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Volvo shares deal may be a catalyst for change
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A Swedish investor has just picked up 5% of Volvo. No big deal..
until you look beneath
the surface 011ie Dixon indulges in
a little informed speculation on who's in the market for whom.
.r he news that Swedish investment firm Cevian Capital has bought 5% of Volvo's shares answers one question hut poses others.The answer is we now know the name on the share certificate. Volvo shares have been traded actively over the past few weeks — and have risen by some 15% this year — and, while Cevian had been seen as the likely buyer. it's always nice to tie up a loose end.
Which brings us to the questions, the first of which is, why? Investing in a cyclical sector that is heading towards the downturn is a strange thing to be doing. Let's be blunt here: truck manufacturing is in fora rough time. Most pundits are agreed that post Euro-4/EPA 07, the traditional EU/US markets are heading for the bathroom. When a gilt-edged stock such as Paccar is downgraded by analysts, you can be reasonably confident of rough weather ahead.
Money in the bank
But Cevian has its eyes on the balance sheet. Volvo's net financial position, including cash reserves, is around .3bn. Cevian boss Christer Gardell wants a piece of this pile,and in order to get it he's looking for a seat on the board. In addition to a nod from Parvus, Investment AB Oeresund has also offered its support, so an appointment looks like a shoe-in.
Let's speculate for a moment. Gardell gets his seat and a redistribution is agreed.This will affect the situation in a couple of ways. Firstly, the cash pile earmarked for expansion will have dwindled. Secondly, and more worryingly for Volvo, Cevian will have made its money, and might look to bail out.
Volvo is trying to expand. It's currently courtingAshok Leyland, which recently bought back 15% of itself from lveco, after the Italian OEM teamed up. via Fiat. withTata.At the same time. it had been trying to take a stake in China National, the other half of the Jinan Huawo Truck joint venture. In what amounts to a poke in the eye, China National said no, and will make its own arrangements later this year.
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Of course, if Gardcll gets his wish and Christmas arrives prematurely for Volvo stockholders, then the pursuit of acquisitions will slow down a touch. But, what happens if Cevian's stake comes to the market? The simple answer is that someone will buy it."Ihings get more involved when you try to work out who that someone will be.
Volvo wants to buy things. It is likely that it would be laughed out onto the street by the EU should it make a play for the four European OEMs that could conceivably he up for grabs. It's tried to expand its business in China and been rejected; now it's trying to do the same in India.
Because Volvo is such a huge player — number two in global terms — we tend to think in terms of it as the attacker rather than the victim. But should a 5% lump come onto the market, the dynamics shifi a bit.
Volvo's biggest shareholder, with a 21% stake, is Renault SA The key player at Renault is Carlos Gliosn, who is not known for messing about. He's also a man who has dinner with people like Kirk Kerkorian, a major shareholder in the basket case that is General Motors. KK has urged GM to consider a partnership with Renault Nissan, and at that dinner CO is reported to have expressed an interest in taking up to a 20% stake in GM. But it's not quite QED yet. Renault is reported to be satisfied with its piece of Volvo. It pays a good dividend, and offers a complementary business cycle to its core business.
At the moment, that is. But with downturns in both of Volvo's core markets — the EU and North American Free Trade Association — looking likely, this view may change. Further afield, China remains a problem and India a challenge. Just for good measure. Iran, another important market for Volvo, looks to be a candidate for sanctions as a result of its nuclear ambitions. Brazil, another key market, looks
reasonably happy, but the benchmark Selic interest rate stands at a towering 14.2%... hardly a figure designed to encourage expenditure.
We think it's highly probable that Cevian will be looking to unload its stake in the medium term..1 hat's 5% of Volvo up for grabs straight away, and in a downturn it will be seen as a longterm investment so the investment houses are less likely to be interested.
But if Ghosn goes for broke with GM (or decides to have a look at some of the Ford brands up for grabs in the fire sale that is the US auto sector) then there may be a bit more of Volvo in the shop window— 5% gets you a persistent shareholder with a seat at the table; 25% gets you a new boss.
Loads of money
There's a lot of money kicking around out there at present. If you've a spare ,L13.6bn or so idling in the safe, you could, as of close of business today, be Volvo's new owner. Given that the stock is riding high at the moment you could probably do a deal, but even on the basis of these figures Renault SA could expect to see about £2.85bn for its lump.
That's a number that the Chinese could get their heads around pretty quickly; they have foreign currency reserves in excess of $437bn under the mattress at present, and Ghosn could make a lot of friends through such a deal.
This is no more than speculation, but we feel there is good cause for a re-evaluation of the accepted norms within the truck business. Any such re-evaluation has to take as its starting point the current shortage of sacred cows. In short, all bets are off and we're watching with interest. But probably not with the same level of interest as they are in Gothenburg.•