There are 1981 miles between Detroit and Los Angeles, and that figure will hopefully stand as a serendipitous good omen, because it was that year that finally started to see Ford gain traction after the 1970s oil shock(s) and aftermath that saw major market-share loss and a need for corporate overhaul. Obvious echoes resound today.
Take that tourist drive through the Ford heartlands of Indiana, Missouri, Kansas, Colorado etc (as many have over the decades) and eventually you’ll pull into the manicured streets of Beverley Hills. Disembark near Beverly Gardens Park, hop across Santa Monica Blvd into North Rodeo Drive, wander past the famed designer stores, cross Wilshire Blvd into South Rodeo and at #150 you’ll have reached the offices of Tracinda Corp.
With a 4.7% stake in Ford - intended to rise to 5.6% with today’s announced 20 million share tender - Kirk Kerkorian and Jerome York will be hoping their efforts at 150 Rodeo will have a major bearing on the future of Ford; the semantic irony being that the firm’s core earner - the F-150 pick-up - is seen at so many fairs and rodeos. But in reality, boardroom and stock-trend rodeo rides are the last thing Tracinda & Ford wants. But as ever much is about the capital market's perceptions of Tracinda’s end-game.
Some will say that at such prescient times as these, with major previous ‘drags’ dissipated (ie the UAW liabilities converted to VEBA) and high leverage giving large cash-piles, the obvious desire from activists is simply to see that cash-cushion used for dividends. Aspects of this may be true, but of course much depends on ‘weights and measures’ of the immediate yield demanded vs long-stay yield expectations.
The trouble is that activist investors per se in Autos over recent years have tended to have traded on the sector’s volatility through ‘shorting’ stocks. That scenario tends to develop when there are many micro & macro confluence factors of considerable impact, such as the previous UAW concerns and level of operating/fiscal inertia. However, when that impacting complexity decreases and operating inertia freed, the scope for such volatility decreases, so opportunity to ‘short’ decreases. We can see that opportunity in the Banking sector at present, but Autos has come through that period…or so the signs show. And so the ‘slow build’ looks to be Tracinda’s angle.
Kerkorian & York are recognised to have a different track-record to the ‘shorting’ or ‘heavy-handed’ activist. Indeed, one of longevity and commitment given Chrysler, MGM and MGM Mirage examples.
Though that’s not to say they remain inactive – active they are, and rightly so when circumstances demand. Given their not insignificant stakes, they are reputed to take a collaborative interest as opposed to a confrontational one at Board level. Though that isn’t what’s oft been reported given the 1990s Chrysler ‘debate’ (after Iacocca’s step-down) regards proxy battles, cash-cushions, dividends levels and Board representation. That ‘debate’ became more heated after effectual acquisition by Daimler in 1998, which led to Tracinda’s attempt to gain $1bn restitution, once it emerged that it was not a partnership, but a take-over. (Kerkorian claimed that Chrysler was being ‘milked’ by Daimler). And more recently, in April 07, he offered $4.5bn to Daimler for Chrysler, but the Cerberus offer for 89.9% won out. So it can be argued that Kerkorian / York understand that decent value-creation in the ‘auto-game’ takes time. Of course they’ll have an exit strategy, but appear to prefer income generation from a mix of dividend yield and slow capital growth, as opposed to more nefarious options.
But onto today, and the major focus will stay on Ford North America’s operational re-build, buoyed by the impressive Q108 cost-saving of $1.2bn. Ford states that that is expected to slow to $2.6-$3.2bn for FY08, suggesting that perhaps big ‘tailwinds’ like Global Fiesta’s engineering that possibly helped Q1 figures aren’t understandably as sustainable. Of course Ford could be giving such guidance to latterly surprise capital markets, but analysts will have calculated where the 08 year’s Q2/3/4’s additional savings will originate from and to what degree they’ll shape overall contribution.
And beyond NA, the real question hangs over Europe, and particularly Germany as the country’s industrialists air the high possibility of German/European economic contraction as the effects of the Credit Crisis hit commerce and consumers. Ford Europe (and Latin America) once again assisted with strong results and thankfully for Ford their European product mix will improve in the B and latterly A+ segments just as the possibility of a down-turn hits European consumers who’ll be looking for conservative small car purchases.
So, by starting to hit a new product mix ‘sweet spot’, NA will be greatly assisted by introductions of new F-150 ‘cornerstone’ for business and private buyers, with ideally the larger F-series models with cylinder-deactivation for improved highway MPG. Below F-series FMC could follow GM’s lead in re-introducing the car-derived pick-up segment for truly fuel conscious, less demanding utility users, importing Falcon Ute from Australia, though current FX rates dictate that margins would be slim even at production price transfer-costing – GM are positioning their ‘SportsWagon’ (based on the Holden HSV Ute) as a trendy-lifestyle pick-up. [Though with a street named El Camino only a block away from Rodeo Drive, York may see that serendipitous too!] But the truth lies in whether such a project is used to simply provide export capacity for an export desperate Ford Australia or can actually make money. For all the serendipity York will want to see fiscal traction not the treading water of foreign operations. Additional NA launches include the Flex ‘muscular station wagon’ CUV as a modern-day spiritual successor to Explorer, and the upscale Lincoln MKS for wallet-strung Euro-premium migrants seeking more affordable luxury. (Latterly, extremely important is the successor to Taurus…vs Camry & Accord).
