Commercial awareness: think like a professional about... Saab

The Gateway reveals how a banker, lawyer, accountant and consultant react to the challenges faced by carmaker Saab

Swan song

Has carmaker Saab reached the end of the road?

Troubled Swedish carmaker Saab has staved off potential bankruptcy by accepting a $70 million (£43 million) lifeline from an American private equity firm. Connecticut-based North Street Capital will invest $10 million in buying over two million ordinary shares in Saab's parent company Swedish Automobile (Swan), and will give the company a further $60 million as a loan to be secured by a lien (see useful terms below) over Swan's assets. This deal is the second between made between the two parties this autumn. In September, North Street Capital paid $43.9 million to acquire Saab's luxury sports car business, Spyker.

Saab has also been in talks with two Chinese-owned car companies, Zhejiang Youngman Lotus Automobile and Pang Da Automobile Trade Company. The two firms, a leading Chinese car manufacturer and automobile distributor respectively, agreed with Saab in a memorandum of understanding that they would give the Swedish company $340 million of investment in exchange for ownership of half the company. However, the Chinese investors subsequently retreated from the agreement, and suggested to Swan that they instead buy the whole company. Swan rejected this new offer, claiming that the price proposed was too low and insisting that Youngman and Pang Da should instead fulfil their obligations under the original agreement.

Even with further US investment on the cards, Saab's situation remains severe. Manufacturing at the company's plants ceased in March due to lack of funds, and the company is already involved in an administration processes with the Swedish courts. The price of shares in Swan, which trade in Amsterdam, dropped significantly when the Chinese pull-out was announced, and they have fallen in value by over 75 per cent in total over the course of 2011. It is questionable whether North Street Capital's input is any more than a short-term solution.

Saab's problems have been attributed variously to its small size, mismanagement during its period of ownership by US auto conglomerate General Motors, and a failure to generate sales of its products, despite their often innovative and much-admired technology.

Thinking like an

  • Solving the problem? While I'm not an expert on how insolvency practitioners do things in Sweden, I think it's worth clarifying Saab's financial position. The company has not yet been declared bankrupt, but I understand it's currently in an administration process, which means things are bad enough that the courts have got involved in monitoring its financial affairs, but not so dire that a wind-up is - yet - on the cards.
  • Tick tock: It's normal for companies to report back to their investors - and to the general public in the case of publicly listed companies like Saab's parent, Swan - on how they're doing every quarter. Swan was due to publish its 2011 third-quarter results, that is, those for July, August and September, on October 28, but has announced that these won't be available until the end of November. A lack of punctuality is never a good sign, I say...

Thinking like a

  • Maybe they're just forgetful: So what's the deal with this Chinese business? Do these potential investors have a legal obligation to pay out? Well, a memorandum of understanding is a tricky creature which may or may not be legally binding, depending on how it's drafted and under which jurisdiction, so I'm going to be lawyerly and reserve judgement on this one.
  • King of the jungle? Let's turn to take a quick look at the deal Saab is getting from the Americans. As happens with many corporate loans, the money handed over will be legally secured by its assets, in this case by a type of security known as a lien. This arrangement means that, should Saab prove unable to repay the loan, North Street Capital will have a claim over Saab's remaining property. I also hear they've made sure they'll have some second-ranking rights over assets pledged to other creditors. Jolly sensible, I say - but let's hope there's enough to go round if Saab does crash.

Thinking like a ...banker

  • Bird-brained: Why on earth would an investor want to pour nearly £50 million into a company that's having such a wobbly ride? Well, vulture funds have certainly taken an interest in the asset-heavy automobile industry in the past - check out the sale of near-bankrupt Chrysler by Daimler to aptly-named Cerberus Capital Management in 2007. However, word on the street is that, rather than wanting to make a quick profit by feasting on what's left of Saab, the North Street Capital partner involved on the deal, Alex Mascioli, is a car enthusiast who's keen to assist the troubled company in any way he can. Heaven help him.
  • Go east: Even though it looks like the proposed Chinese investment in Saab may not come through, this deal should be seen as yet one more instance of a global corporate power shift. Economic crises in Europe and America over the past four years has allowed Asian corporates and governments to take advantage of their relatively strong asset bases and buy into European and US companies. Sweden's other major car company, Volvo, was sold by Ford to Chinese conglomerate Zhejiang Geely Holding Group last year.

Thinking like a ...consultant

  • Driving me crazy: Saab's troubles are the latest pothole in what has been a very bumpy road for the global automobile industry over the past few years. The US "Big Three" carmakers, General Motors, Chrysler and Ford have all endured severe problems since the beginning of the financial crisis in 2007. Why? Prices for raw materials have increased. Fuel prices have too, which, together with harder economic times for consumers has meant lessened demand for new models, particularly the inefficient high-end vehicles like SUVs on which many companies in the sector had mistakenly focused. Add some strong competition from Asian carmakers, and you have a car crash situation on your hands.
  • Flyaway: Saab is a great brand. Descended from an aeronautical company (Saab is short for Svenska Aeroplan AB), they've always been proud of their sky high reputation for technology, environmental responsibility, and safety. But significant as a strong market reputation and popular affection is, it means nothing if you can't sell the right number of products at the right price.