For a few mainstream automakers, hot asset allocation could be a good way to compete for capital with Tesla and Rivian. For the most part, however, it’s more complicated than that.
Wall Street never tires of wondering what companies like Volkswagen or General Motors might be worth if their subsidiaries were valued more in line with their rated peers. Hopes this month have been on VW, following reports from Reuters and the German newspaper Handelsblatt that the automaker continues to assess an initial public offering of its lucrative sports car brand Porsche.
As brokerage firm Bernstein pointed out, if Porsche’s earnings got the same multiple as independently listed Ferrari’s, the unit would be worth much more than its parent company. Porsche also has a promising pied-à-terre in electric vehicles: the all-electric Porsche Taycan sold more than the brand’s classic gasoline-powered 911 model in the first nine months of the year. VW shares jumped about 9% on the day of the IPO reports.
News around GM is flowing in the opposite direction. Expectations about the listing of Cruise, its majority-owned autonomous vehicle unit, took a hit last week when GM announced the departure of unit general manager Dan Ammann. GM has not given an explanation, but Mr Ammann, a former banker, has been associated with the push for an IPO by Cruise, which counts Honda and SoftBank among its minority investors. GM shares fell about 6% in response.
The two cases illustrate the conundrum: Automakers want to appeal to bullish investors in auto and luxury technology, but without ceding control of assets critical to their future.
Even after a strong post-pandemic recovery, stocks such as GM and VW are rated very poorly relative to electric vehicle specialists, which offer investors huge growth potential, as well as luxury dean Ferrari. This means that startups Tesla and EV can look to stock investors for the massive sums needed to design and build the next generation of cars, while traditional players have to rely on hard-earned cash flow. They need the means to level the rules of the financial game.
Porsche isn’t the only asset VW could fundraise against. Perhaps in preparation for the successful IPO of South Korean battery giant LG Energy, VW announced last week that it was setting up a company dedicated to its battery investments. Likewise, analysts speculated earlier this year that GM could carve out its battery platform, Ultium, as it did Cruise.
The problem with such theories is that electric vehicles and the associated digital technology are at the heart of the strategies of automakers. Companies might consider selling stakes in supply chain assets – this is VW’s plan with the battery industry – but only when the deals don’t limit their strategic flexibility. GM’s reluctance to list Cruise is a clue that CEO Mary Barra increasingly sees driver automation as a core business skill like electric vehicles, and not as a side business better suited to taxis.
The few EV spin-outs that have been announced are exceptions that prove the rule. Last week, Harley-Davidson announced that it would go public with its LiveWire EV brand through a merger with a specialist acquisition company. Ironically, however, a key part of the pitch is that Harley bikes, unlike LiveWire’s cars and urban two-wheelers, aren’t ready to go electric – the batteries are still too heavy to take the bikes long distances. With no Tesla or Rivian equivalents encroaching on Harley’s territory, he may see EV tech as enough leeway, for now, to sell a minority stake at a hard-hitting valuation.
Porsche is an equally plausible derivative candidate, as VW’s wider EV push doesn’t depend on it. In addition, the majority shareholders of the parent company, the descendants of Ferdinand Porsche, would likely like their ancestor’s namesake brand to be independently listed again. The potential deal has emotional and strategic dynamics.
The most shareholder-friendly listing model would be Mercedes-Benz owner Daimler’s recent split from its heavy-duty division directly to investors, giving Porsche proper free float and independence. But the latest news reports suggest that VW is considering a minority IPO instead, which would raise money for the parent company but may not yield much value. Publicly traded stocks often trade at a discount due to illiquidity and controlling shareholders who do not always have the same interests as the capital markets. It’s also an issue for Harley investors to watch out for: The bike maker will still own nearly three-quarters of LiveWire after its SPAC merger.
Automakers who are considering spinoff companies face a dilemma. They can retain control of the assets, but that would be partly counterproductive as it would limit the value that can be taken from them.
Investors may need to think more about how automakers can improve their valuations by parting with legacy combustion engine assets, a topic only Volvo Cars has addressed in any meaningful way. Financial engineering can probably help the auto industry, but not as Tesla-obsessed investors often think.
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