Mazda Asset Sales Loom for Japan Unprofitable Automaker

Should Mazda Motor Corp. (7261) dump the Hiroshima Carp?

Two weeks after selling $1.8 billion in new stock to replenish its depleted capital, Japan’s only unprofitable automaker said last month it will sponsor the All-Star baseball game in July. Mazda is the only Japanese carmaker to own control of a team in the league and also has a professional soccer club, a hospital and more than $5 billion in land.

The diversity of Mazda’s assets illustrates why scrutiny may intensify on President Takashi Yamanouchi’s plans to revive a company that’s forecasting its biggest annual loss in 11 years. Hiroshima-based Mazda, the nation’s most export-reliant carmaker, has struggled under Yamanouchi after he defied the appreciating yen by keeping production in Japan and as Mazda’s 30-year partnership with Ford Motor Co. (F) crumbled.

“This comes at the worst time,” said Kazuyuki Terao, chief investment officer at Allianz unit RCM Japan. “People might think if they don’t cut spending on baseball, they may also not worry about other expenses.”

Investors have reason to be concerned. Though all of the nation’s major carmakers saw their shares drop last year following natural disasters in Japan and Thailand, Mazda’s 42 percent fall was the steepest because of its vulnerability to the yen. The company produces almost 70 percent of its cars in Japan, of which 80 percent are shipped overseas, the highest ratio in the industry.

Under Performer

Revenue probably fell 12 percent to 2.05 trillion yen ($25 billion) in the year ended March 31, worse than the 2.3 percent drop at Toyota Motor Corp. (7203) and 10 percent decline at Honda Motor Co. (7267), according to the average of analysts’ estimates compiled by Bloomberg.

The stock is extending the under-performance this year, trading unchanged from the end of 2011, compared with the 13 percent advance by the benchmark Nikkei 225 Stock Average. The cost of insuring against default on Mazda’s bonds using credit- default swaps is at the highest in almost three years.

Last March, Mazda sold 151.2 billion yen of new stock -- a record for the company -- as four years of losses drained away so much capital it faced a debt-rating downgrade, which would raise borrowing costs for the industry’s most indebted carmaker. When unprofitable companies sell stock via public offerings to boost capital in the balance sheet, they also dilute the value of existing shares. In Mazda’s case, the number of outstanding shares rose by about 70 percent.

Ties to Hiroshima

Mazda’s investments reflect the deep ties the carmaker, Hiroshima’s biggest company, has with the city where it was founded 92 years ago, spokeswoman Kozue Nitta said. The company said after the atomic bomb devastated the city in 1945, it lent its headquarters to the Hiroshima government for about a year.

“We started to run the hospital and investing in baseball, soccer teams to make contributions to the local community,” Nitta said. “We have many reasons to hold on to each asset.”

Mazda owns 34 percent of the Carp baseball team -- a three- time winner of the Japan Series -- and 22 percent of the Sanfrecce Hiroshima soccer club, according to the company last year. The unprofitable carmaker also owns welfare facilities, including a hospital and dormitories, worth 20.5 billion yen and 432.3 billion yen in real estate.

By comparison, Mitsubishi Motors Corp. (7211) shut an employee hospital in Okayama during 2009 after its recall crisis forced the company to sell 780 billion yen of new stock. Daiei Inc. (8263) sold the Hawks baseball team in 2005 to mobile-phone operator Softbank Corp. (9984) after the supermarket operator needed a government bailout.

Rotary Engine

Mazda’s finances are a contrast to four years ago, when the developer of the rotary engine and the RX-7 sports car was coming off record profits. Then the collapse of Lehman Brothers Holdings Inc. (LEHMQ) sparked a global recession and the yen appreciated more than any major currency for two straight years.

The company is scaling back spending as Mazda plans to reduce new hires of college graduates by 71 percent this fiscal year and offered buyouts to U.S. employees. The Nikkei newspaper reported March 24 that Mazda plans to halt manufacture of commercial vehicles, although spokesman Toyota Tanaka declined to confirm the report.

The carmaker may have further room to cut costs. Selling, general and administrative expenses accounted for about 19 percent of revenue in the year ended March 2011, the third highest spending ratio in the industry after Honda and Suzuki Motor Corp. (7269), according to data compiled by Bloomberg.

‘Fanatical’ Fans

Mazda is also increasingly turning to Sumitomo Corp. (8053) and Sumitomo Mitsui Financial Group Inc. (8316) for financial aid after Ford Motor Co. cut its stake in Mazda to 3.5 percent in 2010 from 33 percent in 2008, dismantling an alliance spanning three decades. Mazda said in June it plans to stop making sedans at a Michigan plant shared with Ford since 1992.

“It will take time for Mazda to expand overseas because Ford has taken care of such tasks for a long time,” said Takeshi Miyao, an analyst at a research firm Carnorama Japan. “I doubt Mazda really means to stay in Japan. Foreign production may increase gradually after a few years.”

The company’s reliance on the yen may decline starting next fiscal year, when a factory in Mexico is scheduled to begin production. The company is also counting on fuel-efficient models such as the CX-5 sport-utility vehicle that went on sale in February, the first vehicle to be fully fitted with its so- called “SkyActiv” technology. The technology is enough to keep Mazda competitive for the next 5 to 10 years, Kurt Sanger, an analyst at Deutsche Bank AG (DBK), wrote in a report late last year.

While the yen may be reversing gains -- it’s the worst performing major currency this year -- Mazda should give investors a better indication that management is spending the company’s money wisely, said Tokyo-based Tachibana Securities Co. (TSCLZ) strategist Kenichi Hirano.

“Given the situation, Mazda may need to consider selling the Carp and weather the backlash from the team’s fanatical fans,” Hirano said. “They should be reviewing what assets they can sell, but I can’t see them having made an effort.”

To contact the reporter on this story: Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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