Friday, 1 April 2011

Company Focus – Spyker & SAAB – Creating a Network of Foreign 'Russian Dolls'.

Spyker Cars has been back in the news over the last month when the announcement was made that ts parent holding company 'Spyker Cars NV' has signed an MoU with UK based CPP Global Holdings Ltd for the sale of sportscar division. The deal worth E32m in total, E15m paid initially with E17m to be paid from future earnings, and these monies used by the NV holding company to pay-down accrued debt generated after the purchase of SAAB Automobile AB in 2010.

And over the last few days Vladimir Antonov announced his buy back into the NV Holding Co – which critically owns SAAB Auto – after having been forced to sell his 29% stake at the behest of GM as a condition of the SAAB sale to Spyker NV.

The new Spyker Cars and Spyker NV activity belies what investment-auto-motives believes to be continued efforts by Russia's big players to create ownership of a network of foreign automotive enterprises that will underpin Russia's national ambition to become a global automotive powerhouse.

Let us start by looking at the Spyker Holding Company:

Beyond relieving the pressure of immediate debt payment pressures, the sale of the Niche Car unit allows the Euronext listed NV body to give more Board level focus to the development of SAAB of Sweden. Indeed the sale of the sportscar arm to CPP was not wholly out of the blue given that CPP has assembled Spyker Cars product on a contract manufacturer basis since 2009.

CPP is a manufacturer of prototype parts, an assembler of previous niche vehicles and also specialises in bespoke coachwork (ie body) fabrication. Its UK location offers the Spyker sportcars division a broader and deeper supply-base when compared with its previous assembly in Zeewolde, Holland, and offers stronger links to varied vehicle systems development.

[NB Reports that CPP builds large-sized coaches (buses) appear a fallacy, simply journalistic misunderstanding of the term 'coachworks'].

The divestment of the sportscar section from NV's direct control and its own money worries means that it looks less likely that SAAB cars in the immediate future will mix-and-match engineering DNA with Spyker. Initial strategic review saw co-branding opportunities of Spyker special editions of mainstream SAAB models – from base, to Viggen to Spyker. These now appears more remote; though still plausible in the long-term.

Thus, the Holding Co Spyker NV recognised that it must address the more pressing commercial issues at SAAB AB: sales volumes dropping to below 32,000 in 2010, with recent product initiatives such as 'new' 9-5 and model-line improvements doing little to boost sales. Unit margins heavily pressured given the factory's low utilisation rate, in-turn squeezing working capital which has been highlighted by news reports that cashflow problems meant that five suppliers went unpaid in recent months. This then damaging the firm's reputation and very probably causing very real strain inside Scandinavia's small supplier network. The WSJ reports that SAAB cannot even afford to cover debt interest payments which were approximately $40m last year, showing SAAB to be little more than starving minnow versus the global automotive giants.

It was thought that the original investment exit for the listed Holding Co would have been sale of SAAB to either a foreign trade buyer or alternatively identifying a well positioned PE buyer; the latter to either overtake the previous lead stake-holder role that Vladimir Antonov had played and to share the PE interests with the UAE's Mubadala Development Company, which itself took 17% in 2005 (also holding 5% of Ferrari).

[NB. Russian banker and entrepreneur Vladimir Antonov - via Bankas Snoras – had secured a 29% stake in the company in 2007, but was required to sell-out as part of GM demands when it sold SAAB, given reports of connections to organised crime by Swedish authorities; this dismissed by Spyker CEO Victor Muller; yet not so far rescinded by the Swedish government].

The initial hope when buying SAAB was that it could be sold-onto a cash-rich Chinese VM having to vie against SAIC with its Euro-brand interests and Geely the owner of Volvo - in which case BYD might be a useful fit given the eco-credential it is trying to build. Alternatively sold to an Indian firm to vie against TATA's ownership of Jaguar-Land Rover – in this case Mahindra or Maruti obvious candidates: Mahindra expanding into saloon car production beyond 4WDs, and Maruti creating a new arm to supplement its JV with Suzuki. As was the case with TATA with Jaguar-Land Rover, the idea was that such buyers would also wish to step-in at a point at which SAAB's darkest days, set with a plan for improvement.

So over the last year or so, Spyker NV has had the dual tasks of both being seen to generate a SAAB 'turnaround': created market traction for its rebound, whilst also privately marketing the company to other trade and PE buyers.

