Ford and GM Spinoffs Look Likely, But Not for a While Longer

(Bloomberg) --

Ford and General Motors face some pressure from investors and analysts about splitting up their companies — creating new, separately listed entities that would focus just on their growing electric-vehicle businesses and operate independently of their gas-burning vehicle operations.

Old Co. and New Co. can have licensing agreements for brands and share parts and engineering work where needed. The argument is New (EV) Co. needs to be separate and ideally valued at a Tesla-like premium. That will enable the spun-out business to raise the billions needed to go electric. The increasingly out-of-vogue Old Co. will be isolated and pay nice dividends until the internal combustion engine becomes a fossil.

The old-line automakers aren't ready to do this yet. Ford looked hard at a spinoff, but in the end decided just to split its cast of engineers and executives internally into an EV half and an internal-combustion half. Its shares rose more than 8% after the announcement Wednesday morning. GM Chief Executive Officer Mary Barra said in December that electric drive is just another form of propulsion — it's still the same business of making cars and trucks — and that she doesn't need to raise money to fund the company's $35 billion electric push.

I polled a group of advisers and bankers who sell, split or merge companies. The consensus is that truly splitting up an automaker would be very hard, very risky and yield uncertain rewards. EVs and conventional vehicles share about 80% common parts. The people who develop most of both kinds of vehicles are scrambled up in carmakers like eggs in an omelette. It's no easy task to send some to the EV company and others to the internal-combustion one. And, I've got to ask, who wants to work for Old Co. knowing that it's going to wither away?

Also, what about that Tesla-like valuation that the EV companies want — how sure is that? Tesla is a unique animal. It trades stratospherically because it's now a 1 million EVs-a-year business with technological advantages. And it carries the promise that Elon Musk, whose other companies fly to space and bore tunnels under big cities, can innovate like no one we've seen.

Other EV pure plays include Rivian Automotive and Lucid Group. They both have huge market caps for companies with trace levels of revenue, but Rivian stock has lost half its value so far this year, while Lucid is down more than 40%. Harley-Davidson plans to spin out electric-bike brand LiveWire at a $1.8 billion value. That's a 28% bump on Harley's value, which is a nice return, but Tesla is valued at 10-times Ford or GM. None of this tells me that hypothetical EV spinouts by GM or Ford will be able to raise cash for a decade the way Tesla did.

They also don't need to do this right now. GM and Ford are printing money selling pickups and SUVs. That's funding the vehicles of tomorrow without selling expensive equity or borrowing at rising interest rates.

There are spinouts that could create value in a few years. GM's Ultium battery unit is soon to be a four-factory EV cell-making business, with Honda as another customer. Similarly, Ford has its BlueOvalSK venture with Korea's SK Innovation. Both could be spun out much more cleanly than their entire EV businesses. So, too, could GM's Cruise LLC and Ford's Argo as autonomous-vehicle companies. Both already have diverse shareholder bases.

Barra offered an instructive response when pressed at Wolfe Research's investor conference about spinning out Cruise: “This is not, ‘GM's decided to keep it,'” she said, meaning GM won't ever take it public. Barra wants to grow the business, then in a year, or two, or three, look at bigger options. That's the kind of spin investors might see. But two different carmakers coming out of GM or Ford is, for now, off the table.