GM's woes

Yesterday, General Motors management took the time to explain how it intended to preserve the group's liquidity in 2008 and 2009. This latest set of restructuring measures comes just six weeks after the previous one (four truck plant closures and sale of the Hummer brand). It involves reducing office worker costs by 20% -- which would presumably mean making several thousand people redundant. This and other measures (including -- pensioners take note -- lower retiree healthcare) would help meet a new target of cutting costs by $10 billion. GM will also stop paying dividend on its common stock for now, reduce capital expenditure by $1.5 billion vs. plan, and sell up to $4 billion worth of assets (e.g. Hummer) to generate liquidity. GM holds some $24 billion in cash, but has an amazing cash-burning track-record. None of the new measures goes beyond the short-term: on the contrary, further cutbacks on white-collars and capital expenditure may well completely jeopardize GM's chances of coming up with a constructive longer-term vision.

Debt and equity analysts alike do not appear to be fooled by GM's latest announcement. Yesterday evening, after market hours, Moody's placed GM's ratings on review for a possible further downgrade (out of solidarity, Chrysler Automotive LLC's ratings are also on review, and those of Ford Motor Co remain on negative outlook). GM's senior unsecured debt is already rated Caa1, highlighting a very high likelihood of default. With sky-high oil prices and a GM portfolio full of fuel-guzzling models, who will want to take up the $2 to $3 billion of new financing that GM intends to issue? Surely not your conservative portfolio manager, but an aggressive breed that is probably betting on a debt-to-equity swap several years (or quarters?) down the road.

Continental's fight for independence

A few weeks ago, I would have said that the next big news about Continental AG would come on 31 July 2008, when the tyre and car component maker releases its results for the first half of 2008.

On 26 June, after Standard & Poor's changed the outlook to negative on its BBB credit rating, Continental's management insisted that they viewed their financing structure as "sound" and that this change would have "no effect on VDO financing – no additional costs". CFO Dr. Alan Hippe noted that this was equivalent to Moody's Baa2 with a negative outlook, and reflected the difficult market environment for issuing hybrid bonds. "Currently, we would only be able to place the hybrid bond planned as part of the VDO acquisition financing arrangements at extremely unfavorable conditions, which is why we have refrained from going ahead so far." The group continues to target annual sales of more than €26.4 billion in 2008.

But Continental is already back in the news. On Monday, it confirmed that "one brief conversation about a possible engagement by Schaeffler-Group in Continental AG took place at the end of last week." Yesterday, Schaeffler made a takeover offer for the group at €69.37 per share in cash. Unsurprisingly, this morning, Continental is announcing that "the Executive Board of Continental rejects the offer," adding that "the offer is highly opportunistic, does not come to the true value of Continental, does not create trust and lacks a convincing strategic rationale." The press release goes on to describe how Schaeffler took control 36% of Continental's capital "in an unlawful manner", or "using Porsche tactics" as the Financial Times says.

True, the Continental share price had under-performed the DAX index: since July 2007, it lost some 50% of its value before the recent surge, compared to only 25% in the case of the DAX. But the current share price reflects investors' belief that less than €70 per share (or the weighted average price over the last three months) is not sufficient.

But who is Schaeffler anyway? Well, it is a German-based industrial group that supplies the automotive, machinery and aviation/aerospace sectors with mechanical, mechatronic and precision components, including a whole variety of bearings. INA, FAG (since 2001) and LuK are household brands for its customers (and competitors like SKF). Synergies, if any, are with CAS (Continental Automotive Systems), rather than with the tyre activities of Continental. Schaeffler is "an independent family-owned company, which, as a major shareholder with a long-term outlook, offers Continental AG the stability and security it needs to continue on its course in a difficult market environment." Schaeffler says that it does not want to break up Continental and that it will not need to upstream cash flows from Continental to service the takeover financing package.


Continental is one of the healthiest groups in its sector, with an attractive combination of complementary segments that do not follow exactly the same demand or investment cycles, ensuring a reasonable cash flow stream even in "bad" years. Schaeffler's tactics may look mean, but maybe they will trigger a counter-offer from a deep-pocketed financial investor who has been wondering how to use its sponsors' cash. But as far as independence goes, it could well be time for Continental to waive it goodbye...

