Sunday, 14 June 2009

Micro-Level Trends - Swedish Swag-ger - Koenigsegg Automotive & SAAB AB

investment-auto-motives continues to be encouraged by GM's divestment and structural reform process. The divestment of regional divisions and lacklustre brands a much overdue necessity, though of course there emerges a broader sector-related philosophical tension regards the handling of the $42m outstanding debt to 3 Illinois pension funds. That set a dangerous precedent that undermines the confidence of high-tier bond-holders across 'smoke-stack' America.

As recommended some time ago by ourselves, this unprecedented massive unbundling of America Inc means that GME's (effectively national-based) fragmentation has at last come to light - a very neccessary step on the path forward.

And as such, the opportunity arises for an effective springboard toward re-newed regional automotive policy-setting given the greatly shifting macro-context that sees the very notion of personal and mass mobility altering; from car usage patterns to the concept of the car itself, through to the very make-up of a global industry at large. In short societal change is requiring industry to undergoing a slow but powerful alteration in the search of new era economics and profitability.

However, as press commentary conveys - most prevalent being the FT's Paul Betts - a snap-shot of sector's present phase of re-structuring could be said to indicate a sense of 'de-consolidation' as the likes of Hummer, GMC, Pontiac, Saturn and arguably Jaguar & Land-Rover set adrift from their previous parents temporarily undermine the conventional "economies of scale" understanding; toward effectual "dis-economies" in the short-term. But instead, what we are rather perhaps witnessing is only a very necessary momentary fracturing before full and proper re-calibration on a global scale takes place. Such occurrences were perhaps not so evident previously given the trend for regional-centric consolidation, but now a critical juncture given Indian, Chinese & SWF involvement (ie their much needed liquidity) and of course the effectual re-structuring of the capital and money markets.

Thus we are in very very different days of far greater complexity, with more 'players' with different pressures and obligations having to reference much changed consumer, economic and funding terrain [NB the corporate bond issuance trend in lieu of normal credit-lines along with the consolidation of PE such as BlackRock-Barclays GI].
Thus it must be noted that Wall St & City investment banks, regional state funders such as the EIB and globally-linked lenders such as the IMF along with national governments are seeking to maximise the world-wide asset allocation of the sector to underpin long-term growth and enable global trade at sector and capital market levels.

So, the political communities and M&A book-runners within investment banks and advisory are seeking to best align under-performing assets with alternative new owners. That means seeing past the normative 'Horizontal Value-Chain Integration' (though still valid as with FIAT-Chrysler) to seek greater long-term sector stability and of course value creation potential to be had from "Vertical Integration" & "Diagonal Integration". Whether that be at industry level through either typical conglomerate leverage of major EM corporations (eg TATA), or at fund level via the synergy-seeking of investment holding companies within a portfolio (eg RHJ International).

Interestingly the case of Koenigsegg's interest in SAAB appears to play-out a mixture of both.
Although at first glance reminiscent of the 'David & Goliath' actions of Shaeffler on Continental and Porsche on Volkswagen, this latest minnow-swallows-giant deal could potentially offer a more cohesive rationale. The prime elements of the 'deal menu' being: capability integration (at management and technical levels) and a more stable, conventional financing framework given the mix of Swedish Government/European Investment Bank backing to the value of a reported $1bn, together with what appears reputable, industrial savvy privateer funding.

investment-auto-motives highlighted the potential for the Nordic marques of SAAB & Volvo some time ago. Given their prime positions as globally recognised 'national champions' set within a low-key but prevalent 'eco' and 'progressive' industrial economic agenda.

Thus, today we see Sweden taking-up the 'national cause' - no doubt with political persuasion from Stockholm - via Koenigsegg's interest in SAAB; the deal reportedly taking an "unconventional" shape. Though a world away in terms of present business size, production capacity & turnover, the potential for ideological and operational alignment seems apparent.

Even so, much depends upon:

a) SAAB being properly operationally re-structured via present court supervision.
b) The Riksdag being brave enough to weather the 'social storm' of further redundancy
c) Koenigsegg being able to quickly organically expand its operations so as to strategically service and philosophically lead its larger business twin.

