Will Ford Need to Sell Its Stake in Mazda?

Some analysts fear the ailing U.S. automaker may be forced to raise funds by unloading its interest in its much healthier Japanese partner

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, 3/26/08) 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.

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