Redcats and green donkeys

I cannot say I am superstitious about black cats. Being allergic to cats generally, I am not really fond of them, but I will not go out of my way to avoid them. Redcats are another matter altogether. No, not ginger cats. Redcats, the internet / mail-order clothes retailer that belongs to the PPR group.

I have been ordering a few childrens' clothes over the last year, as they tend to be relatively cheap and cheerful, and you can return items for free if you do not want them, for whathever reason. They have a fairly aggressive marketing approach. If you are on their e-mailing list, you are bombarded at least weekly by promotions making you regret ordering two T-shirts and a pair of shorts two weeks ago, when they are now 20% cheaper. But the trick is that your average customer (presumably budget-conscious mothers) needs to be particularly good at maths to find her way through this marketing campaign.

I recently decided to use up a £8.90 credit balance with VertBaudet, a Redcats brand which means Green Donkey. Here is what went through my mind. I am only allowed to use one "promotion code" per order, but which should I choose: free P&P if I order over the web (but the web did not acknowledge my account credit), £5 off my order if I order more than three items, 30% off my first item, 20% off my first three items, a free rucksack worth £15, a £5-off loyalty voucher, etc.? Trusting my old maths skills, I ordered two duvet covers (not on the list of items excluded from promotions), or, I figured, just enough to use up my credit, enjoy the £5 loyalty voucher and receive a free rucksack.

Well, you can imagine my surprise when VertBaudet invoiced me £45.75 for the duvet covers (single-size, printed cotton, nothing fancy at all). I rang up "Customer Care" and asked to be put through to Complaints: there was no need for it as the lady on the other end of the line handled my complaint herself. In fact, she presumably only deals with complaints... After only a few minutes and no fuss, she said a cheque of more than £20 would be issued to my attention, including £15 that had been charged for the "free" rucksack. How can I trust this monkey-, sorry, donkey-business in the future?

VertBaudet's motto is "Putting children first." Fine, as long as it is not at the expense of their mothers' purse!

Valeo quo vadis?

Last Friday, car parts maker Valeo proudly affirmed that its operating profit margin would rise in 2008, from 3.3% last year and 3.6% in the first quarter of 2008, and would reach 6% by 2010. Management acknowledges that 2008 will be a "very difficult year for the car industry" and that raw material prices are a constant challenge. Valeo is betting on continued success of products like "stop and start" and "park4U", which I tended to view as nice-to-have gizmos, and on further geographical expansion, especially in Russia.

Pardus, which is also a Visteon Corp. shareholder, owns just under 20% of the capital of Valeo. In fact, in May 2008, Pardus has committed not to exercise voting rights beyond 20%, should its stake increase in the future. Patrick Faure, an ex-Renault executive, who was the representative of Pardus at Valeo's assembly general meeting, made diplomatic comments involving forgetting past disagreements and focusing on a win-win cooperation for the benefit of all shareholders. Another outspoken shareholder, Guy Wyser-Pratte, is growing impatient and complains that Valeo has not done enough lately to dispose of loss-making business units.

On 2 July 2007, when the discussions with an "investment fund" came to an end, Valeo had promised it would implement the value-creation strategy discussed at the May 2007 AGM: focus on three core activities thanks to targeted acquisitions and disposals. In October 2007, Valeo sold its cabling unit to Leoni, leading to a €200 million reduction in net debt. The group is working on selling its truck engine thermal unit to EQT. Anything else with respect to disposals of non-core activities? Valeo bought Connaught Electronics (which plans sales of about €80 million by 2010) a year ago. Any other acquisition of core activities? Unlike Mr. Wyser-Pratte, I do not have a penny invested in Valeo shares, but I certainly sympathize with him.

Pushing metal and buying metal

Pushing it... In the United States, GM, Ford and their fellow carmakers are increasingly creative in their efforts to "push metal" out of their factories. For instance, on Monday, GM announced, among other things, 6-year 0% car loans aimed at slowing the decline in some its previously most-successful models, which have now become unattractive due to their fuel requirements and consumer demand sluggishness. The GM share price recently hit a 26-year low: maybe the market does not really believe these measures will help much?

