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The Auto Industry's IPO Odd Couple
The automotive industry has undergone a drastic transformation over the past few years. From the rise and fall of the SUV-heavy lineups, to the more recent waves of vehicle recalls, there have been numerous events that have significantly reshaped the global industry. Perhaps two of the most seismic occurrences within the group, though, in the last decade have been the overwhelming shift in drivers’ tastes toward fuel efficiency and the public downfall of Detroit.
Thus, 2010 may mark another turning point in the auto group’s history. Indeed, a pair of companies, sitting on opposite sides of the automotive spectrum, look to garner investor favor when shares of each are sold in initial public offerings. For one company, it is the next step toward maturing on the global automotive scale. For the other, it is a second chance.
At the start of the year, Tesla Motors announced its intentions to take its electric vehicles (EV), the same ones driven by the likes of Brad Pitt and George Clooney, to the next level, with an initial public offering of its shares. At the time when Tesla first fired up its assembly lines, many viewed the electric car as nothing more than a novelty, with celebrities and the most rabid conservationists the only ones behind the wheels. After all, car makers had previously tried to build mass produced electric platforms, but inferior batteries would not allow such a feat. Not to mention, Tesla’s birth followed an era when gas-guzzling SUVs dominated the highways.
The surging price of oil, however, soon had drivers reconsidering. As the trip to the pump got more expensive, drivers’ grievances got louder. In turn, auto manufacturers once again took aim at alternative options, and crossovers and hybrids soon gained popularity. Although some of the larger players had electric in the works, Tesla put its name on the map, introducing the first federally compliant highway-capable vehicle.
The EV market is still relatively small. That said, it is growing and, more important, it is a virtually untapped segment. As a result, now may be the perfect time for Tesla to reach out to investors, who may be quite receptive, especially as the big boys jump into the EV arena.
Nissan Motor (NSANY), for one, is making a significant commitment to the electric segment. The Japanese car maker is expanding capacity, with the goal of producing hundreds of thousands of electric vehicles on an annual basis. In fact, the company anticipates the EV market will comprise 10% of total vehicle sales by 2020. And Nissan has already put its money where its mouth is, having invested nearly $6 billion, along with partner Renault, in the electric initiative. The Nissan Leaf is set to roll out in the United States in 2011. It does not rack up the miles-per-charge of Tesla’s options (about 100 miles versus 200 plus). On the other hand, the Leaf is more affordable, priced at just over $30,000, compared with Tesla’s luxury cars, which can be had for over $100,000. (Tesla is developing a less-expensive vehicle, the Model S sedan, priced at nearly $60,000.)
And the EV market is getting more crowded. General Motors’ Chevrolet division is set to launch the Volt, while Toyota Motor (TM) is developing a plug-in version of the popular Prius and Ford Motor (F) plans to enter the fray, as well. With the bulk of the industry’s top manufacturers now incorporating electric vehicles into their lineups, it adds validity to the fledgling segment.
President Obama has even thrown his support into this segment. In fact, Washington has set a target of one million electric cars and plug-in hybrids in use by 2015. And federal funding comes along with such a challenge. Indeed, Tesla has already received a $465 million loan from the Department of Energy for EV production.
The wait for investors to get on board is now over. Tesla has launched the IPO of its stock (listed under the ticker TSLA), the first American car company to do so since Ford went public over half a century ago. The company’s optimism over how much it could raise in this issue has grown since the start of the year. Originally, when the IPO was announced in January, Tesla had anticipated raising around $100 million. Shortly thereafter it had upped the tally to $175 million, and now, it appears the total has topped the $225 million mark.
The company issued 13.3 million shares, up from the 11.1 million it had originally planned, at a per-share price of $17, above the $14-$16 range that was expected. Not long after the public issue, another $50 million in stock will be sold to Toyota Motor as part of an earlier deal that included Tesla’s purchase a manufacturing facility from the Japanese company.
Investors will likely favor these shares for their vast, though uncertain, growth potential. Tesla looks to build on its niche platform, and becoming publicly traded ought to help it do so. The EV market is small, but the company has the opportunity to become a large player in a fast-growing segment. Proceeds from the IPO will be used to complete the facility purchase from Toyota, and funds will also be utilized for additional capital expenditures and possibly acquisitions.
So what might be stopping investors from jumping in feet first? In a word: profits.
