LONDON, Dec 28 (Reuters Breakingviews) – The auto group could soon embark on a private equity pitch. Shares of automakers such as Stellantis (STLA.MI) and his BMW (BMWG.DE) have suffered as investors fear a possible recession and declining car sales. This is an opportunity for deep-pocketed funds and backers to push them off the public market once and for all.
There are many reasons to be worried about auto stocks. The shift to electric vehicles could erode profit margins and threaten to steal market share from Chinese start-ups. Still, automakers are already setting prices for scrap piles, especially in Europe. Indexes of Volkswagen (VOWG_p.DE), Mercedes-Benz (MBGn.DE), BMW and Stellantis are trading at an average of 5x, about 25% lower than their average over the past decade.
Indeed, a recession in 2023 could lead to lower demand for cars and lower prices. But the outlook is far from bleak. Automotive groups are no longer the bloated beasts they once were, with sales declining in recent years due to semiconductor shortages. The same four automakers are expected to grow sales at an annual rate of 3% through 2024, according to Refinitiv data, a far cry from the more than 10% annual decline seen in 2009.
One way to profit from declining valuations is to buy back your own shares. BMW, for example, has his €2 billion buyback program, but has the power to sell up to 10% stake in the next few years. Assuming the controlling Quandt family doesn’t join, its stake will rise. More companies could follow BMW in 2023.
A bolder move would be to delist the company entirely. There are risks. Automakers hate to borrow too much for fear of harming the financial services sector. But the sector is also cash-strapped. For example, according to Refinitiv data, BMW will have net cash equivalent to his 47% of his December market cap in 2023.
Suppose a private equity buyer partnered with the Quandt clan and used debt to acquire minority stakes at a 25% premium for €37 billion. After deducting cash, BMW’s debt remains around €10bn, less than half of his 2023 projected EBITDA and not far below its medium-term free cash flow target of almost €7bn. . This means that buyers can pay off their debts quickly and then withdraw large dividends. If the public market doesn’t like European automakers, there may be a private market solution.
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(This is Breakingviews’ forecast for 2023. Click here to see the details of the forecast.)
According to LMC Automotive, global light vehicle sales are expected to grow slowly to about 85 million units in 2023. This is still well below his 90 million figure seen in 2019 before the pandemic.
Edited by Liam Proud and Oliver Taslic
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