This will be the entry strategy for the consortium of PE parties that include: Christian Koenigsegg, Baard Eker (an industrialist who owns Eker Group Holdings which in turn owns 49% of SAAB & is backer of the new Koenigsegg stake), possibly Dag Alexander Hoeili (an original part-backer of Koenigsegg Automotive) and the Swedish nation itself - a nation that embraces the idea of independence and self-determination both industrially and economically.

And to do so obviously means nurturing value creation by suppressing all dimensions of the cost base, building a strong 2-way 'parent-daughter' relationship, re-casting SAAB as a true premium marque and broadening the horizons for Koenigsegg Cars (as seen with the 2009 Quant concept).

Identifying the 'value gap' appears to have been the forte of Christian Erland Harald von Koenigsegg - the founder of the Sportscar Company. The progenee of an aristocratic Germanic-Swedish family, he used the capital gained from Alpraaz AB - the successful fish wholeseller & trading company - to initially fund Koenigsegg Automotive AB. (The company's logo and car's badge is derivative of the family's coat-of-arms).

The company's factory is based at Angelholm Airport within 2 aircraft hangers that previously housed fighter jets, so the spiritual link to SAAB given its links with the aero industry (ie SAAB Viggen aircraft) is very apparant. The factory move to the airport can be seen as either serendipitous or a very well orchestrated credibility building exercise.

Sweden's politicians have a strong voice in promoting industrial capability and growth, and appear to act as catalysts for inter-corporate co-operation for the good of the country. Thus Volvo previously assisted Koenigsegg in the mid-90s with wind tunnel testing, crash testing and powertrain sourcing from its parent Ford. Thus it is seen that the Riksdag well-recognises the need to develop a niche 'high-value' advanced auto-sector that can act as both deliverer and beneficiary of inter-sector technical transfer. Thus Koenigsegg is nurtured as the crown of Sweden's niche car sector; a vital component part of national industrial agenda to serve technology, components and sportcar trade across B2B and B2C markets domestically and globally.

investment-auto-motives therefore believes Stockholm is seizing the present opportunity to re-mould the country's core asset-base. (Just as so many other nations are, perhaps the most high-profile being China's Chinalco endeavour with the Australian assets of Rio Tinto).
The SAAB deal was announced on June 11th by Koenigsegg, is set to close by early July, demonstrating the urgency to get deals settled before competitors and general market sentiment can alter the deal-landscape.

So whilst the above provides the context, what is the core M&A rationale?

Observed as the unloved cousin in the GM stable, SAAB has supposedly been loss-making since its purchase from the Wallenburgs in the late 90s (as a reaction to Ford's creation of the previous PAG). But there is a distinct possibility that GM loaded SAAB with GME and GMNA development and purchasing costs to lighten their own financial burden, that in turn possibly exerted greater pressure on SAAB management which in turn annually set forth ever greater volume forecasts/goals to absorb overhead. Furthermore being a low-volume, low priority element of Detroit's globally dictated product/platform development schedule, meant that their was little autonomy regards product management (specification, variants and development & launch timing). Such restrictions lead to the current 9-5 (SAAB's core product) becoming 12 years old in a very competitive segment, thus detracting from consumer appeal. Additionally forced JV projects seeking synergies - such as Subaru SW & Cadillac X-over - whilst providing a nominal contract design & production income vitally constrained what would have otherwise been independent management decisions and accordantly improved income planning.

It was this inadvertent vicious circle of encumbered Detroit top-down decision-making that led to year on year under-performing growth (vis a vis its Volvo peer) and eventual sales demise. The years of GM antipathy meant that SAAB was swimming naked as the (credit) tide retracted.

However SAAB Bidders (including Ira Leon Rennert's Renco Group PE firm, Merbanco group of Wyoming investors and a previously rumoured FIAT) see the brand and company as the unpolished diamond, with potential to re-obtain its former glory typified historically by the original Sasson concept, the 60s & 70s rally wins, the 99 Turbo, the iconic Cabrio and vitally as the "understated thinking (wo)man's" brand.

