The German Auto Industry: Daimler, Porsche and Opel Struggle

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Tag: financial results, Porsche, Daimler, BMW, Opel, Magna, GM, Deal

May 29, 2009

The saga in the auto industry keeps getting richer as the global economic recession unfolds.  There is no doubt that the sharp and sudden contraction in global auto sales since last October has placed a huge strain on the balance sheets of the top tier global auto companies including the German manufacturers. Daimler, Porsche-VW and Opel have had an interesting few months as Daimler needed to raise cash, Porsche turned into a troubled hedge fund and Opel sought a new owner.

Daimler
When Daimler reported its full 2008 financial report, it was pointed out that the company has burned through a lot of cash in the past year.  Much of the cash burn was associated with a stock buyback program stemming from its divorce with Chrysler in 2007.  In , GM Reports Full Year 2008 Financial Results and Opel Restructuring it was stated: 

Daimler the maker of Mercedes-Benz and commercial truck vehicles, last week reported their full 2008 results and there was a surprise (Press release).  For a quick overview, Daimler’s net profit declined from €4.0 billion in 2007 to €1.4 billion in 2008.  Furthermore, free cash flow fell from a positive €7.6 in 2007 to a negative €3.9 last year.  The company also reported a net liquidity of €3.1 down from €12.9.  The surprise was the sharp drop in available group cash.  Readily available cash for the company was reported to be  €7 billion and only €4.6 billion was assigned to the industrial business including it car and commercial truck operations. At the end of 2007, Daimler’s consolidated cash and cash equivalents stood at €15.6 billion.


Late last March Daimler announced it raised €1.95 billion through the sale of a 9.1% stake to Abu Dhabi's Aabar Investments PJSC.  The company issued 96.4 million new shares to Aabar at €20.27.  This action makes Aabar, Daimler’s larges shareholder and dilutes Emirate of Kuwait's stake in Daimler to 6.9% from 7.6%.  Furthermore, Daimler later announced the company will cut costs by reducing the work week by up to 5 hours and cut pay by 14% for 73,000 salary employees.

The previously discussed share buyback program was a significant drain on Daimler’s cash position and the cash infusion by Aabar was an imperative.  For the 1st Quarter, Daimler reported a net loss of €1.286 billion, compared to a €1.332 billion profit during the same period last year (Press release, Financial results).  Revenue was down 22% to €18.7 billion from €24 billion in 2008.  The industrial groups’ cash position improved from €4.6 billion at the end of last year to €7.2 billion at the end of the 1st Quarter.   Net liquidity during that same period improved slightly to
3.7 billion.  Action taken by the company curtailed the drain on cash to €97 million for the quarter.

Porsche-VW
Of a more pressing nature the hedge fund sometimes sports car manufacturer Porsche Automobil Holding SE may have some serious financial problems stemming from its attempt to take over Volkswagen.

Porsche which now owns 51% of VW holds options to acquire an additional 20% of the company.  The company has been steadily increasing its position in VW since 2005 but currently does not have the money to exercise the options.  At the same time the company cannot sell the options because it would erode VW’s share price.   The company now has €9 billion of debt and is having difficulty raising additional funds to exercise the option.  Porsche has recorded
17.3 billion in profit from its VW position (Financial results). Porsche and VW have been in talks over merging their operations (Porsche news site).  However, VW has suspended talks over concerns about Porsche's debt.

VW share price has increased over 600% from €33 in 2005 to €249 at the end of January 2009.  More recently VW has been trading at around €70. The situation is leading to speculation that if Porsche cannot raise the money it may be forced to sell its auto making operations to VW.  There has also been some speculation that Porsche Holding was close to bankruptcy back in March as the company just confirmed it secured a €700 million loan from VW.  It is estimated that Porsche needs €11 billion or an additional €2 billion to exercise the options.  The company last reported its financial results for the period ending January 31st, 2009.  Porsche will issue its latest results next month. (See Porsche and Volkswagen - The Automotive Version of AOL-Time Warner)


Opel-GM-Magna-Fiat
As GM is within a few days of formally filing for Chapter 11 bankruptcy protection, the future of its Germany based Opel division has been secured.  Opel has been a cash drain on GM for the better part of decade and could not afford to bail Opel out during this economic downturn.  GM has been seeking an investor since around February as a condition to secure loans from the German government to keep Opel solvent.  Today it was announced that the supplier Magna International along with a Russian partner will be joint owners along with GM in Opel.  GM is likely to retain a 35% stake in Opel with Magna, its partners and labor controlling the rest.

Magna beat out Fiat who also has been angling to partner with Opel.  Fiat backed out of last minute talks that would have helped position itself to take on Opel, paving the way for Magna to reach a deal.  It appears key Opel financial information was not made available to Fiat preventing the company from accessing Opel's risk.  The company's CEO Sergio Marchionne wanted to create a mega auto company along with Chrysler and Opel assets that would rival the industry leader Toyota.

