Monday, 11 January 2010

Company Focus – SAAB Automobile AB – Genii : Creating (Chitty Chitty Bang) “Bang for the Buck”

Since GM put SAAB up for sale various enquiries and collated tenders have been submitted to its advisors Deutsche Bank. With realistically, little interest in the whole – given the depth of pockets and size of capability required – sale of the whole burdonsome enterprise was/is wishful thinking. Instead more successful results regards hived-off sections for successive partial sales of the full asset-base.

Hence GM has understandably undertaken a dual track path of offering the division, or parts thereof, as ongoing business(es), and pursuing a course of administrative liquidation. The latter obviously intended to create a greater 'break-up' value, by doing so thereby raise the value of 'in-trading' offers.

First out of the block on 16.06.09 was the niche sportscar maker Koenigsegg, which even with high ideals, substantive regional backers and the loan guarantee of the EIB, was seen to be 'chancing its arm'. It had the major headwinds of still partially frozen capital markets, what seemed a specific 'window', and in truth operational & synergistic limitations, which presumably that 'window' (ie alliance capability agreements) was intended to overcome.

Next in line, as of 19.12.09, and more successful, was that Chinese leviathan BAIC. Cutting a $197m (SEK 1.4bn) deal to buy the IPR and tooling of the 9-3 & 9-5 vehicle platforms and associated drivetrain. BAIC states that it bought 3 platforms but we infer that as the possibility for a 3rd product and/or generated vehicle variants. Although focused primarily on technologies and plant BAIC says it has continued interest in possibly buying the full brand & identity rights.

These 2 approaches pertinently demonstrate the past and potential attitudes that are driving solicited and unsolicited offers:

a) the value of SAAB's market potential into the future.
b) the value of SAAB's present physical assets as built up in the past

As with the Volvo counterpoint example, Eastern trade buyers seek modern technology and know-how at knock-down prices, whilst Western private equity seeks the regenerative potential of the marque within a closely aligned socio-economic context.

In almost a replay of the Koenigsegg pitch - given its business model - Spyker entered the fray with parental backing from Convers (its holding co) and in turn superior interests from a few big players within the Russian banking system. GM has stated that it was concerned about the lack of information available regards one of the individual backers, and so retracted negotiations just before Christmas 09. Whether that was a stalling tactic to illicit a second offer (as has been the case), or indeed an edict straight from Washington remains unclear.

Throughout the process the Swedish government has made it clear it will not take on the burden of SAAB (or indeed Volvo) through formal nationalisation. It is however willing to offer loans to maintain the company's survival if the new owner provides clear commitment that sizable SAAB manufacturing will be retained in Sweden. Today SAAB holds a staff of 3,400, and realistically that governmental offer should stay firm with an understanding that 10-15% of that workforce will need to be retrenched to assist the company's survival and future growth.

Thus, the very obvious aim by any interested party is to be able create a new enterprise whole that looks and feels like an unaltered – indeed improved - SAAB in culture and product identity. But critically one that provides potential for turbo-charging of the organisation and its financial returns. Done so via the use of a much reduced cost-base, with new (and ideally seem-lessly integrated) procurement routes for: raw materials processing, component sourcing, sub-assembly procurement, logistics, whole car assembly. Moreover, a new owner that can bring to the table a credible forward-facing technology plan within its power to execute.

Given fragile business confidence, unsurprisingly, pulling together such a matrix of 'competence enablers' will be tough going, and only really open to those who are pulling the strings behind the scenes of the likes of Koenigsegg or Spyker, and see such companies as relevant 'proposition fronts' for far greater structural reform needed at Trollhatten (now SAAB's only manufacturing site of core vehicles).

It is in this vein, that as of 07.01.09, another entry has been muted: one seeking to align what appear more visible interests and capabilities.

The Swiss Investment firm Genii Capital, accompanied by Bernie Ecclestone, stated its interest in buying a majority stake in SAAB, so leaving GM as a minority co-owner. This is of course a similar proposal to Koenigsegg & Spyker given the criticality of shared, but to be paired down, technological links. Those links that underpin the brand's technology strategy can only really be shed, and superseded with other (reduced cost) parties, in a timely and phased manner. Thus any new owner must have the technology and manufacturing 'reach' to realistically re-energise the SAAB business model.