Buying it... Audi, part of the Volkswagen AG group, warned on Sunday that it may need to raise prices faster than inflation in 2009 due to higher raw material and other costs. This will depend on what competitors do. Nissan said that steel groups (e.g. ArcelorMittal, world #1) were bound to raise their prices significantly, perhaps in 2009: the carmaker is therefore planning to reflect this in its car prices, starting with markets where Nissan is strongest, such as +2% or +3% in Japan. The timing will depend on when its competitors start to announce similar intentions. Conversely, Fiat's spokesman said today that its Auto division did not plan an increase its prices, especially in the current market of sharply declining Italian car registration numbers. A Credit Suisse analyst estimates that raising prices by 5% to 10% would result in a 10% to 20% loss in volumes and therefore (additional) over-capacity. Are we going back full circle with carmakers desperately trying to "push metal" at any cost again?

Norske Skog: farewell Korea!

Norske Skog is selling its two South Korean newsprint mills to Morgan Stanley Private Equity Asia and Shinhan Private Equity. The deal could well be completed just in time for 7 August 2008, when Norske Skog discloses its results for the first half of 2008. One of the mills was acquired in 1998, the other was partly acquired the following year and fully consolidated since 2005. The Korean disposal will generate $830 million proceeds for Norske Skog and will reduce the group's debt by about 25%. The mills have a 1-million-tonne newsprint paper production capacity, that is about 2/3 of Norske Skog's Asian newsprint capacity or just under 1/4 of the entire group's newsprint capacity. No material disposal gain or loss will result. In the third quarter of 2006, Norsk Skog had recorded a provision of NOK 1 billion for a 1,000-headcount reduction and a 180,000-tonne capacity reduction in Korea.

In January 2008, the largest shareholder of Norske Skog was Unionen, with almost 6% of the capital. Owned by activist shareholders, Unionen then made a rather protectionist call that Norske Skog should sell assets outside Norway to keep its home-based mills afloat, for instance by splitting the group into two geographical poles. This was a strong objection of the pro-Asian strategy that had been pursued since Norske Skog took minority stakes in what are now majority- or fully-owned Norske Skog Asian operations.

For now, the group is holding on to its smaller Chinese assets, and management probably still sticks to its belief that long-term prospects there are "bright", despite the current over-capacity situation.

M.S. Europa

Nassau-registered M.S. Europa spent the week-end moored near our home, on the river Thames. Motor Ship Europa is a passenger ship (cruise liner) built in 1999 by Kvaerner Masa-Yards, Finland for Hapag-Lloyd AG (part of the TUI AG group), which owns and operates her. Her gross tonnage is 28,600 BRZ and she carries 408 passengers.

The Europa is equipped with two “Azipod” units, each sporting a power of 14 MW. They enable the Europa to achieve an average speed of 21 knots. In the late 1990s, 'Azipod (Azimuth Podded Drive) Electric Propulsion Drives' (jointly developed by Kvaener Masa-Yards and ABB) were the latest development in shipping drives. The propulsion unit looks like a small gondela hanging beneath the stern of the vessel, containing a powerful electric engine and the propeller. The pod can be rotated a full 360 degrees and works as a steering unit as well. Traditional rudders, stern thrusters, propeller-shaft and shaft tunnels become obsolete. The small engine room contains only the diesel generators to provide electric power. Noise, vibrations and weight are reduced to a minimum. Additionally the unused space can be used to increase cargo capacity.

In December 2000, in addition to docking and repair works, enhancements were carried out on the Europa at Lloyd Werft: enlarging of the grand penthouse suites, additional balconies; enlarging of crew sun deck; new gymnasium area; new spa and beauty area; additional crew cabins; conversion of public area (reception, restaurants and bars); new antennas for advanced telecommunication.

