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News broke this week that General Motors (NYSE: GM) plans to move the headquarters of its Cadillac brand from Detroit to New York. Though the move only involves between 50 and 100 employees, it makes Cadillac more independent than ever before.
It also paves the way for a Cadillac IPO.
This hasn’t been the best year for General Motors, the company or the stock. The company is facing likely civil and criminal penalties for its handling of numerous safety recalls, namely the fatal ignition switch issue with several of its vehicle models.
CEO Mary Barra, the first woman to lead one of the “Big 3” car companies, was presented with the safety recall crisis very near the beginning of her tenure. Most critics agree that she’s handled things relatively well, though the same critics seem to agree that GM as a whole has handled the whole thing relatively poorly starting with the culture that allowed such issues to arise.
Investors don’t seem to have lost total faith in the company but it hasn’t been a great time to own GM stock.
As illustrated by the chart below, General Motors stock is down almost 18% for the year while rivals Ford (NYSE: F) and Tesla (Nasdaq: TSLA) are up 6.4% and 67.6% respectively. Meanwhile the relative large drop in shares means that the stock is now paying a 3.6% dividend to investors willing to wait for GM to turn things around.
Source: Google Finance
Though GM executives haven’t mentioned the possibility of a Cadillac IPO, it’s not all that unlikely.
The luxury brand stands apart from other GM brands like Chevy and GMC. And it is struggling to combat stiff competition from brands like BMW and Mercedes. Cadillac sales are off 4% in 2014. Just a month ago Cadillac hired the executive responsible for the successful turnaround of Audi USA.
GM executives insist moving Cadillac to New York is about aligning the luxury brand with the “trend-setting” and “luxury” attitude of New York City. Still, you can’t help but wonder whether GM is preparing for a Cadillac IPO.
In late July GM announced that it had earmarked $1.2 billion to settle claims from victims of the faulty ignition switch in several of its cars. Add this to the $1.7 billion in recall-related expenses disclosed since February plus legal fees and we’re up to a pretty serious chunk of cash.
An analyst from Morningstar estimated back in June that the total costs for settlements, recalls, legal fees and penalties could reach $7 billion. An analyst from Bank of America put his estimate below $5 billion.
Regardless of the final number, it’s going to cost GM a lot of money.
GM’s last quarterly earnings report revealed almost $18.5 billion in cash and cash equivalents on the balance sheet. But it’s possible that GM would look to asset sales to help pay for the recall related damages.
Certainly BP (NYSE: BP) had plenty of cash in the bank and ample cash flow to help it pay damages related to the Deepwater Horizon spill in the Gulf of Mexico. Still, the oil & gas giant opted for asset sales to help cover damage claims.
I see a Cadillac IPO as a logical way for GM to raise some cash, retain some ownership in its iconic luxury brand and also focus on its remaining core brands. And I think GM has paved the way for such a move.
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