Daimler AG, the second-largest maker of luxury cars, will raise ¤1.95 billion ($2.66 billion) selling shares to Abu Dhabi’s Aabar Investments PJSC as the global recession stunts sales and cash flow dwindles.
Aabar will buy 96.4 million new Daimler shares at ¤20.27 apiece, the Stuttgart, Germany-based automaker said in a statement on Sunday. The price is a 5 per cent discount to the March 20 close of ¤21.34 and 55 per cent below the stock’s value when Daimler announced a buyback plan in June.
“The share sale leads to the conclusion that things are getting worse and will continue to get worse,” said Mike Tyndall, automotive analyst at Nomura Securities in London. “Daimler may also be taking the view that you don’t want to be the last carmaker to stick your hand out.”
The investment, amounting to a 9.1 per cent stake, buttresses Daimler’s resources as the worst auto-industry crisis in decades forces the maker of Mercedes-Benz cars and trucks to cut hours for 54,000 German assembly-line workers and close two plants in North America. Moody’s Investors Service said February 18 that it might downgrade Daimler’s credit rating as the car-sales slump risks hurting the manufacturer’s financial flexibility.
Daimler rose as much as ¤1.76, or 8.3 per cent, to ¤23.10, the highest intraday price since February 17, and was up 2.7 per cent as of 11 am in Frankfurt trading. The gain pared the stock’s decline this year to 18 per cent, valuing the carmaker at ¤21.2 billion.
“Daimler’s move suggests it needs capital more urgently than widely realised,” Max Warburton, a London-based analyst at Sanford C Bernstein & Co, said on Monday in a research report.
The willingness to dilute existing shareholders to secure funds of 2 billion is hardly a confident management statement.”
Car sales in Europe, Daimler’s biggest market, fell 18 percent in February, extending a 10-month contraction. The company, also the world’s largest truckmaker, lost 1.53 billion euros in the fourth quarter, burdened by declining sales and expenses related to former U.S. arm Chrysler LLC. Cash flow from operations last year shrank 76 percent to 3.21 billion euros.
Abu Dhabi’s investment will help Daimler react to changing market conditions and give it “greater flexibility to invest in innovative automotive technologies,” the company said. It didn’t say how the sale proceeds will be used.
Development-Spending Pledge
Daimler has vowed to maintain spending on research and development at 4.4 billion euros this year, even as it cuts expenses elsewhere, to gain an advantage on competitors through more fuel-efficient engines once demand picks up.
“Without new products, an automaker is nothing,” head of development Thomas Weber said in a March 3 interview.
Daimler will also ask shareholders at the annual meeting on April 8 to double the amount of cash it can raise. The company, whose A3 credit rating at Moody’s is the fourth-lowest investment grade, has 6.91 billion euros in cash and faces more than 10 billion euros of debt maturing this year.
Contracts on Daimler’s debt fell 39.5 basis points to 290 as of 9:10 a.m. in London, according to CMA Datavision prices.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to debt agreements. A decline indicates an improvement in the perception of credit quality.
Buyer vs Seller
With the sale to Aabar, Daimler has gone from a buyer of its shares to a seller in the span of a few months. The automaker announced plans to buy 6 billion euros of its own stock on June 17. At the time, the shares traded at 45 euros. The company halted the program in October as the financial crisis began to stifle demand and the stock price sank.
Daimler has underperformed its nearest competitor, Bayerische Motoren Werke AG, the No. 1 maker of luxury vehicles. Daimler’s share decline this year contrasts with a 5.3 percent gain for Munich-based BMW.
Aabar will overtake Kuwait, which owns 6.9 percent, as Daimler’s largest shareholder, the carmaker said. Aabar initiated the talks with Daimler, which began in December, said Thomas Froehlich, a spokesman for the carmaker in Stuttgart.
IPIC’s Role
Abu Dhabi’s government-owned International Petroleum Investment Co. completed a 5.18 billion-dirham ($1.41 billion) purchase today of bonds convertible to Aabar stock, part of a 6.68 billion-dirham capital increase that will eventually give IPIC a 71 percent stake in Aabar. The two funds agreed on the transaction in September to invest jointly in a range of industries, including energy. Aabar rose 4 percent to 1.83 dirhams in Abu Dhabi trading.
With 16 percent of Daimler’s capital in the hands of long- term investors, the carmakers may be less vulnerable to an unwanted takeover attempt. Other German automakers, such as Porsche SE and BMW, have large stakes held by families that help secure their independence.
“It’s good for Daimler to raise cash and get a long-term investor, because the next two years will be very hard,” said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.
Daimler and Aabar intend to cooperate on the development of electric vehicles and new materials for auto production as well as establish a center to train Abu Dhabi youths for the auto industry.
Aabar agreed in December to pay 307 million Swiss francs ($273 million) and assume 100 million francs in debt to take over the Swiss-based private banking unit of American International Group Inc. Aabar was advised on the Daimler investment by Goldman Sachs & Co., spokesman Ben Burton said. Deutsche Bank AG advised Daimler.
