GM's Akerson to Struggle in Proving to IPO Investors Europe Fixable
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General Motors Co. incoming Chief Executive Officer Dan Akerson’s biggest challenge in selling investors on the company’s initial public offering may be convincing them he can revive the unprofitable European unit.
In Europe, the Detroit-based automaker’s only unprofitable region, losses totaled $637 million before interest and taxes in the first half. Its updated Astra compact failed to reverse a drop in market share and unions still are stinging over plans to close Adam Opel GmbH’s factory in Antwerp, Belgium.
Akerson’s appointment last week erased one of the biggest questions over the IPO, giving investors a long-term chief instead of 68-year-old Ed Whitacre. Possible buyers now want to know whether Akerson has a plan to stem the losses in Europe, investors said. GM may seek to raise as much as $16 billion in the offering, a person familiar with the situation has said.
“One of the aspects to consider before deciding upon the IPO is to see a more specific roadmap for how, and by when, they are going to turn Opel around,” said Raimund Saxinger, a fund manager at Frankfurt Trust Investment GmbH, which oversees about $21 billion including automaker shares.
Europe accounted for 20 percent of GM’s vehicle sales in the first half of this year and an equal percentage of its employees. Industrywide, more vehicles were sold in Europe last year than in the U.S. or China.
One challenge in restoring profitability will be boosting deliveries with lower sales incentives. In Germany, Europe’s biggest auto market, Opel dealers offered average discounts of 12.7 percent in June, trailing only the 12.8 percent of French carmakers Renault SA and PSA Peugeot Citroen, according to trade publication Autohaus PulsSchlag.
Opel sells about 90 percent of its cars in Europe. Opel’s first-half market share fell to 7.2 percent from 7.5 percent.
GM has said it plans to spend 3.6 billion euros ($4.6 billion) of its own money to overhaul Russelsheim, Germany-based Opel and its U.K. brand Vauxhall after the German government refused in June to provide aid. The restructuring would include closing the Antwerp site if a buyer for the factory can’t be found by the end of the year, GM has said.
GM had planned to sell a majority stake in Opel under a German-government brokered deal in November to a group led by Magna International Inc. before the board, goaded by Akerson and other members from private-equity backgrounds, decided to keep the unit.
“Europe is a concern and a drag,” said Mirko Mikelic, a senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, who helps manage about $18 billion including debt of Ally Financial Inc., formerly known as GMAC Inc. “The quicker they can redeploy assets to growing economies, the better.”
Opel spokesman Stefan Weinmann declined to comment on the carmaker’s IPO plans or whether the German unit might have a negative impact on a share sale.
GM’s IPO may be the second-largest in U.S. history, behind Visa Inc.’s $19.7 billion initial offering in March 2008, and would come at a time when share sales haven’t rewarded buyers or sellers.
Eight of the last nine American companies to complete their initial offerings took discounts to sell their shares, while half of the IPOs this quarter have left buyers with losses, data compiled by Bloomberg show.
“This is an investment based on hope, not on economic reality,” said Matthew McCormick, money manager at Cincinnati- based Bahl & Gaynor Inc., which has $2.7 billion in assets that do not include auto holdings. “This IPO is designed to meet the government’s needs, not investors’ needs. No one is clamoring for a GM IPO right now. This is not Facebook.”
The share sale is GM’s first step in freeing itself from government ownership, which Whitacre has pushed for after GM’s $50 billion taxpayer bailout and bankruptcy last year. The company, 61 percent owned by the U.S. Treasury, aims to sell a fifth of the government’s stake, reducing the U.S. to a minority owner, two people familiar with the plan said in June.
“The underwriters will have to find a pricing that takes into account GM’s regional imbalances,” said Michael Holland, who oversees more than $4 billion, including automaker shares, as chairman of Holland & Co. in New York. “There are too many places that are easier for investment. The challenge they have to get away from government involvement is nothing I want to have to deal with.”
Chief Financial Officer Chris Liddell said in an interview last week that GM is confident it can break even in Europe by next year. The restructuring plan includes eliminating 8,300 jobs from a European workforce of 48,000. The German brand is also looking at markets outside the region to expand sales.
“This issue of Opel has been way overplayed,” Steven Rattner, former head of President Barack Obama’s Automotive Task Force, said in an Aug. 12 interview. “Opel lost $500 million in the first quarter and less than $200 million in the second quarter. If they can keep Opel down to that kind of a loss rate, this is not GM’s biggest issue by any stretch of the imagination.”
GM said in its second-quarter earnings statement last week that its operations in Russia and Uzbekistan were recategorized as part of its international segment instead of its European unit, reducing Europe’s first-half operating loss by $29 million. The first-half results also included a gain of $123 million from the sale of Saab Automobile AB to Spyker Cars NV.
Opel developed the platform that served as the base for the new Astra compact, the Chevrolet Cruze small sedan and the electric-powered Volt, Weinmann said. German engineers also help test and fine-tune smaller Cadillac models, he said.
GM is studying the possibility of adding a stretched version of Opel’s Zafira minivan for sale in the U.S., three people familiar with the process have said.
“Strategic investors will appreciate the strategic benefit from the Opel investment, while those looking for a quick profit may be turned off by its current poor performance,” said Sascha Heiden, an analyst at IHS Automotive in Frankfurt. “Of course Opel has a problem right now, but GM chose to keep it for a good reason -- its competence in small and compact cars.”
The Astra starts in Germany at 15,900 euros, compared with 16,825 euros for the segment-leading Golf from Volkswagen AG and 16,290 euros for rival Fiat SpA’s Bravo, according to the manufacturers’ websites. Opel this month began offering warranties on all cars up to 160,000 kilometers (99,200 miles).
“GM is happy to nurse Opel because they need their know- how,” said Juergen Meyer, who manages 1 billion euros at SEB AB in Frankfurt including shares of Bayerische Motoren Werke AG and Porsche SE. Still, “the value of a manufacturer lies in its brands and I can’t think of any GM brands worth a mention.”
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