Why Ford’s EV split big decision may be even bigger in the future

Attendees see the Ford F-150 Lightning electric truck in Washington on Tuesday, January 25, 2022, in Washington.

Bill Clark | CQ-Roll Call, Inc. | Getty Images

In the biggest deal in a long time, Ford Motor Co. decided last week to divest its electric vehicle business from its regular car business, but most importantly, don’t let the EV business get a share valuation. EV leader Tesla and, occasionally, fast followers, fast followers like Rivian and Lucid Group, whose stock prices have suffered recently.

The company met Wall Street halfway through its restructuring plan, which is still significant, and analysts were very positive with the decision.

Nick Colas, one of the founders of DataTrek, a former Wall Street car banker, said the car companies will have to convince the street that Ford’s move is “an interesting reorganization.” . “

“Car companies don’t often confuse their reports / organization charts so dramatically and such moves are always dangerous in terms of productivity. However, it allows for clearer management responsibilities and that’s always good in the long run,” he said. .

The message from Ford’s management is that the EV business, despite strong sales of the well-received Mustang Mach-E, is not ready for the first hour. Ford chose the safest way to keep its promising business tied to its profitable mother ship. As a result, the EV unit will be called the Ford Model e, and other technology efforts will invest $ 50 billion in most of Ford’s existing cash flow, which will be called the Ford Blue. This cash flow was $ 40 billion in the last two years, which means that Model E will not have to resort to bonds or stock exchanges to finance the expansion.

At the same time, Ford could undo a significant portion of its share discount compared to empty EV games. Ford’s chosen commitment was to keep its business aligned, but reported its results separately next year so that Wall Street could begin evaluating and valuing EV business growth independently.

Ford’s tour

Will it work? For now, the answer is likely to be yes.

“We like the move, and we think it was driven by frustration,” said CFR Research analyst Garrett Nelson. “Ford [price-to-earnings ratio] single-digit share trading, part of Tesla, [dropping this year] they even became the second largest seller of electric vehicles and will grow much faster when the F-150 Lightning pickup is shipped within a few months. ”

Ford executives emphasized the operational and financial benefits of keeping the company together. Farley spoke about the ability of the combined company to finance its growth strategy without entering the capital markets, and the contributors explained in a press conference the details of plans to share the costs of EV and gasoline vehicle business to reduce and achieve costs in the traditional unit. the two sides of the business can increase the profitability of working together faster than they probably can on their own.

“If we take this out, we’re really putting that lever at risk,” Farley said. “It doesn’t make sense. The lever is the key, and we have the capital.”

The focus of the plan is to reduce annual costs by $ 3 trillion by 2026, with Ford’s advertising budget as its main goals – Statista estimated $ 1.8 trillion in US spending for US spending in 2020 alone – and the cost of $ 4 billion in annual guarantees, Ford said. President Kumar Galhotra Blue said Ford will focus on improving the quality of vehicles.

Nelson said it is likely that the company will also look outside the US for a lot of cost reductions, pointing to loss-making operations in parts of Europe and Asia.

The new growth is likely to be driven by the advent of new EVs, most notably the F-150 Lightning, which Ford has pre-ordered 250,000 and is working to increase production before shipment this year. Ford has achieved this goal, while still offering a market-leading electric version of the truck in a single body style, compared to the different cabs with different levels of luxury in the traditional F-150 petrol.

The company said it expects to get a third of its car sales from EVs by 2026: about 2 million vehicles. It sold about 726,000 F-150s in the U.S. last year.

But there is still a real spin-off to suspect that it may happen sooner.

The EV spinoff debate will not go away

All of this could still lead to a better position for Ford to make the rest of the deal and completely dismantle its Ford E unit by 2024, said analyst Dan Ives Wedbush. The keys will continue to expand sales of the Mustang Mach-E electric, which sold more than 27,000 units in 2021, about half of the gasoline Mustangs, and following the initial promise of the F-150 electric and F-150 electric. E-Transit electric commercial vehicle for small businesses, adding other models as the company grows.

“In 12 to 18 months, given the success of the F-150, investors will want to raise and double their capital,” Ives said. “Once they start reporting on unit sales, we’ll be able to see if you can see the EV business demand. EV is the first step in a temporary spinoff of the EV business,” Ives added.

The problems underlying Ford’s management go beyond the automotive sector. In the energy business, where traditional carbon-intensive businesses are facing threats from renewable energy sources, incumbents are being attacked by activists to consider spin-offs. Shell has tackled an activist campaign, and its CEO has responded that investors do not understand the importance of the current money-making model for future renewable energy investments. And over the past year, it has been at the height of the corporate restructuring of iconic companies, including GE and Johnson & Johnson.

Emilie Feldman, a management professor at The Wharton School at the University of Pennsylvania who specializes in corporate restructuring and divestment, says Ford and other auto companies that may follow his approach do not give the final word on corporate structure. ending in a complete separation.

“Today, it is still valid to be integrated into Ford’s traditional car and electric vehicle businesses, whether due to cash flow and other operational dependencies. . “

The value of the separation of the history of the market was eventually surpassed by the value of integration and is full of examples of divestments that later took place.

“Situations have often occurred in industries and over time, whether it’s companies with old and new tech businesses, companies with mature and newborn businesses, or companies with raw materials and end products,” Feldman said. “I guess the same thing will happen in the end with cars like Ford and GM and other energy companies with Shell and the green and brown energy businesses.”

Other automakers like General Motors and Volkswagen will look to see if they can make similar moves, Stanley analyst Adam Jonas Morgan said. But Jonas, who does not recommend Ford shares, argued that relying on the cash flow of an existing business is expensive capital invested in a high-risk EV business.

And comparisons between Ford and other automakers only go so far, according to Colas.

The Ford family, focused on the shoulder of the board and focused on keeping the “blue” Ford icon at all events – the only one among its members to fail – has described history as “more thoughtful decisions”. next leg. They want to survive for the next 100 years, ”he said.

“Ford has made a lot of good decisions lately, and this is one of them,” Ives said.

When a real Ford EV company makes more sense

When can there be a formal EV spin-off on the cards? Economic cycles and a predetermined timeline may occur rather than when a recession occurs.

Right now, financing EVs is based on the hot market for U.S. truck vehicles, and Ford may continue to meet those conditions for years to come, allowing money from traditional cars to serve Ford to meet all of its goals. But if a recession occurs, “they can’t get anywhere,” Colas said. “Cars have a cyclical profit profile and those cash flows are disappearing, and you still have $ 5 billion in EV investments a year to make. Where will you get four million fewer vehicles when you sell them?”

His view of the banking sector based on his time in banking: Car companies tend to turn their backs well on the financial wall, in a weak economy. “In every other part of the cycle, they are reluctant. They want to maintain a critical mass,” Colas said.

A Ford EV spin-off won’t necessarily get Tesla’s rating for the next eight years as the majority of profits live on regular F150 sales. But the current environment sets it even better when Ford needs capital to rotate when EVs need it and when the next recession occurs under stock stocks. “You create choice and you don’t have to do anything,” Colas said. “There will always be a market for the Ford EV IPO,” he added.

Ford’s analysis of cash flow and its decision show a strong strength, Feldman says, has been confirmed by research on corporate strategy: the inertia surrounding spinoffs and divestments.

“The mentality is this: ‘We know we’re going to have to break up, but the flow of money is too useful at the moment / interdependence is too complicated to undo now /[insert other explanation here]so let’s hang on to the business. ” That logic is probably right now for Ford, “he said.

Why Ford’s EV split big decision may be even bigger in the future

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