Yet whilst the mass manufacturers were boosted by small-car green stimulus packages over 2009-2010, and premium vehicle manufacturers saw SME's and wealthy private replace their up-market vehicles on the basis of the economic rebound in that period, SAAB has been effectively stuck between these 2 stools, operating as it does in the more limited 'lower executive' segment. From an operational standpoint SAAB of course still relies upon GM for its basic platforms, the agreement of which in the sale from GM to Spyker very probably has a scale-demand dimension: the smaller the demand for the platform / modules, the greater the unit cost per vehicle.

At the time of the GM sale of SAAB, whilst many were optimistic about an immediate turnaround by Spyker, investment-auto-motives was less so, recognising the level of headwind that both in-house SAAB management and its new senior Spyker executives faced. Given the finite balance of presumed overall unit cost versus sales volume and pricing, it was always going to be very heavy going to magically re-energise the company in such tight operational conditions. This is why investment-auto-motives considered the alternative GENII PE offer more practicable given a business model that relied on co-partnering with Renault and a motorsport dimension. Yet, wisely, even GENII in a better position than Spyker retracted its offer, leaving Spyker as the bid-winner for SAAB.

It was always recognised by informed industry executives and investment bankers that SAAB needed a cash-rich parent with very good industrial connections, so as to be willing to undergo the inevitable cash-burn and create a new industrial foundation. In the modern era, here in the west, there are very few such parties, necessary risk-adversity the necessary ploy over the last few years.

In contrast although Russian oligarchs have also suffered with the economic downturn – well exemplified by the previous value devastation of Deripaska's Basic Element – Russia has ridden the mini commodities boom of late and so oligarch's fortunes have generally faired better than most.

It is in this light that Vladimir Antonov has re-entered the scene, recently publicising the fact that he had submitted the forms to Sweden’s national debt office seeking a change of control at SAAB. The application a procedural necessity given that the Swedish government had partially exposed itself to SAAB's future by partly guaranteeing Spyker's purchase of SAAB. It seems that Antonov has had an eye on SAAB for some time, courting the brand's classic car community in various ways.

[NB Given his Russian roots, exacting information in English is hard to find about Mr Antonov, for it appears that his wikipedia entry has slight bias, given that it ends with the use of 'Vladimir' when discussing his purchase of Portsmouth football club; thus offering an overtly friendly tone].

However, it seems apparent that the sale of Spyker's niche car business to 'CPP' will have been endorsed – indeed even probably orchestrated – by him, since Dunn & Bradstreet reports that he has interests in CPP via Conversgroup (UK) Ltd and Snoras Development, associated to Snoras Bank.

CPP in turn has links with 'Bowler Off-Road', manufacturers of Paris-Dakar style vehicles, aswell as 'Bowler Spirit' which offers Off-Road Rally training and race support. Conversgroup is also represented in the UK by 'Workforce Bank', its business inter-relations with these 'loosely consorting' companies unknown.

By 'connecting the dots' it seems that Antonov seeks to create a UK automotive stronghold consisting of: a niche manufacturing hub married to complimentary involvement in motorsports at product and service levels. This probably assisted by the UK based 'Workforce Bank'. This network can then be 'plugged into' the needs of SAAB, now possible with his direct control of SAAB via Spyker NV.

Thus consequentially he appears to have aspirations for a UK-Swedish – and presumably inevitably UK-Swedish-Russian – activity base. A base aimed at high-value manufacturing and events that both serves SAAB and non-SAAB clients, and ultimately creating a multi-tiered inter-connected business template which investment-auto-motives believes would either be separately recreated within Russia, or melded into Russia at some point in the future.

This suggests that Russia's industrial and FDI policy seeks to reach into the business base and operational capabilities of the UK, to in time drip-feed such models and skills into own homeland – not unsurprising given Russia's desire to continue massively updating its own automotive capabilities via foreign coupling – as seen with Avtovaz etc.

This is also supported by the Russo-UK activities of MARUSSIA Motors.

Some time ago investment-auto-motives posted an item on MARUSSIA Motors, an enterprise backed by Andrey Cheglakov and fronted by Nikolay Fomenko. It has apparently developed prototype versions of 'Russian' supercars and a sports-SUV. It sponsored the Virgin F1 team in 2010 and in February took a sizable shareholding in the Virgin F1 race team, now named MARUSSIA – Virgin Racing. It also publicises via the Virgin F1 website, its intentions to open its showrooms in various prime cities, including London.