With this regard it seems Genii Capital has been hard at work to build that framework.

As of mid December Genii Capital has taken a large ownership interest in the Renault F1 team. And what timing in doing so relatively inexpensively, given that the team itself is in a contextual trough, presently 're-grouping' to overcome its strategic embarrassments caused by the Nelson Piquet crash fiasco, and to re-organise in order to face the much changed 2010+ F1 era.

[NB Renault F1 was previously run by Flavio Briatore, who as Ecclestone's confident and following in his career footsteps was and still is considered possible successor to lead Ecclestone's F1 media-owner FOM enterprise. The point is that Briatore still wields considerable power behind the scenes at Renault F1 and so it is an imperative that ego clashes or power struggles are avoided if all parties involved are to mutually steer a clear path through what is still a relatively poor visibility F1 'business circuit' with much track debris still remaining].

To his credit, Genii's CEO Eric Lux was very open in his public statement regards the role he wishes Genii to play essentially as an 'co-architect' of F1 into the future, leveraging the technologies and services of Genii's own portfolio interests to (implicitly) move the technology platforms of the sport forward and in doing so that of tech-trickle-down possibilities.

Given the oft cited argument regards technology trickle-down from motorsport into premium car sectors and latterly into mainstream sectors, it seems obvious that Genii's ambition is to create a powerful automotive business model 'eco-system' for its own ecologically orientated powertrain and braking technologies (ie MCE-5 engine & MOV'IT braking system).

[investment-auto-motives notes that for over a decade SAAB has had R&D interests in 'variable compression' engines, the prime tenent of MCE-5].

Thus for Genii, its seeks the ambition to create and sit upon the breadth and depth of the eco-tech value-chain. The R&D feeds into the requirements of the new era F1 formula – in turn creating a competitive tech spiral - which gains both public visibility/acceptance and reliability 'prove-out'. This in turn entertains the conjecture of an affiliate SAAB branded twin to the Renault F1 team both using the best of Genii-SAAB & Renault systems and componentry. Successful performance and longevity on the track with concomitant bench-testing leads to niche and latterly series production technology licensing to SAAB and 'sister' Renault-Nissan's premium Infiniti brand with possible eventual inclusion into Renault's mainstream cars.

Thus Genii is developing a long-term value creation pathway, looking to every step of the way, from the small scale high-margin R&D work demanded by F1 to eventually the large-scale reduced margin sales of components themselves.

Of course an alternative path that highlights the real remit of an investment company, is to see it create the value-creation 'plan and pathway' and selecting to dispose of its commercially inter-connected portfolio either as a whole system in phased stages, or as discrete slices to other investment firms or indeed trade-buyers – such as Tier 1s or fast growth new Auto-players themselves.

Thus the exit strategy for the Swiss company could well be to re-build SAAB as an independent, progressive entity, but with loose & tight technical alliances with Renault, which in due course provide the base synergies that encourage Renault to take a minor stake-hold, replacing GM, and latterly add SAAB to its corporate stable.

The term “Genii” is the Latin plural of Genius, and it is perhaps not uncoincidental that the Directors of the firm may well have created the name in reference to GEN II, the numberplate of the automotive movie-star 'Chitty Chitty Bang Bang'. For the magical Chitty was created in a pheonix like manner (by inventor Caracticus Potts) from the remnants of an old and disheveled post WW1 Grand Prix car.

It seems the Genii title is indeed apt. The Chitty metaphor pertinant as the Luxembourg firm creates business strategies, new investments, and strengthens its own investment vehicle, partially generated from the 'ashes' of Renault F1 and 'ashes' of SAAB. To now embrace the repute, scale and eco-premium potential of SAAB Automobile AB.

As one of the songs in that famous 1968 musical cites...”up from the ashes, up from the ashes, grow the roses of success!”

GENII Capital seems to have created a formula that should theoretically fly as high as SAAB Viggen jets and a certain alternative 'fly-drive' hybrid fairy-tale car. The Swiss Alps are re-knowned as the origins for the happy endings of children's fairy-tales...perhaps it can provide one for the Swedish auto-industry.