Tesla has yet to make money. Since building its first vehicle back in 2003, the company has failed to turn a quarterly profit. In the first quarter of this year, the car maker lost over $25 million, even worse than the loss of $16 million in the year-ago period. In fact, with only three months in the books, Tesla is nearly half way to its total 2009 deficit of $55.7 million.
Thus, much will probably depend on the success of the Model S, which is set to launch in 2012. Tesla hopes to produce about 20,000 cars a year at the start, but over the long term, it is hoping to use this as a blueprint for mass EV production. However, with its competitors’ electric vehicles priced significantly lower, it is unclear how Tesla’s high-end showrooms will fare. As a result, it may be some time before the company can finally pull itself out of the red.
As Tesla completes its offering and ends its first days as a publicly traded company, General Motors faces a different challenge. The once mighty auto behemoth must now win back Wall Street, which is not likely to be an easy task.
A far cry from the $225 million Tesla raised in its offering, GM is likely to garner between $15 billion and $20 billion when the reinvented car maker’s stock IPOs, probably by year end. The Detroit staple intends to file for the public offering in early July, and the new shares may hit the market as early as the fall.
Already the company has outlined some of the process, though how the IPO will reduce the U.S. government’s majority stake remains somewhat cloudy. Conflicting speculation indicates that 20% to as much as one-third of Washington’s 304 million shares will be sold, reducing the federal stake in GM to less than half. Either way, the GM sale will likely become one of the largest IPOs in U.S. history, if not the largest. Indeed, a $20 billion intake would surpass the $19.7 billion record currently held by Visa (V).
It has been a long and windy road for General Motors, which is the only company that can make the claim that it was once the world’s largest auto manufacturer before becoming one of its most notorious bankruptcies. And because of this, all eyes will likely fall on this IPO.
Many probably believe the lessons have been learned, and GM came out of bankruptcy a leaner more-efficient company. After all, the car maker was able to unload the bulk of its sizable debt burden, while trimming its lineup to four core brands and increasing its focus on fuel efficiency. Too, more recently, the company seems to have initiated talks with numerous banks, such as JPMorgan (JPM) and Wells Fargo (WFC), in the hopes of revitalizing its auto loan channels (GMAC was sold prior to the bankruptcy filing). Finally, the auto maker has taken aim at reducing the legacy costs that have been Detroit’s albatross for so long.
For others, however, skepticism surely remains. The pension and benefit expenses, though reduced, are still a bit daunting. Meanwhile, some may question whether the company can revive its market share, which has continued to erode over the last decade, steadily losing ground to Japanese competitors.
What it will really boil down to, though, is sales. It’s true, improving auto demand in North America enabled the company to generate a profit in the first quarter of 2010, the only time it can claim this feat since the March, 2007 period. However, a large portion of that success was driven by waves of discounts, as the domestic manufacturers fought to lure away Toyota’s recall-scarred customers. Still, U.S. car sales have retreated somewhat, of late, and they will likely fluctuate in tandem with the broader economic recovery. It seems inevitable that overall sales will increase for the full year, but the success of GM shares, Part 2 may have a lot to do with timing. Any hiccups in an economic rebound or persistent lethargy in the showrooms may weigh heavily on the pricing of this issue.
There is the appeal of size here, as well as the potential for GM stock to once again be a prominent portfolio and index holding. Still, there are numerous questions surrounding the near-term future of this soon-to-be publicly traded issue. After all, the company is trying to win back many investors that had previously watched as their GM shares plummeted from over $90 to mere pocket change in the span of less than a decade. As a result, we anticipate a bevy of “burn me once, shame on you, burn me twice….” investors showing their hesitation.
Not to mention its crosstown counterpart Ford Motor. Many that were looking for an investment in Detroit’s recovery would likely be more than happy to stick with the region’s only car maker to avoid the bankruptcy pit and refuse billions in government funding. Ford stock has rebounded since slipping to $1 a share in late 2008, but it can still be purchased far below where it traded in the early 2000s.
In sum, GM appears to have moved past its calamitous downfall and should benefit from a return to the public market. But it will not be an easy sell. Pricing is vital, as is the perception of the company and the industry, as a whole, at the time of the offering. GM cannot control the latter. What it can do, though, is continue to focus on improving its business, which translates to keeping costs in check, maintaining a healthy balance sheet, and, most vital, building cars people want to drive.
For now, we celebrate the birth of Tesla Motors’ publicly traded stock. Simultaneously, we are inclined to look ahead to the rebirth of an industry giant. One thing is certain, as seems to always be the case these days, the automotive industry will look quite different heading into 2011.