Undoubtedly for Sweden it is the ability to bring back SAAB into the national fold, hence the willingness to back the enterprise. That back-stop financing provides a sizable level of risk-aversion for Eker and Koenigsegg on which they can build their own risk-reward business modelling. And given the current favourable political and consumer climate toward 'eco-engineering' and clean-tech the SAAB (& Volvo) brands given their Scandanavian roots perhaps hold a special place in the 'consumer psycho-space' and the zeitgeist - Premium Eco. These 2 marques are arguably set apart and positively positioned as the Sporty (SAAB) and Functional (Volvo) dimensions of that high-value product arena.

The deal allows Koenigsegg to capture what GM reckons to be $500m worth of plant and liquidity in addition to the $150m cash and cash convertibles on the present balance sheet. As to whether GM will retain a strategic sharehold (of 105 or under) is yet to be understood but it would make for a far better operational relationship in the short-medium term given that there will be platform licensing and general service agreements in place to ensure technical support for the re-born company.

So what of the SAAB & Koenigsegg similarities? And how has SAAB CEO Jan-Ake Jonsson been presenting the company's natural alignment and untapped potential?

SAAB originated from Sasson's original concept as being Aero and Weight focused regards its engineering ethos; progressive & sporty in direct contrast to Volvo's conventional boxy functionalism. Koenigsegg is obviously Aero & Materials focused given its supercar remit. Thus their theoretically exists a white-space for SAAB to return to its purist design roots, the new advanced engineering parent acting as the enabler. R&D work to date by both parties demonstrates interests in bio-fuel & flex-fuel powertrain solutions, the CCXR mooted as the 1st 'green' supercar in 2007. [NB whilst E85 orientated, realistically high-grade bio-ethanol production is still limited especially since the retraction in bio-fuel investment; and though many point to Brazil/Mexico's infrastructure as 'the possibility' they tend to use lower quality grade fuel compared to NA or Euro). As stated, a new concept called Quant was recently shown at Geneve 2009, conceptually a solar-electric 4dr supercar; supposedly created for an unspecified customer, but in reality probably to try and create a market demand 'pull' and critically gain credibility for the SAAB bid.

Importantly it is expected that Koenigsegg will seek to leverage use of its in-house eco-tech IPR for application in SAAB's niche and follow-up mainstream powertrains. This to provide welcome cross-company income streams from engineering development, perhaps sale of full IPR to SAAB or on a per unit royalties basis regards eventual mass production. Furthermore such internal sales allow for more flexible transfer pricing as and when necessary to boost or reduce either party's turnover or cost-base.

Business Strategy
This approach appears to indicate that Koenigsegg apparently wishes to raise profile by:
1. Becoming 'the' prominent player of advanced engineering applied to volume production.
2. Use its core competencies as the catalyst of metamorphosis at SAAB
3. Use SAAB to access off-the-shelf, lower cost front-engined architectures (Epsilon 2 to broaden own product range - (vs Merc CLS, Maserati Quattroporte, Porsche Panamera, Aston Martin Rapide, Tesla Bluestar/Whitestar, Fisker[Quantum] Karma) -and use Delta platform for smaller footprint vehicles.
4. The creation of a fully fledged Engineering Consulting division for external client work
5. Providing opportunity for Koenigsegg to access Opel-Magna given technical origins
6. The opportunity for Koenigsegg's eco-developed GM-SAAB platforms to be offered for contract manufacturing purposes to 3rd party '21C' car companies that focus on brand and outsource all manufacturing and build. (see below)

Importantly, NB the link between the Koenigsegg Quant name and the Fisker-Quantum JV. This could be coincidence, but also possibly suggests that Koenigsegg wishes to associate with Quantum for access to its PHEV technology. This could in turn lead to SAAB platforms being used for smaller future Fisker cars so providing contract manufacturing income.

