IMPORTANT NEWS: National Electric Vehicle Sweden has agreed to buy the assets of Saab Automobile and the sale is expected to be finalized during the summer.

Friday, April 15, 2011

The property sale and what it means for Saab

Earlier this evening we got the good news that the Swedish Government has approved Saab's request to sell the subsidiary Saab Automobile AB. The buyer is supposed to be a company owned by Vladimir Antonov. Saab will lease back the properties so that the development and production of Saab cars can continue in the same facilities as today. This is a totally normal business transaction and has been widely used the last 25 years by companies that need to raise money. Following is my assessment of what this means to Saab.

The sale might put Saab in a catch-22 situation
When Saab was sold from General Motors to Spyker Cars, one of the most important parts of the funding was a loan from the European Investment Bank (EIB) of EUR 400 million. Of this amount only EUR 217 million has been drawn so far. This loan is to be used on developing more environmental friendly technologies and cars. Money to develop the next Saab 9-3 and other future models. Money to operate the factory, produce cars and sells cars must come from other sources. Saab's recent problem is that there has not been enough money to produce cars. In other words, there is enough money to develop the next generation Saab cars, but no money to produce the current generation cars. The sale of Saab's properties on the other hand, will give Saab money to produce cars, but at the same time, it will reduce the amount Saab can borrow from the EIB to develop the next generation Saab cars. A catch-22 situation.

How much money can the property sale raise?
Well, what we know is that during Saab's reconstruction in 2009, the properties were valued to SEK 915 million. That's approx $155 million or EUR 110 million. That is the accounting value, in other words the value for a company that will use the properties to produce cars. They also calculated the value of the buildings and land in case of bankruptcy. This value was estimated to SEK 270 million - EUR 30 million or $45 million.

It is a well know fact that Saab is under-performing compared to the business plan. Sales haven't increased like Saab estimated and the liquidity position became very strained last month. And thus the fair value that Saab can get from selling the properties should be somewhere in between SEK 270 million and SEK 915 million.

Will the money Saab makes from the sale be enough to run Saab? 
From earlier we know that Saab lost SEK 1.3 billion in 2010. And the Swedish newspaper Dagens Nyheter estimated that Saab needs a income of over SEK 1 billion each month to break even. It is impossible to know how much Saab loses each month, but an estimate could be approx SEK 100 million. But the more cars Saab sells, the less money they lose. And hopefully the company will start to make money next year. I will let it be up to you to estimate for yourself how long the money from a property sale will last. Maybe it will be enough to cover the loss this year, and maybe enough to cover losses until Saab becomes profitable.

What will happen to the development of the next generation Saabs? 
As noted above, one serious side effect of the property sale is that Saab Automobile must reduce the loan in the European Investment Bank (EIB) from EUR 400 million to EUR 280 billion. That's a reduction of EUR 120 million or 30 per cent. We can assume that Saab did apply for EUR 400 million because that is the amount needed to complete the development of the next Saab 9-3. It's hard to tell how long the amount that remains of the EUR 280 million will last.

Conclusion: Property sale is only a short-term solution 
As I see it, the property sale is only a short-term funding solution for Saab. Now there is enough money to produce Saab cars this year and maybe a bit into next year. Hopefully this time next year the cash flow from sales will finance the production of cars. But what is more alarming now, is that the money to complete the development of the next Saab 9-3 has been greatly reduced. In other words, for the long-term, Saab needs a new part owner, for example Vladimir Antonov, who is willing to invest more money. Or as the key players all have said to the media, Saab needs to become independent of the Swedish National Debt Office and the Swedish Government. In other words, Saab needs to transfer the loans from the politically controlled European Investment Bank over to a commercial bank. Hopefully a commercial bank will see that the collateral in Saab has been undervalued by the Swedish National Debt Office, the Swedish Government and the EIB, and will be willing to lend Saab more money than the EUR 400 million. If Spyker Cars and Saab can find a new shareholder and/or transfer and increase the loan, then a long-term solution can be found.