Hapag-Lloyd operates three other cruise ships: MS Colombus, which is also owned by Hapag-Lloyd, was built in 1997. She has a 14,000 tonnage and carries 420 passengers. She operates from Europe all year round, with destinations in the Caribbean Sea, the Great Lakes and the Mediterranean. She can drop anchor in small ports. MS Hanseatic was built by Rauma Yards, Finland in 1991, originally as Society Adventurer. She was operated by Hanseatic Cruises 1993-1997 and by Hapag-Lloyd Cruises since then. She weighs 8,378 GT and can carry up to 188 passengers and 125 crew. Her service speed is 16 knots. MS Bremen was built by Mitsubishi Heavy Industries (Japan) in 1990 and launched as ‘Frontier Spirit.’ She was renamed in 1993 by Hapag Lloyd, when it started operating her. She is a 6,752-GT specially built ice-strengthened eco-cruise ship which makes regular tours from South America to the Falklands and other South Atlantic islands as well as to the Antarctic Peninsula. Her top deck features a helicopter pad. She suffered heavy damage from a freak wave that hit her during a Christmas season Antarctic expedition cruise, in February 2001, and had to be escorted to Argentina after temporary repairs. The Bremen carriers up to 185 passengers and 94 crew, and her service speed is 15 knots.

Last year’s cruise-line activity of Hapag-Lloyd activity is briefly discussed in TUI’s 2007 annual report. “In the 2007 financial year, the Hapag-Lloyd Kreuzfahrten business again developed positively, benefiting from the acquisition of new customer groups for cruises and the fact that the destinations were largely free of insecure political situations and natural disasters. Due to the high-quality product portfolio, average turnover per day also continued to rise year-on-year. Total turnover accounted for €183 million, up 14.3% year-on-year. Hapag-Lloyd Kreuzfahrten reported earnings of €14 million, an increase of 79.7%. This growth was mainly attributable to the rise in the improvement in rates and occupancy rates. Earnings were adversely affected by the rise in fuel prices which, however, were countered by means of corresponding price hedging measures. […] The cruise market in the German-speaking region again developed well in 2007, with high single-digit growth in total passenger volumes year-on-year. In the period under review, two new ships started operations in the German cruise market. Hapag-Lloyd Kreuzfahrten continued to expand its position in the German-speaking premium and luxury market for traditional and expedition cruises. In the 2007 financial year, the fleet was made up unvaried of four cruise ships: the 'Europa', the 'Columbus', the 'Hanseatic' and the 'Bremen'. Two of the ships [Europa and Colombus] were owned while the other two were chartered. The average age of the fleet was twelve years. Two of the ships had a scheduled dock period in the financial year under review in order to be technically overhauled and have their inboard accommodation facilities improved. In 2007, all four ships increased their utilisation year-on-year. Average utilisation of all ships was 78.6%, up 5.1 percentage points year-on-year.”

With oil prices continuing to remain high or to climb further, I remain skeptical as to holiday-makers' appetite for ever-pricier cruises. But then, of course, air fares and other forms of transport are not cheapening either. And Hapag-Lloyd will argue that they can differentiate their service and cater for specific needs of their customer base.

How about the commodity side of Hapag-Lloyd, that is to say the container shipping arm? It was put up for sale last week, after TUI finally scrapped its long-proclaimed "two-pillar strategy" of container shipping and leisure holidays. The container shipping industry is very fragmented and commoditised. The largest, Maersk, is based in Denmark. #2 Mediterranean Shipping Company has just over 12% of the global market, #3 CMA CGM 7%, #4 Evergreen 5%, followed by Hapag-Lloyd itself with about 4% (with almost 5% expected in 2010, taking into account future deliveries), and Neptune Orient Lines with 3% or 4%. According to the Financial Times, the four largest players have ruled themselves out of the race for Hapag-Lloyd or have never made external growth acquisitions. So will Hapag-Lloyd end up in Asian hands or will local supporters raise enough support to win the deal, which could be worth some €6 billion? Either way, John Fredriksen, who owns just under 15% of TUI shares, wants the proceeds to be handed back to shareholders, but TUI may decide to plough them back into the remaining business, TUI Travel. TUI Travel is unlikely to use fresh cash to buy more planes outright, since it is announcing a $526-million sale and leaseback deal on 19 of its 32 aircraft today. But maybe it will want to splash out on a few sister ships for M.S. Europa?