Thursday, 23 October 2008

Company Focus – Ford Motor Company – Tracinda's Double Play?

With previously secured funding in late 2006 described as “America's biggest home loan” to buoy the balance sheet, assistive UAW / VEBA agreements, successful divestments of Aston Martin & Jaguar-Land Rover, a successful rationalisation and integration of global operations under the banner of ONE FORD and a promising attractive high margin world-wide small in the pipeline; Ford promises to be the best bet of Detroit's Big 3.

So why having accumulated 140.8m shares in FMC would Tracinda Corp (namely Kirk Kerkorian & his trusted lieutenant Jerome B York) be so public about its partial sell-off of 7.3m shares? Especially since their sale price of $2.43 is well under the Bloomberg reported $7.07 average price paid for the complete stake?

To what degree this move is prompted by or interconnected with the timely departure of FMC Board members Sir John Bond (the ex HSBC Chairman) and Jorma Ollila is unclear. But what isn't is the behind the scenes pressure Tracinda has been putting on FMC to be braver in its turnaround efforts. Jerry York previously apparently aired his desire to see Volvo sold-off and Mercury disbanded as soon as possible to gain income, cut costs and further assist the balance sheet to both strengthen the cash-at-hand position and possibly/probably start paying improved dividends.

It may have been to counter such pressures that prompted FMC to install Odell from successful Mazda into suffering Volvo to steel Board and investor confidences. And more recently rumours are abound that FMC has been touting a partial sale of its 33% stake in Mazda to Mazda business partners ranging from suppliers to bankers. That move may well have been a precursor effort to maintain Tracinda's interest and avoid a slow sell-off, or even its potential, that can be so damaging. If that was indeed the ploy it was unsuccessful, Kerkorian choosing to sell-down his holding.

He and FMC recognise his buy & sell influence on the capital markets, and through the general grapevine and that (along with the general stock slide over recent weeks) has been demonstrated by the stock price fall from Sept 30th a$5.20 to the $1.99 low, followed by a psychologically driven rebound to the £2.40-2.20 range, resulting in a new recent low of $2.10 as of today (at GMT time).

Exactly why he did it when the longer-term prospects for FMC look good will only be known to him, but one or both of the following reasons are obvious:

1. Board Influence
Given Tracinda's lack of voting rights (40% held with the Ford family) and long-stay Board directors who's independence could have wavered, he probably feels Tracinda's voice is not being heard at Board level, and so what he regards as reasonable corporate strategy actions remaining unexplored. Having had that experience with GM (over the Renault-Nissan alliance debate) he may now this time feel that such 'pro-activity' through fiscally influential moves may he feel be his only recourse.

2. Drive-Down / Buy-Back-In
The other aspect is that he could have cannily attempted, and succeeded, to undertake a loss-leader play, taking a substantial hit on that small stake % to drive the market lower and buy back in with greater interest at a later date. Having seen FMC stock bounce back at the previous $1.99 pyschological floor, he may well be trying to break that floor to substantially buy back in at that record low level. To achieve this he may have to run the risk of selling further small-slot stakes to maintain market discomfort.

Thus Tracinda's statement that said that it saw “unique value in the gaming and hospitality and oil and gas industries and has, therefore, decided to reallocate its resources and to focus on those industries” are undoubtedly rationale; all 3 sectors are valued lowly given their position and immediate headwinds – and of course Tracinda's MGM holding has been reported as requiring shoring up. So there may well be sound reasoning, but there must also be an element of generated ruse to reactively raise FMC Board concern

Undoubtedly Ford believe, and have reason to believe, that new F-150 and global Fiesta will substantively assist revenues.

New F-150 looks and performance are far better than the current truck, and outshine its GM, Dodge and Toyota peers. So although the truck market has shrunk rapidly over the last year and looks in the doldrums for the foreseeable future, it could be Ford that wins the biggest slice of the pie. Even if it has to ply further incentives on-top of the new model to equal GM & Chrysler promotions, its cash-at-hand pool and direct control of Ford Credit should enable such a fight to 'bring-in' the dithering buyer. And the mooted GM-Chrysler merger, although irrational and realistically untenable, would add more fuel to the fire for Ford's dealers to seize upon.

And new global Fiesta looks to attract much consumer attention as the flight to smaller cars continues and a dimensionally enlarged segment car effectively equalises the size of the super-mini small-car segment internationally. Ford and Gm have done much to harmonise their international offerings, and whilst GM has benefited across Europe and RoW, it looks to be Ford with Fiesta that will win hearts & minds & pockets in North America.

Above and beyond the product angle, and the likable Don Leclair has been replaced by the tough Lewis Booth as Chief Financial Officer. This was done to both give recognition to Booth for his European efforts, but also to provide a clear signal to the markets that (along with the Odell appointment at Volvo) that Ford is strengthening its critical eye over the P&L, Balance Sheet and Cash Book. The rightly undertaken staff cut-backs within Volvo a major signifier of its commitment.

So in summary, it seems that Tracinda still appreciates the longer-term promise for its 6% holding in Ford, but understandably wants a greater say in operational decision-making. Having failed to gain operational influence at GM with his previous 10% stake he's seeking to jivvy-up what he may see as an overtly conservative FMC attitude. That attitude has undoubtedly been the calm hand on the tiller through what have been, and still are, choppy sector waters. Steering a safe course in troubled times has always been Ford's strength given its family interests, but equally it should look to tomorrow to build-upon the comparative domestic strength it has today.

As ever, that 'win-win' for both parties will be key. So Tracinda should demonstrate its long-term vision for FMC (possibly synergistically with its other holdings) aswell as continuing to use its muscle-power to have that voice heard. And in turn FMC could correspondingly employ Tracinda's presence as the informal confidence builder for other PE and institutionals. The family and the big institutions well recognise the ever present friction generated between Tracinda & FMC, the trick is to make it creative and positive friction.