Manufacturers are discovering that if they want their innovations to be recognized, they must give investors the opportunity to own them individually.
Legacy businesses striving to stay relevant in a stock market dominated by tech giants and high-flying electric-vehicle manufacturers are discovering that two companies are better than one.
Harley-Davidson Inc. announced on Monday that it would merge its LiveWire electric motorbike unit with special purpose acquisition firm AEA-Bridges Impact Corp. to create a new public listing. Chief Executive Officer Jochen Zeitz’s “Hardwire” strategy to increase the company’s sales growth and profitability included a shift to electric.
However, due to structural demand declines, the plan was only expected to deliver mid-single-digit annual revenue growth in the motorcycle segment — an uninspiring target given that overall sales this year are anticipated to be about 30% lower than the 2014 peak according to Intelligence analyst Kevin Tynan. The “Hardwire” makeover also required annual investment of $190 million to $250 million, a tall order for a company that lacks the financial support of a larger industrial parent like most of its competitors.
In a statement, Zeitz, who will serve as acting CEO of the new entity for up to two years, stated that carving out the electric motorcycle business “will give LiveWire the freedom to fund new product development and accelerate its go-to-market model.
LiveWire will be able to operate as an agile and innovative public company while benefiting from the at-scale manufacturing and distribution capabilities of its strategic partners, Harley-Davidson and KYMCO.
The latter is a Taiwanese power-sports equipment manufacturer that will invest $100 million in the new LiveWire company. Harley-Davidson will retain a 74% equity interest in the company and support it with its engineering and manufacturing expertise, as well as its global supply-chain infrastructure, allowing it to accrue some of the valuation benefits of repositioning for the energy transition without bearing the full cost of the required capital investments.
Harley-Davidson stock rose as much as 19.5% in response to the news before settling at a gain of roughly 5.5%. Even the smaller increase is expected to boost the company’s share value by several hundred million dollars. Harley’s market capitalization had been roughly flat for the year prior to these news.
The Harley-Davidson deal is a microcosm of a larger industrial trend. Legacy manufacturers have long complained that investors give them little credit for innovation, but startups with no revenue and commercial prospects that rely on aspirations and fantasies are rewarded with exorbitant valuations. Rivian Automotive Inc., for example, has no significant revenue but a market value of more than $100 billion.
Despite this, I regularly read articles questioning whether Rockwell Automation Inc., a company that generates close to $2 billion in quarterly sales and is in a prime position to capitalize on an arguably equally important narrative in factory-floor robotics and software, is overvalued with a market capitalization of $41 billion. And one of the lucky ones is Rockwell.
In a recent interview, Melius Research analyst Scott Davis stated that industrials “have a very serious growth problem.” There’s a slower-selling or out-of-favor counterpoint for every hot product or high-flying theme, such as grocery-store refrigerators, oil and petrol pumps, or normal motorcycles, for every hot product or high-flying thematic, such as factory automation or interior air quality equipment. Why would investors pay top price for an electric motorcycle or industrial software company when comes with all the baggage of a historical brand?
Many businesses have come to the conclusion that if they want their crown jewels to be recognized, they must allow investors to own them independently.
ABB Ltd., a Swiss manufacturing giant, is preparing an initial public offering for its electric vehicle charging subsidiary in the first half of 2022, with the company keeping a controlling stake. Emerson Electric Co. is merging some of its software assets with Aspen Technology Inc. to form an industrial software company in which it will own a 55 percent stake. The idea is that the software-focused company will have a larger multiple and a stronger currency to use for acquisitions in the future. Schneider Electric SE merged its software division with Aveva Group Plc in 2018 in exchange for a 60% in the combined company, and that deal is modeled after that.
For the better part of the last two decades, the industrial sector has been unraveling conglomerate structures, but most breakups have traditionally concentrated on dumping the less valuable assets that were dragging down the total worth. In today’s market, carving apart the faster-growing pieces to alleviate the burden of the industrial parent’s lackluster valuation requires a mental adjustment, but it is likely to result in a greater payout.
A parallel debate is happening in the oil industry, which is inextricably linked to Harley’s traditional business. Renewables-related stocks have substantially higher valuation multiples than oil majors, in part because renewables businesses currently spend cash rather than earn it. As a result, some of these companies, like Harley-Davidson, are considering how to capitalize on the energy transition’s excitement — and hence lower capital costs — while keeping it central to their whole business.
As Royal Dutch Shell Plc is learning with Dan Loeb’s call to break apart, catering to two very different sets of shareholders at the same time is always a tricky arbitrage that attracts the attention of activists. Eni SpA has taken a more subtle strategy, one that is directly comparable to Harley’s move with LiveWire. The Italian oil major plans to spin off its retail energy and renewables businesses into Plenitude, a new publicly traded company in which it will own a 70% stake. The goal is to capitalize on ESG enthusiasm while also demonstrating that traditional businesses are committed to achieving net-zero emissions goals.
The incumbents have an important role to play in the future economy, but it may be one that is best performed from afar.
