It’s suddenly looking a lot harder for Ford Motor Co. to sell its luxury brands. Private equity players have been among the most active buyers of car assets such as Chrysler and Aston Martin recently. But credit market jitters may have dampened their enthusiasm.
Just this week leveraged lenders showed they have no appetite for the sector. They refused to finance either loss-making Chrysler’s leveraged buyout (LBO) by Cerberus Capital Management, Lp., or the acquisition of highly profitable Allison Transmission by the Carlyle Group (TC Llc.) and Onex Corp. But Ford shouldn’t worry.
After all, motor city’s No. 2 car maker doesn’t need the money. It filled its coffers last December while investors were still desperate to lap up almost any debt offering juicy yields. And Ford mortgaged Jaguar, Land Rover and Volvo as part of its bumper capital-raising exercise. The manufacturer now has some $37 billion (Rs1.5 trillion) of cash on hand, and chief Alan Mulally reckons that he needs less than half of that to fund his turnaround plan.
What’s more, the Premier Auto Group (PAG), which houses the three brands, drove back into the black in the second quarter, posting a $140million pre-tax profit. That reduces some of the pressure to sell the unit immediately, and provides a welcome, if small, respite to the firm’s cash burn. The fact that PAG is making money also bolsters Ford’s leverage in negotiating a good price for the business—though it’s not yet clear if these improved results are sustainable.
That’s not to say the proceeds from selling any or all of the three wouldn’t be welcome. In total, they could fetch as much as $9 billion, according to Breakingviews.com’s calculations. Even after accounting for perhaps half being used to pay down debt—as stipulated in last year’s capital-raising agreements—that still leaves a decent chunk for Ford shareholders. That would come in handy either for reducing debt even more, or for helping to fund any health-care deal that might stem from current negotiations with the United Auto Workers’ union.
But neither is an urgent issue, meaning Ford is not under duress to conduct a fire sale. It has already experienced the ignominy of doing that once—the private equity consortium that bought its Hertz car rental business in 2005 virtually doubled its money within a year. There’s no need to make a similar mistake now with strategic buyers. Ford has the luxury of waiting to see if the LBO bid returns.