Attendees view the Ford F-150 Lightning all-electric pickup truck at the Washington Auto Show in Washington on Tuesday, Jan. 25, 2022.
Bill Clark | CQ-Roll Call, Inc. | Getty Images
In its biggest deal in a long time, Ford Motor Co. decided to spin off its electric vehicle business from its traditional automotive business last week — but crucially, not to spin off the business. EV in the pursuit of white-hot stock valuations that have trailed electric vehicle leader Tesla and, intermittently, quick followers like Rivian and Lucid Group, whose stock prices have recently suffered.
The company met with Wall Street halfway through its ever-important restructuring plan, and analysts were overwhelmingly positive about the decision.
DataTrek co-founder Nick Colas, a former Wall Street auto banker who has been saying for a while that automakers will have to convince the street that this fallout shouldn’t come sooner rather than later, called Ford’s decision a “interesting reorganization”. .”
“Auto companies don’t often overhaul their organizational charts/org charts in such a drastic way and such moves are always risky in terms of productivity. Nonetheless, it allows for clearer management accountability and that’s always good in the long run,” said he declared. .
The message from Ford management is that the EV industry, despite strong sales of the well-received Mustang Mach-E, is not ready for prime time. Ford has taken the safer route by keeping its promising mothership-related emerging business profitable for longer. This allows the EV unit, which will be dubbed Ford Model e, and other technology efforts to invest up to $50 billion, mostly from cash flow from the existing Ford, which will be called Ford Blue. That cash flow was $40 billion over the past two years, meaning the Model e won’t have to look to the bond or stock markets to fund its expansion.
At the same time, Ford may be able to negate some of the steep discount its shares trade at to pure EV players. Ford’s chosen trade-off was to keep its businesses aligned, but report their results separately starting next year so Wall Street could begin to gauge the growth of the EV business and value it independently.
Will it work? For now, the answer is probably yes.
“We like this decision and believe it was driven by frustration,” said CFRA Research analyst Garrett Nelson. “Ford [price-to-earnings ratio] stock trading in the high digits, a fraction of Tesla, [dropping this year] although they have become the second largest seller of electric vehicles and will experience much faster growth when the F-150 Lightning pickup ships in a few months.”
Ford executives have highlighted the operational and financial benefits that keeping the companies joined can bring. Farley dwelt on the ability of the combined company to finance its growth strategy without accessing capital markets, while aides explained at a press briefing the details of cost-sharing plans between the businesses electric and gas-powered vehicles, cutting costs in the traditional unit, and getting both sides of the business to work together to increase profitability faster than they probably could alone.
“If we spin that, we’re really risking that leverage,” Farley said. “It makes no sense. Leverage is the key point, and we have the capital.”
The centerpiece of the plan is to cut annual costs by up to $3 billion by 2026, with major goals including Ford’s advertising budget – estimated at $1.8 billion in 2020 by Statista for US spending – and the $4 billion annual cost of warranties, which Ford Blue Chairman Kumar Galhotra said will be solved by improving the quality of Ford vehicles.
Nelson said the company would likely look outside the United States for many cost reductions, pointing to loss-making operations in Europe and parts of Asia.
Further growth is expected to be spurred by the arrival of new electric vehicles, particularly the F-150 Lightning, for which Ford has reported 250,000 pre-orders and is working to increase production before shipping this year. Ford achieved this goal while only offering the electric version of its market-leading pickup truck in one body style, versus different cabs with different levels of luxury in traditional gas-powered F-150s.
The company said it expects to derive a third of its auto sales from electric vehicles by 2026, or about 2 million vehicles. It sold about 726,000 F-150s in the United States last year.
But there are still reasons to suspect that a real fallout could come sooner.
EV spinoff talk won’t go away
All of this could still lead to, in fact, better positioning Ford to make the rest of the deal and completely separate its Ford E unit by around 2024, said Wedbush analyst Dan Ives. Keys will continue to drive sales of the electric Mustang Mach-E, which sold more than 27,000 units in 2021, about half the number of gasoline-powered Mustangs, and deliver on the original promise of the F- 150 electric and the E-Transit electric utility vehicle for small businesses, adding more models as the business grows.
