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The shock demise of Ford, GM

2008-06-30 11:04

Gilles Castonguay

The mounting trouble for US carmakers has cost them any chance of winning more than partial help from a foreign investor or overseas rival.

Bankers and analysts say Detroit-based carmakers could still find partners for limited tie-ups but caution it could prove impossible to find a deep pocket overseas for the cash the US industry could need to ride out the current downturn.

European and Asian carmakers are investing in more promising markets and face their own challenges from the rise in prices for fuel and raw materials like steel, analysts say.
While the market value of both General Motors and Ford was marked down sharply this week, uncertainty over their near prospects could keep bidders away.

"There are a lot of legacy costs that are difficult to estimate," said Klaus Pflum, an investment banker for Nomura in London.

Shares in GM endedlast week down just over 17%, the worst weekly performance for the stock since September 2001.

With a market capitalisation of $6.5bn, GM is now worth less than a third of Renault SA, the French carmaker that was spurned when it sought an alliance with GM in 2006.
The leading US carmaker is worth just one-fifteenth of Toyota ($99bn), which overtook GM this year as the global sales leader by volume.

Once seen as a bellwether for the US economy, GM is also in danger of being eclipsed in value by the likes of India's Tata Motors ($4.4bn) and Russia's Avtovaz ($4.6 billion), home of the Lada brand.

GM says it has enough liquidity to get through the year and options to raise capital if needed, but analysts have raised questions about its cash burn between now and 2010 when GM and crosstown rivals Ford and Chrysler LLC start to realize savings from a contract with their major union, the UAW.

Billionaire investor like Kirk Kerkorian has offered to help Ford with a capital infusion.
But few other angel investors are in sight. European and Japanese car makers are unlikely to make a direct investment.

"What's wrong with GM is it's too big now. GM is also deep in the red and no one would want to buy it. I can't think of ways to help it except through restructuring," said Koji Endo, a Credit Suisse analyst in Tokyo.

Capital could come from a foreign sovereign fund, but Pflum said he did not expect it to happen. "The automotive sector has been volatile. It is cyclical. The issue is that in the United States it is not a growth business," he said.

JP Morgan's Asia Chairman Gaby Abdelnour, a veteran Middle East and Asia banker, was more open to the idea but he acknowledged that the political implications loomed large.

"If a Middle Eastern investor or a CIC (China's sovereign fund) shows up to an iconic name in the US like GM or Ford to put a ticket of several billion dollars to stop the bleeding, it's going to raise a lot of eyebrows in an election year and politically charged environment.

"Most of these (funds) don't like that type of publicity," he said.

Smaller deals, limited risks

If foreign car makers step in, they will do it by buying an asset or forming a narrowly defined partnership to contain any potential risks, analysts said.

Italy's Fiat for example, wants to build Alfa Romeo cars in North America and has been talking with the three US carmakers about using one of their plants.

That could ease the burden of the excess production capacity US carmakers have been left with due to dwindling share in their home market and the slump in light truck sales.

In a similarly limited deal, Nissan is building a small car for Chrysler, while Chrysler is working on a truck for Nissan.

Meanwhile, India's Mahindra & Mahindra is seen as a possible bidder for GM's Hummer brand, which is on sale. Mahindra is keen to get a foothold in the US market, where it plans to launch its Scorpio SUV next year.

"Mahindra has already shown it has an appetite for global acquisitions," said Neeraj Bandhu, a CSM Worldwide director.

Manish Mathur, a principal at consultancy AT Kearney, said both Tata and Mahindra want a global presence and their need for new technologies would drive them to do more deals.
"Money is not a concern. Their ambition goes beyond that," he said.

- Reuters


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