The decision to consider a sale of its Volvo unit could bring
Ford Motor Co.
(F) one step closer to solving its persistent problems in
North America, where escalating retiree health-care costs and a bleak operating performance underpin a growing financial crisis.
While the Dearborn, Mich., auto maker has increasingly relied on Volvo to develop vehicles in its global lineup, the benefits Ford receives from its link with Volvo are overshadowed by a need for cash as contracts talks with the United Auto Workers union start Friday. Ford Chief Executive
Alan Mulally, along with his counterparts at domestic rivals, will push the UAW to establish a union-managed trust, or VEBA, that could enable Ford to transfer tens of billions of dollars worth of retiree health-care liabilities off its balance sheet.
Establishing a VEBA is far from a certain outcome from labor negotiations, but if it were to happen the trust it would take the roughly $26 billion obligation related to funding blue-collar retiree health care off Ford's plate and significantly lower cash outflows over time, therefore reducing risk. Still, it could put a substantial dent in Ford's already-taxed bank account because the VEBA would need to be funded up front with cash, securities and debt.
As Ford eyes a VEBA, Mullally - under immense pressure to make good on a promise return the company's North American operations to profitability by 2009 - may be tearing a page from General Motors Corp.'s (GM) playbook. GM spent the last two years shedding a portfolio of non-core assets in order to bolster a liquidity position largely composed of high-cost loans, many of which are secured by assets from the automotive business. Most recently, GM sold its Allison Transmission unit for $5.6 billion after nearly 80 years of ownership.
Mulally has been fund raising since he took the helm at Ford in October. He presented Ford's plans to 586 bankers in December to try to bolster Ford's available liquidity, and exceeded the company's expectations by raising $23.5 billion via secured loans and other funding in four days. Still, Ford's available liquidity could sink below $30 billion by the end of 2007 because of enormous restructuring expenses related to bailing out North American operations under a plan that will cost $17 billion through 2009.
Standard & Poor's equity analyst
Efraim Levy on Monday said Ford's liquidity should be adequate to fund the company's restructuring efforts, but if there was a deal with the UAW related to health-care obligations, "Ford would have to come up with cash." He noted the company would likely have to issue more debt as well if a health-care deal was sealed.
If it sells Volvo, Ford would have to use at least a chunk of the proceeds to pay down debt that Volvo had been pledged to secure in December. Such a move would free up Ford's balance sheet so it could take on more debt to fund a VEBA.
Ford spokesman
Tom Hoyt said the company is not commenting on speculation related to its Volvo subsidiary.
Ford last month hired advisors to help shop its Jaguar and Land Rover brands in a move expected to reap as much as $8 billion, according to some estimates. Volvo is also estimated to be valued as high as $8 billion, but establishing a price for the unit is difficult because Ford does not break out Volvo's financial numbers. While people at Ford familiar with the sale say Volvo is not actively being shopped, the company's board is obligated to consider attractive offers on behalf of shareholders and there has been interest in Volvo among strategic buyers dating back to earlier in 2007.
Selling the trio soon to eager bidders could help achieve several initiatives considered to be among Mulally's top priorities. The former Boeing Co. (BA) executive, who came on board at the auto maker last October, is under pressure from the Ford family, whose fortune is tied up in Ford stock, to deliver results. Ford is expected to post deep second-quarter losses next week, which will add fuel to Ford's sense of urgency walking into labor talks.
Wall Street is intensifying pressure on Mulally as analysts and traders are increasingly betting on a health-care deal. Ford's stock is trading at the higher end of a two-year range, and momentum is being supported by optimism related to Ford's attempt to win labor cost cuts and forge a VEBA deal during negotiations.
Ford shares closed Monday at $8.86, down 11 cents from Friday's closing mark. GM shares fell 36 cents to $36.67.