“In 12 to 18 months, given the success of the F-150, investors will want to see them raise capital and double down,” Ives said. “When they start reporting unit sales, so you can see the demand in the EV business, we can gauge that. That’s the first step towards a possible fallout from the EV business,” added Ives.
The underlying issues facing Ford management go beyond the automotive sector. In the energy sector, where traditional carbon-intensive businesses are under threat from renewable energy sources, incumbents are under attack by activists for considering fallout. Shell faced an activist campaign and its CEO countered that investors failed to understand the importance of the current cash-generating model for renewable energy investments going forward. And the past year has shown this to be a peak moment in the restructuring of iconic companies, including GE and Johnson & Johnson.
Emilie Feldman, a professor of management at the University of Pennsylvania’s Wharton School who specializes in corporate restructuring and divestitures, said Ford and other automakers likely to follow its approach aren’t emitting what is likely to be the last word on the corporate structure, resulting in full separation.
“Today, there is still value in Ford’s traditional automotive and electrical businesses remaining integrated, whether because of cash flow or other operational interdependencies. At some point in the future, however (perhaps once EV technology develops further), the calculus will change.”
Market history is replete with examples where the value of separation ended up exceeding the value of integration, and then sell-offs occurred.
“The situations have occurred repeatedly across industries and time periods, whether companies with old and new technology companies, companies with mature and more fledgling companies, or companies with commodity and end-product companies,” Feldman said. “I suspect the same thing will eventually happen for companies like Ford and GM in autos and Shell and other energy companies that have green or brown energy businesses.”
Other automakers like General Motors and Volkswagen will be watching to see if they can take similar action, said Morgan Stanley analyst Adam Jonas. But Jonas, who does not recommend Ford stocks, argued that relying on cash flow from the existing business is expensive capital invested in a high-risk electric vehicle business.
And comparisons between Ford and other automakers go no further, according to Colas.
The Ford family, looking over the shoulder of the board and focused on maintaining Ford’s ‘blue’ icon through all eventualities – he noted that he was the only one of his peers to never go bankrupt – has a history of what he described as “more thoughtful decisions about where to go next. They want her to survive for the next 100 years,” he said.
“Ford has made a lot of good decisions recently, and this is one of them,” Ives said.
When a real Ford EV business makes more sense
When could a formal EV spin-off be in the cards? It may be less dictated by a predetermined timeline than the economic cycle and when a recession hits.
Electric vehicle financing currently relies on a hot vehicle market for trucks in the United States, and Ford may continue to have these conditions for a few years to come, with cash generated from traditional automobiles allowing Ford to reach all her goals. But if a recession hits, “they can’t get close to it,” Colas said. “Automobiles have a cyclical profit profile and those cash flows disappear, and you still have $5 billion a year in electric vehicle investments that you have to make. Where are you going to get it when you sell four million vehicles? less ?”
His take on the auto industry based on his time as a banker: Automakers tend to do the right thing when they’re financially backed into a weak economy. “In all other parts of the cycle, they are reluctant. They want to retain critical mass,” Colas said.
A Ford EV spin-off won’t necessarily get a valuation from Tesla, with the majority of earnings over the next eight years still residing in traditional F150 sales. But the current environment makes Ford even better able to produce electric vehicles when it needs capital and provide a floor under stocks in the next recession. “You create an option and you don’t have to do anything,” Colas said. “There will always be a market for a Ford EV IPO,” he added.
The analysis of cash flow at Ford and its decision demonstrates a powerful force that Feldman says his research on corporate strategy has confirmed: the inertia that surrounds spinoffs and divestments.
“The mentality is something like this: ‘We know that eventually we will have to separate, but the cash flow is too useful at the moment / the interdependence is too complicated to unravel at the moment /[insert other explanation here], so let’s hang on to the business. That logic is probably correct right now for Ford,” she said. “But that mentality illustrates how and why some companies might hold on to certain businesses too long when divestments might instead be warranted.”