In Europe Kuga should theoretically gain a following – though we reserve judgement given the ‘badge credibility’ dimension of CUVs in Europe, and of course Global Fiesta (and latterly regional new Ka) will provide very good returns on programme spend.
Of course although vehicle launches are key, Tracinda will be looking at the business’s complete structure for value enhancement and divestment possibilities and recent remarks from Jerome York demonstrate that Ford management will be pushed to demonstrate why FMC should continue to hold onto Volvo and indeed Mercury. And in this regard investment-auto-motives has also privately questioned reasoning and possibilities (in terms of product renewal vs divestment) of the 2 divisions. When PAG was set-up Volvo was the group-wide originator/deployer of safety related technologies, It’s core brand values of ‘Premium’, ‘Safety’ and ‘Eco’ strike the perfect chord for today’s consumers, so the question is whether to keep pushing and develop a continuum of cars that stretch down and out beyond C30, or sell the whole entity to another automaker or perhaps Private Equity firm whilst the goodwill and value potential of the brand is apparent.
Indeed, would York be thinking, as we are, that Tracinda could buy Volvo from Ford, so releasing FMC internal management pressures and creating a new legally separate auto-company that derives much of its platform base and (initially) key technologies from FMC? That "2 birds with 1 stone" scenario could suit Tracinda very well indeed. The execution of ‘bygone’ Mercury (in the US market) would also provide additional market share potential for the Volvo brand. At this point with disappointing Volvo results Tracinda could see a ‘steal’ opportunity but conversely Mulally will want to build-up Volvo’s P&L and Balance Sheet if he were to divest at maximum price instead of selling under-value to a ‘pally’ shareholder.
As regards Mercury, there could be great value in selling the once great and progressive marque to any of the highly liquid Chinese Automakers. Such a buyer could then eventually vie against the highly powerful GM Buick brand in China, and create a likelihood of returning the ‘Eastern cost-stripped’ brand back to the US market at a later date. Once again Tracinda would perhaps like create and capture this opportunity.
Finally on the brand front is the major ‘polish-up’ of Lincoln is necessary to regain the luxury ground. In real terms Lincoln has been languishing given the truly beautiful concepts displayed over the last 5 years, only the very basic elements unfortunately diluted into production cars. Lincoln needs to re-energise as Cadillac is seen to age and become outdated. Historically Cadillac and Lincoln have swapped leading positions for periods of time allowing each to ‘own’ the US Luxury market; we’d expect this to continue, now towards Ford’s favour.
In a broader context, Ford has like GM been able to cut production rates and deplete excess ’08 vehicle inventory, though as Edmunds.com has cited, incentive levels have started creeping up again to shift the vehicles – this margin reducing effect of course co-created by Edmunds’ own TMV (True Market Value) vehicle pricing comparison initiative. However, the ongoing dealer rationalisation programme and dealer buy-back initiative will from now on stem the ravenous local and inter-regional competition that has forced the downward spiral in car prices, so giving FMC more leverage over pricing policy and help independent dealer bartering, assisting both supplier and dealer in ensuring improved margins.
As described, at the other end of the value-chain is input prices and although raw material prices have escalated over the last few months - steel more than others at 63% and 71% for mid and high grade, and coking coal at 240% - FMC has managed to counteract with labour costs re-alignment through Ford ONE’s amalgamation of global engineering development efforts and global procurement, including very probably the devolution of certain engineering responsibilities to Tier 1 suppliers and project outsourcing to capable programme engineering firms
All in all, Tracinda’s decision to enter the Ford Fray at this point appears to be extremely valid. Kerkorian and York will be over-seeing that Mulally and his management are indeed keeping to strategy and schedule, and Tracinda itself (as with the Volvo & Mercury examples) will be avidly looking to see which elements it can cherry-pick from Ford, and will be looking externally upstream and downstream of the value chain to see what other strategically advantageous firms to FMC can be snapped-up and sold onto Ford to assist the re-build.
And this looks to be Kerkorian’s end-game. To be part of, indeed construct much of, the value creation process for FMC. Able to gain ‘measured’ cash-pile derived dividends whilst gaining from specific ‘divestment’ and ‘bolt-on’ M&A opportunities that underpins operational and product range improvements, so building mid to long-term share-price.