Here then, investment-auto-motives sees direct compatibilities and synergies between Spyker Cars and MARUSSIA Motors, both set to initially target wealthy Russians through creation of aesthetically different supercars and sports-SUV. Both also reaching directly into the UK's automotive skills base for technical and operational skills via CPP and Virgin F1, together spanning high-profile track-based and off-road motor-sports.

But what of the SAAB fit into this emerging picture?

Russia undoubtedly needs a globally recognised auto-brand which it can exploit as a lead world-export marque, and SAAB fits that mould perfectly. From a world-view, the co-geography of Russia and Scandinavia means it sees the to opportunity to leverage the persona of Sweden / Scandinavia given its very positive overtones of “hi-tech + eco-consciousness + social cohesion”, regional values that are baked into both Volvo and SAAB's own characters, (though it must be said that SAAB has much work to do to 'reclaim itself'). With a Russian owned SAAB such 'positive overtones' could then be accorded to other Russian owned and made goods. But critically with SAAB in Russian hands it means that with concomitant investment the massive spare capacity of ex-state Russian plants can be exploited to powerfully ramp-up SAAB's volumes, with the opportunity to co-develop SAAB and Russian branded platforms, aswell as creating a premium systems technology link between SAAB and Spyker and MARUSSIA.

So in effect the moves being made now by Antonov are a '3-way Pincer' approach by the Russian to create a 'global stage' profile, generate 're-appropriated' self-learning and set-out a national template for new generation exported vehicles. The supercar efforts directed at the home market, Middle-East and European fringes, SAAB maintained globally and Russian branded cars exported to CIS countries, China and SE Asia (as opposed to Europe and America which hold less marketing promise).

Returning to the 'modus operandi':

The WSJ reports that the Spyker NV holding company which operates SAAB currently has a battered balance sheet, as mentioned unable to cover its debt payments, let alone pay for business and capex plans. It needs at least €300 million of equity just to be able to generate enough free cash flow to cover principle interest payments, according to calculations by the Dow Jones 'Investment Banker' which itself is based upon very moderate capex outlay.

Thus it seems that SAAB has little other options, Spyker NV's attitude being pro-Antonov, prompting the Swedish government and GM to do likewise, otherwise seeing the failure of SAAB with consequential job losses at Trollhatten and Stockholm. However, whilst the Swedish government feels possible public pressure to ensure SAAB's future – especially after guaranteeing its EU loan – GM might indeed take a different stance, possibly wanting to see another poorly performing brand discontinued given its own closing of 4 portfolio brand during its restructure. SAAB's disappearance could mean greater opportunity for Buick and Cadillac; though in reality that argument is a real 'stretch' given their very different historic brand values and customer types. But in the new BRIC-led world of burgeoning consumer the case could be nonetheless argued, especially versus Buick in China.

But what is Vladimir Antonov's ultimate aim?

investment-auto-motives believes that in this free-market era, he wishes to create an 'Antonov' equivalent in automotive that his namesake created for aeronautical under previous communist rule. To this end, it seems no coincidence that he chose Spyker given its innate combine of auto & aero as depicted in its logo: a wheel & propeller. Nor should we forget the fact that SAAB's origins are whose origins were also aeronautical, thus a similar combine.

Moreover, he is more than aware of the origination and brand/logo symmetries between the Spyker- SAAB and BMW – its logo symbolic of a propeller's visual strobe-effect – a similar effect drawn centre of the Spyker logo.

In its earliest days Spyker proved itself to the emergent class of wealthy motorists through the endurance races such as the Peking-Paris Rally of the Edwardian era, and embraced early innovations in all-wheel drive, all-wheel braking and robust 6-cylinder power-plants and more. These origins strike a chord for Antonov, which he expects others to recognise through modern re-interpretation; both philosophical and literal.

Today the niche company and its loosely-linked former holding company form what appears as an intrinsic foreign industrial web, one created to eventually give Russia a domestically-owned, forward-looking 21st century auto-sector that has both 'Eurasian' reach and covers premium, upper mid and entry-level vehicle classes. A Russian auto-sector which then compliments its indigenous self-containment in base-materials, metals and plastics processing and of course oil. The ambition is huge given where Russia stands today, but it appears to be pulling the necessary parts together.

It might not be quite as intricate and complex as that famous Churchillian quote would have us believe, but it nonetheless appears to warrant further examination by the investment community as well as raising questions by UK and other governments regards the very futures of their own auto-sector.

In this case, the UK, Sweden and Russia need to find a 'win-win-win' outcome.