Product Strategy -
To critically take-control of product planning and implementation using adapted Epsilon2 platform (9-5), adapted Delta platform (9-3), thus able to focus on high-value systems improvement (eg powertrain, drivetrain, chassis, electrical) since low-value capital intensive BIW (Body) system already in place.
The marriage of small and large operations that are respectively advanced and conventional offers a new spectrum of possibilities:
1. The opportunity to leverage a supercar name for SAAB via cross-over branding ties.
2. Thus create a new premium/performance division for SAAB similar to Mercedes AMG, BMW M-Sport, FIAT Abarth et al
3. Possible 3 tier product orientations of: Base > Viggen (sport) / Griffen (lux) > Koenigsegg
4. This would theoretically enable stretch beyond the current credibility constrained price ladder so reaching into BMW, Audi and Merc buyer territory.

Engineering Strategy -
The deal suggests the possibility of the formation of a 'technology bridge' between niche & mass.
1 As stated focus on systems differentiation to build the brand(s)
2. To migrate advanced materials from niche to mainstream use.
2. So growing volumes and gaining efficiencies of scale.
3. Thereby providing innate product performance (speed and mpg) differentiation.
4. Being seen to apply Koenigsegg's engineering ethos & build quality principles into SAAB.

Design Strategy -
1. To gain greater cross-range aesthetic cohesion which has been lost.
2. Presently the SAAB styling cue palette is overlayed onto less than optimal body dimensions, proportions and forms).
3. Maximise the opportunity to regain the conceptual purity of Sixten Sason's design language sympathetic to aero and modernist functionality.
4. (As re-layed by the reference-point created by the 'Aero X' concept).
5. 'this will be a prime element of SAAB's rebound and so the upcoming vehicles (9-5, 9-3, 9-4X etc) together espouse a 'clean cohesiveness'.

[NB 'stretched' & 'lost' product identities have arisen given merging of segment distinctions, constant aesthetic meddling and constraints of multi-marque platforms].

Manufacturing Strategy -
Need to wholly rationalise plant operations:
1. Maximise capacity utilisation in Trollhatten to improve unit margins (ideally >100%=120K +)
2. End contract manufacture agreements (eg Magna build of Cabrio)
3. Reduce parts count and logistics costs using high % common parts (undoubtedly an objective of Aero-X.
4. Possibly set-up SVO (Special Vehicle Operations division) for niche series projects prospecting and delivery (though ideally using main-line build process for manufacture).

Brand / Marketing Strategy -
1. Major opportunity to create the 1st credible eco-performance orientated premium car brand
2. Need to re-invent SAAB in consumer's eyes and mid-space
3. Need for new approach to avoid being lost in marketing comms 'white noise'
3. The possibility to open up the world of global Motorsport to SAAB via itself & Koenigsegg
3. To recapture Rally heritage and run at Le Mans (LMP1, GT1)
4. Ultimately create a new market space SAAB and Koenigsegg can 'own'.

Thus SAAB enters a new era with a possible new parent, but what of the long-term distant business view, that of investment collection. The ideal exit strategy may well be already formulated or could be a more distant, fluid expectation.

Business Exit Strategy -
A. To possibly sell SAAB to either an Asian Trade buyer with global ambitions, maintaining a strategic stake for continued dividend and capital earnings and business links.
B. To possibly sell to a PE firm, latter-day Hedge Fund (as that sector pulls-back) or SWF. Indeed would the Wallenberg's be interested in re-purchasing their former stake to GM?
C. If / when SAAB has excess sizable liquidity after paying-off state debts, the possibility to sell Koenigsegg to SAAB in a reverse take-over, thereby providing what should be impressive ROI for Eker & Koenigsegg.

Whilst far from a completed deal, with what seems an intricate level of mass detail regards the deal structure itself and confirmation of funding sources, the marriage of 2 such entities could create conditions for a successful re-birth of SAAB and the mutual reciprocation of far greater credibility for the rapidly expanding supercar manufacturer with what seem - by reading between the lines - ambitious plans for itself and Sweden.

investment-auto-motives highlighted the opportunity to be had from GM and GME fracturing / divestment, and proposed and prompted the idea of a Northern European 'eco-tech rainbow' centred on the Scandinavian, Germanic and UK automotive value-chain.

As with our participation in Australia's auto-industry re-orientation, we are proud to have played the subtle role of debate catalyst for Northern Europe; recommending with broad-brush direction how the industrial asset-base(s) of the region should be re-comprised to create value through a new eco-roadmap.