations in Hangzhou between top trade officials of the two countries. Naturally, Ford left open the possibility that it could back out of the deal, saying more detailed talks were needed.
It’s been nearly a year since Ford began efforts to sell Volvo, and only a week ago a source was telling us that concerns about intellectual property rights were threatening to scupper the deal. That followed news of a former Ford engineer’s arrest in the United States on charges of stealing trade secrets from Ford and using them to try to get work with Chinese auto makers. Good thing Volvo is such a safe brand; even with a preferred bidder in place, this asset sale could prove to be a wild ride.
Well, traditionally the most reckless industry espionage in Germany used to be committed by – Americans. So, it seems that this tool of the trade, too, has just been copied by the Asians.
The deal with BMW proposed by Paul is my dream, too – technically their would be lot of synergies, while the brand images are very complementary. Just too bad that BMW don’t have the funds and the confidence right now.
Deals du Jour
At long last, Europe may see its first sizeable IPO: Aviva says it expects to complete the flotation of its Dutch unit, Delta Lloyd, in November. And shares in Telenor jump 15 percent after it settles a long-standing row with Russia’s Alfa Group. The agreement will involve a pooling of assets between the two companies. For these and other stories on deals, click here.
And here’s what we found of interest in other media today and over the weekend.
Shoprite Holdings Ltd chairman Christo Wiese is looking to swap some or all of his stake in Africa’s biggest grocer for stock in furniture maker Steinhoff, a South African newspaper reports.
Hana Financial Group, South Korea’s No. 4 banking group, is seeking to raise 1 trillion-2 trillion won ($853 million-$1.7 billion) in a rights offering, according to media reports.
A U.S.-led consortium has entered the race to buy Volvo from Ford, the Financial Times reports, in a challenge to China’s Geely Automotive, which confirmed its interest in the money-losing Swedish carmaker last month.
Chinese steel and iron ore group Baosteel has proposed to pay 1 billion pounds ($1.6 billion) for a 30 percent stake in Anglo American’s huge Minas Rio iron ore mine in Brazil, according to a report.
British housebuilder Taylor Wimpey is considering the sale of its North American housing operations, which have been hit hard by the global recession, in a bid to cut debt, the Sunday Times reports.
Of course GM worked on the numbers to make the IPO look attractive. Let the buyer beware.