Ford's Death Watch 35: Everything Must Go

Desperate times, desperate measures. Ford Motor Company has retained the services of three investment banks to advise it on the sale of Jaguar, Land Rover and, perhaps, Volvo. Flogging the remains of the Premium Automotive Group (post-Aston) will plug a giant hole in the automaker's balance sheet, give FoMoCo a cash injection to sustain short-term operations and fuel its do-or-die turnaround plan. As Oliver Hardy would say, well, here's another nice mess you've gotten me into.

The Premier Automotive Group (PAG) was the brainchild of Ford's then-CEO Jacques Nasser. Goaded by former BMW superstar Wolfgang Rietzle, the terrible twosome aimed to take Ford where Lincoln [supposedly] couldn't go: the top tier of the world luxury car market. With PAG, Ford sought to escape the mass market pressure at home and begin turning profits on margins, rather than volume.

Nasser's plan wasn't beyond realization, but its implementation was deeply flawed. Arguably (and certainly in retrospect), Ford overpaid for tired assets. In '89, Jaguar cost Ford $2.5b. In '94, Aston cost… "nothing much." In '99, Ford paid $6.45b for Volvo. And in '00, Land Rover sucked $3.3b from Ford's corporate coffers.

Ford poured unspecified billions into its PAG properties to improve product quality. It also spent tens of millions on Rietzle's pet projects, such as a Berkley Square, London design center and a doomed, prototype PAG "super dealership." A combination of executive profligacy, beancounting and bureaucracy rendered Ford's early investments woefully inefficient and largely ineffective.

In the last five years or so, Land Rover, Volvo and Aston all managed to claw their way to profitability. (Ford dumped Aston this year for $957m.) Meanwhile, Jaguar kept trying to build luxobarges on the cheap, aiming to create massive profits through hiked prices and radically reduced development costs. The result was– is an unmitigated disaster.

Jaguar lost Ford money from the git-go, and went downhill from there. In '06, Jaguar lost FoMoCo $715m, easily absorbing the profits generated by Volvo and Land Rover and plunging PAG into a $328m sea of red ink. A leaked internal memo indicates Jaguar will lose $550m in ‘07 and $300m in ‘08. Or more.

In the past, car firms were bought and owned by other car firms or industrial conglomerates whose core business had synergies with the car business. Chrysler's macabre financial results would have been a giant red flag to possible investors. Today, the game has changed.

When Dieter Zetsche put Chrysler in the discount bin, many openly wondered if there would be any takers. Having posted a $1.5b loss in fiscal ‘06, competing in the world's most competitive market against non-union shops, the company wasn't exactly a future growth superstar.

That said, Chrysler has been profitable as recently as ‘03. Truth be told, a $1.5b loss for Chrysler represented 2.1 percent of its gross revenue. It may look abysmal in absolute terms, especially for a shareholder, but at the macro business level, Chrysler's loss was small. No car firms stepped up, but private equity did.

Conversely, Jaguar's loss alone accounts for 8.4 percent of PAG's 2006 gross revenue– and that's including PAG's profits from Volvo and Aston Martin (before it was sold). Though it's an admittedly crude calculation, the figure illustrates the extent of Jaguar's plight.

With these kinds of numbers, no car firm is likely to buy Jaguar. So, in come Cerberus and Blackstone again, to announce their interest.

It's easy to see the potential "synergy:" Jaguar atop Chrysler as a luxury brand, Land Rover atop Jeep as a luxury SUV. Private equity, though, isn't interested in running a car business. It's interested in return on investment. Any offer for Jag and Landie will consist of pennies on the dollar.

According to Automotive News, Cerberus' latest "come to the table" offer for Jaguar and Land Rover is around 5.5b Euros ($7.3b). That's a pittance for a company like Ford, which currently carries $139.4b in debt. The cash would barely allow Ford to service their debt for a year, let alone pay it down.

Bidders may insist that Ford bundle po-faced Jag and Landie with higher-flying Volvo. While separating Volvo's platforms from Ford's products would be problematic, it's not an insurmountable challenge. And the final disposition of Ford's upmarket divisions could pave the way for a resurgence at Ford's original "premium" brand: Lincoln- if they have enough cash to fund it.

Even if Volvo escapes this round of selling, when the next financial period ends and The Blue Oval needs to feed its ongoing cash conflagration to make it through the next quarter, it's going to be awfully tempting to unload the quirky Swede. Will that be enough? To quote Oliver Hardy in Sons of the Desert, "That's all there is. There isn't anymore. Is there Stanley?" No, Ollie, there isn't.