Will Ford Need to Sell Its Stake in Mazda?
http://tinyurl.com/6n9csc
Just a week after Ford's (F) disastrous quarterly earnings announcement
on July 24, (BusinessWeek.com, 7/24/2008), Mazda (MZDAF), the Japanese
company one-third owned by the ailing U.S. automaker, on July 31 once
again highlighted how much better it is faring than its larger partner.
In a tough environment for all automakers, Mazda's operating earnings
slid an expected 12%, to $265 million, but that was largely explained by
a sharply stronger yen. Perhaps more important, the company said it
still expects net earnings of $750 million during the current financial
year. Despite weaker U.S. sales in July, Mazda plans to sell 1.48
million cars this year, up 9% from 2007.
The Japanese carmaker's prospects for the second half of 2008 also look
relatively bright. On July 23, it began production at AutoAlliance
International in Flat Rock, Mich. of a fully remodeled version of the
popular Mazda6 sedan. In January, the company will launch a new version
of the Mazda3 hatchback, its global best-seller. In North America,
despite a weak July—news of which triggered an 8.8% slump in Mazda's
stock in today's Tokyo trading—Mazda's sales are down just 1.7% during
the first seven months of the year.
Casting a Shadow over Mazda
That contrasts starkly with the grim news from Ford, which has scrapped
a plan to return to profitability by 2009 and now has a market value of
$10.4 billion—just $2.4 billion more than Mazda. Ford's year-to-date
sales are 1.265 million, down 14.4% from a year ago.
Despite Mazda's prospects, Ford's troubles cast a shadow over the
Hiroshima-based automaker. Should Ford's position worsen, Mazda could
begin to feel the heat. Battling with higher gas prices, a slowing U.S.
economy, and a heavy reliance on trucks, Ford is burning more cash than
it planned. Even before its recent loss, the company's red ink topped
$15 billion in the past two years, and it went through $8 billion in
cash during the first half of 2008. While Chief Financial Officer Don
LeClair says Ford believes it has enough cash, the company is not
committing to a return to black ink by 2010. "There is still too much
uncertainty and volatility in the economy [to target a return to
profitability]," CEO Alan Mulally said on July 24.
That causes several headaches for Mazda. After being rescued by Ford
from near-bankruptcy in the mid-1990s, the company has become a crucial
part (BusinessWeek, 6/14/04) of passenger car development for Ford.
Ford Benefits From Japanese R&D
In addition to jointly operating auto plants in Michigan, Thailand, and
China and sharing personnel, Ford and Mazda collaborate on research and
development. Over half of the passenger cars developed at Mazda's
Hiroshima R&D hub will end up badged as Fords, says Hirofumi Yokoi, an
analyst at consultants CSM Worldwide in Tokyo. That's up from 14.8% in
2000 and 42% today, as Mazda's role within the alliance flourishes.
Credit Suisse (CS), meanwhile, estimates that Mazda saves over $90
million a year by sharing development costs with Ford. The benefits to
Ford, it says, are likely several times greater.
Most important, many of the jointly developed cars will be the smaller
models that Ford chief Mulally believes are vital to his company's
turnaround. But if the U.S. automaker's troubles get so bad that it
couldn't pay as much into the partnership, Mazda would feel its share of
the pain. Analysts say Mazda would have to scale back its plans or pay
more of the costs itself, which would weigh on its financials.
Of even greater concern, though, is what would happen to Mazda if Ford
was forced to sell or reduce its stake in the Japanese automaker. To
raise much-needed funds, Ford has already sold off Aston Martin, and
earlier this year raised $2.3 billion by selling Jaguar and Land Rover
(BusinessWeek.com, 3/26/0
to Tata Motors.
Mazda Sale is a Last Resort
So far, the prospect of selling Mazda has been seen widely as a last
resort (See BusinessWeek.com, 3/30/2007), but analysts are now wondering
if Ford could become a forced seller. "If things get even worse for
Ford, then the company has no choice but to sell its stake of Mazda to
somebody else," says Koji Endo, an analyst at Credit Suisse in Tokyo.
Endo adds that even if Ford sold or reduced its equity in Mazda, that
needn't necessarily affect the two companies' platform-sharing
capabilities. Nevertheless, any move would undoubtedly cause
uncertainty. Today, Ford's 33.9% stake gives it effective control over
Mazda, but if that were reduced it would leave the door open for another
buyer to attempt a takeover, particularly given Mazda's relatively small
market value.
If potential buyers didn't meet with approval in Japan, "that could get
some people's backs up," says Andrew Phillips, an analyst at KBC
Securities in Tokyo. A sale could also cause friction with Mazda's main
bank, Sumitomo Mitsui, which, says Credit Suisse's Endo, would "do
whatever they can to prevent this from happening" if they don't favor
the buyer.
Still, perhaps the best argument for Ford not selling its stake in
Mazda, a profitable company that contributes to its bottom line, is that
it would be little more than a Band Aid for its current problems. Ford's
entire stake in the Japanese automaker is currently worth about $2.5
billion on the open market, slightly more than it received from Tata for
Land Rover and Jaguar and less than one-third of its most recent
quarterly loss. "I don't think selling Mazda would make all that much
difference to their financial turnaround," says Phillips.
--
Civis Romanus Sum
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