Fiat CEO Sergio Marchionne said:

“We remain committed to finding ways to bridge the expectations of both General Motors and the German government, but the emergency nature of the situation cannot put Fiat in a position to take on extravagant risks."

The deal with Magna will secure a €1.5 billion bridge loan from the German government and also protect Opel from GM creditors when it files for bankruptcy.  Magna also was a bidder for Chrysler when Daimler was looking to unload it. It should also be noted that GM has also reached agreements with its unions a revised contract and it also appears a debt for equity agreement has been reached with some unsecured creditors.  Furthermore, today is likely the last full day GM will be trading on the New York Stock Exchange as a component in the Dow Jones Industrial Average.

Discussion

The German automobile industry has not been immune to the global economic problems.  The cash Daimler raised through stock dilution should provide a cushion until the market stabilizes fully and begins to recover.  The company also appears to have been able to manage their cash flow and is not burning capital.  

The situation at Porsche is just comical to the point of absurd.  VW is well positioned to pay for the Porsche auto group (Annual report) if Porsche Holding decides to sell the asset.  In a very bad economic climate during the second half of 2008 the company reported solid results with 6.5 billion in profit on 109 billion in revenue. VW made 312 million operating profit in the 1st Quater 2009 (1st Quarter 2009 Results) and had 16.5 billion in cash.  That is up from about 10 billion at the start of the year.  It should be interesting to see how this works out as Porsche stands to loose a lot of money if they are forced to sell their options.  It would be my guess VW will buy into Porsche auto to allow Porsche Holding to exercise the options.  However, this could also wipe out the Holding company if they do not play their cards correctly.  The question that needs to be answered is what is the Porsche car group really worth and worth to VW?  In todays market Chrysler and Opel, companies that recently millions of vehicles were essentially given away because there were no takers.  Porsche is a small company that as a standalone company may not be able to survive because it lacks scale. 

As much as I have advocated a GM-Fiat deal, the Opel-Magna alliance is probably the best option for two reasons: 1) GM does not have to deal with  Marchionne who is way over his head and will likely regret ever getting involved with Chrysler and 2) Magna and the Russian partner will help Opel expand in Russia.  From reports is also appears Magna was GM's first choice.  I would have been all for the Fiat alliance but GM would have to be the leader in the deal as far as management because the parent company has resources and technology that far exceed Fiats.  With Marchionne in place I do not believe they would have been able to workMarchionne has been trying to build an empire and yet he certainly would not risk hard capital in either the Chrysler deal or what was proposed with Opel.  It appears he believes he can deal Fiat's way to long term success. Mark my words, Chrysler will keep him busy.

For the record it is not fully understood why Magna wants to become an auto manufacturer so badly.  It is unlikely if they were the successful for Chrysler back in 2007, their fate would have been any different than Cerberus.

This leads me to the last German company not yet discussed, BMW.  As expected, BMW's financial performance suffered in the last half of 2008.  The company also took a large write-down on the residuals on lease vehicles.  It ended 2008 with a net profit of 384 million down from 1.184 billion in 2007.  At the end of 2008, the company had 7.4 billion in cash with €5 billion allocated to the automobile group (Annual report).  In the 1st Quarter 2009 the company reported a net loss of 152 million compared to a net profit of 487 in the same period last year. More importantly for BMW, the automotive groups cash position is now at 5.637 billion (1st Quarter 2009 Results).  That should be sufficient assuming the economic conditions to not deteriorate further.

 


References
Daimler's cash needs shown in Arab fund's stake, Automotive News, March 2009
Daimler will cut more costs; drops one board post, Automotive News, April 2009
Porsche Dialing 9-1-1?, New York Times, May 2009
Porsche Running Out Of Options, Forbes, May 2009
Porsche May Not Be Able to Profit From VW Options, New York Times, May 2009
Porsche’s Billion Options Gain at Risk in VW Bid (Update3), Bloomberg, May 2009
Porsche fights off bankruptcy talk, The Economic Times, May 2009
GM reportedly reaches deal to sell Opel to Magna, MarketWatch, May 2009
Parts Maker Is Said to Reach Tentative Deal for G.M.’s Opel, New York Times, May 2009
UAW chief to announce GM concession results, Detroit News, May 2009
Bondholders back sweeter GM deal, Detroit News, May 2009  

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Comments
Tue Jun 09, 2009 3:43 amhttp://www.marketwatch.com/story/porsche-is-in-talks-to-sell-a-stake-to-qatar-ft

"Porsche Automobil Holding SE is in talks with Qatar under which the Gulf nation's sovereign fund would buy as much as a quarter of the company, the Financial Times reported, citing people familiar with the talks."

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