Now that the silly Microsoft buyout talk is behind us, let’s move on to another target: Ford Motor Co., which began trading today at just $8.25 per share. For context, Toyota opened exactly $100 per share higher. The most basic problem is that Ford poured too much R&D into its gas-hungry truck and SUV division, while under-investing in cars (its only current hybrid vehicle is an SUV).
Anyway, the struggling U.S. automaker now is listening to any and all offers, as part of a nebulous turnaround strategy. One widely-reported possibility is that it could sell off all or part of its luxury car division, which includes brands like Aston Martin, Land Rover and Jaguar (it says that Aston Martin is the most likely, but for the right price…). Interested parties include UK construction group JCB and J.P. Morgan-affiliated private equity firm One Equity Partners. The latter has a definite in, as OEP partner Jacques Nasser created Ford’s luxury unit before being booted as company CEO. Moreover, fellow OEP partner James Rubin is the son of Citigroup executive Robert Rubin, who last week resigned as a Ford board member. The resignation was formally due to potential conflicts inherent in his role with Citigroup — which is advising Ford on the turnaround – but it’s likely that his family tree also played a role.
The more tantalizing scenario, however, is that LBO firms could make a play for the entire ball of chrome. Some Detroit Free Press reporters have been asking if such a deal is plausible in terms of size, and the simple answer is yes. Ford’s market cap is just $15.3 billion, which is well below my hypothetical buyout ceiling of $80 billion. Moreover, this isn’t a rising company that would require a 25% or 35% premium. Instead, it would be viewed as a turnaround play with something closer to 15 percent.
OEP is not large enough to lead such a deal, nor would the Ford board necessarily allow Nasser to retake the reigns. A more likely suitor would be Clayton, Dubilier & Rice, whose relationship with Ford was forged during its multi-year courting of Hertz. And you obviously can’t count out any of the big players, particularly firms like Carlyle Group that have dedicated transportation practices.
The most logical buyer, however, has no interest. That would be Wilbur Ross. In fact, I told a Detroit Free Press reporter yesterday that Ross would be the perfect buyer for four reasons: (1) He now has his hands in Amvescap’s deep pockets, after selling a majority of his firm earlier this month; (2) He is a turnaround legend who bought into U.S. steelmakers when everyone said it was a dying industry; (3) He has an interest in automotives, having formed a platform that includes Collins & Aikman Europe; (4) His steel endeavor was particularly notable for the relative lack of rancor from organized labor. As United Steelworkers International president Leo Garrard told U.S. News & World Report: “The union and Wilbur Ross were the catalyst that not only saved steel jobs, but saved the industry.”
Shortly after hanging up with Detroit, however, I called Ross and learned that he will not be making a play for Ford. He says that his firm has made a “policy decision to bring suppliers to the OEMs, but not to become an OEM ourselves.” More importantly, he provided several reasons why a Ford buyout is unlikely. And each one of those reasons made sense. So here goes yet another list:
- There are legitimate questions as to whether or not Ford can handle extra debt, and any LBO would certainly involve some.
- The Delphi situation remains unresolved.
- The United Auto Workers contract comes up for renewal next year, which would make it difficult for an LBO firm to reach an agreement this year. This is particularly true since the UAW typically does something called “pattern negotiating,” whereby it reaches one OEM deal and then strikes a near-identical deal with everyone else.
- The Ford family has indicated no interest in selling its stake in Ford, which is around 40 percent. In fact, it has done the opposite. This is fine in a situation like HCA, where the senior First was viewed as an asset. In the turnaround case of Ford, however, CEO Bill Ford may be viewed as more of a burden.
To sum up, Ford is a more reasonable target than Microsoft. It is actively looking at strategic alternatives, and is relatively affordable. But Microsoft should not be the standard by which we judge prospective LBOs. Wilbur Ross’ disinterest, however, might be a sentiment worth listening to.