Billionaire Kirk Kerkorian's Tracinda approaches GM about allying itself with Renault-Nissan in a move that could dramatically shake up the auto industry
Something big had to be in the offing. Billionaire Kirk Kerkorian's Tracinda was too quiet about his investment in General Motors (GM) for too long. And now he's making his move.
On June 30, the fiercely private and mercurial investor, who owns 9.9% of GM stock, sent a letter to GM Chairman and CEO G. Richard Wagoner Jr. and the auto giant's board asking them to consider some kind of tie-up with Renault-Nissan. (Click here to see Kerkorian's filing with the Securities and Exchange Commission.)
GM says that it has received no word from Renault, but its board, which held an emergency meeting on June 30, will consider the idea. For its part, Renault said in a statement that it wants the full support of GM's board and management team before moving forward.
The announcement is a huge surprise to many involved. Even some GM executives said Friday morning that they didn't know the filing was coming. If such a tie-up happened, it would send shock waves through the industry. The deal would match the world's largest auto maker with the world's fourth largest, giving the tripartite alliance about 14.5 million vehicles in annual sales volume with an empire that has strong positions in every major market.
Tracinda's move also ratchets up the pressure on Wagoner, who has recently gotten a reprieve after getting 35,000 union workers to accept buyouts. GM turned a $435 million profit in the first quarter after losing $10.6 billion last year.
BIG HAPPY FAMILY. Sources close to Tracinda say that the investment firm wouldn't mind seeing a fix-it guy like Carlos Ghosn, who is chief executive of Nissan (NSANY) and Renault—which owns approximately 16% of Nissan—run GM.
Pulling GM and Renault-Nissan into one family could be a way to push that agenda. "Somewhere in this, there's a Machiavellian move on Kerkorian's part," says Joseph S. Phillippi, a former Wall Street analyst who now runs his own consulting firm, AutoTrends.
At the least, Kerkorian—whose close associate, former Chrysler and IBM (IBM) CFO Jerome B. York sits on GM's board—is signaling that he isn't satisfied with the pace of progress at GM and wants to get more sooner from his $1.4 billion investment. Kerkorian's letter states only that the synergies could save all three companies a lot of money and create value for GM shareholders. Renault said in its statement that the company was approached by Kerkorian and York.
"The main message is that Kerkorian will use this as a tool to add pressure on GM management to restructure the company," says John A. Casesa, analyst with new York-based Casesa Shapiro Group.
SHARING AND CARING. Exactly what the tie-up would look like wasn't made clear by the filing. But it is clear that Tracinda initiated talks. In a letter from Anthony Mandekic—one of Kerkorian's deputies—to Wagoner, the billionaire says that Renault chairman Louis Schweitzer and Ghosn are amenable to an alliance and even buying a "significant minority stake" in GM.
Where this could go if GM's board is interested is an open question. It could be as simple as the GM-Fiat alliance that ended last year, in which GM owned 20% of Fiat (FIA) and, at one point, Fiat owned 5% of GM stock. The two companies formed a pair of joint ventures to purchase parts and share engines.Wall Street is already speculating that Renault-Nissan would take a 20% stake in GM if something happened.
SOME SYNERGIES. But how that would be engineered is also unclear. For Renault to get a stake in GM, it would have to either buy some of Kerkorian's stock, purchase shares on the open market, or convince GM management to issue new shares. The latter would dilute the holdings of existing GM shareholders.
Another big question looms. What does Ghosn get out of this? He is a master cost-cutter and may be lured by the possibility getting costs down even further through sharing development of engines and vehicle platforms and jointly buying parts.
There are some synergies, says David E. Cole, executive director of the Center for Automotive Research in Ann Arbor, Mich. The two companies could share technologies and save money. Getting greater scale is more important now that Korean auto makers are growing and with the forecast that China's car companies will eventually advance globally, Cole says.
FAMILY TIES. Ghosn has hinted that he was interested in an alliance with a U.S. car company, which would probably be either GM or Ford Motor (F). But most of the speculation has centered on Ford. Chairman and CEO William C. Ford Jr. has stated publicly that he made an unsuccessful overture to Ghosn to come to Ford.
And Ford could use an infusion of capital, access to Ghosn's cost-cutting know-how, and shared purchasing and manufacturing with Nissan and Renault. The stumbling block with Ford, though, is always giving up any control of management and decision-making since the Ford family holds onto a majority of voting shares in the company.
Analysts say a tie-up still wouldn't be worth the trouble for Nissan. Goldman Sachs (GS) analyst Robert Barry wrote in a research note that Nissan could save money by sharing parts and could even use some excess GM production in the U.S.
Morgan Stanley (MS)analyst Adam Jonas says the two sides could get economies of scale and share technology. More importantly, Jonas says, Ghosn would be an active shareholder and want a big voice in management decisions.
FULL DECK. There would be some big savings for both companies. And it would put more pressure on Ford, which is also struggling mightily, as two of its main competitors would be joining forces.
But taking a piece of GM and all of its troubles—not to mention joining up with a company that has $90 billion in pension liabilities and massive retiree health care costs—would be troublesome. It would also distract Ghosn from the restructuring he is orchestrating at Renault and his efforts to reignite Nissan's turnaround in the U.S. and Japan.
Maybe nothing will come from Kerkorian's move, but the activist shareholder clearly has plenty of cards to play.
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