Why, Fred, I thought you'd never ask! Yes I have a comment or two on today's news.
First, the Department of Eating Crow: I thought that all the auto companies were playing around with Ballard fuel cells so they could take a photo, feature it prominently in their annual report, and thereby get the Greens off their backs. That may still be true of most of them, but Daimler Benz is obviously very serious about trying to make fuel cells a real alternative to the internal combustion engine. That is great news for Ballard.
The rest of the news is less obviously good for the Ballard shareholder. Daimler is buying 25% of Ballard at a price well below the market. I know, the news release said C$35 per share, but in terms of cash, it is really C$25 per share. The non-cash contribution that Daimler is giving to Ballard, that is supposedly worth the other $10 per share, is Daimler's know how in fuel cells, which it claims it is also contributing to the joint venture between it and Ballard. This asset is largely imaginary and, to the extent it is real, is arbitrarily valued. This is just a face saving way for all concerned to hide the fact that Ballard is selling stock at a big discount. (Still a large premium over what it is really worth, IMO, but a big discount to the market price.)
Furthermore, Ballard is going to have to take a chunk of that cash and hand it back to the joint venture, of which it will be only a one third owner. So the Ballard shareholders' position has changed like this: Before the deal, Ballard had some cash, 80% ownership in its hopeless stationary power partnership with GPU, and 100% of its real, if far off, potential in vehicles. Now Ballard has some more cash, the same GPU partnership, and only a 33.3% ownership in the potential vehicle profits, all divided by 25% more shares.
Is this a good deal for the Ballard shareholder? Well, that depends. All this money in the Daimler(2/3)/Ballard(1/3) partnership should hasten the day and increase the chances that fuel cells some day become a real competitor to the internal combustion engine for vehicle applications. And 75% of one third of something is better than 100% of nothing.
But what does this tell you about management's honesty? At the press conference the guys from both Daimler and Ballard agreed that the first time you are likely to see a car on the road using this technology is 8 years from now, and that is if all goes well. And it will be several years after the introduction of fuel cell powered cars before they will achieve enough volume to be profitable. Buses might be economic before then, but still not anytime soon.
Prior to this deal, Ballard was talking about more or less the same timetable! Maybe after Daimler throws all this money at the problem, the cars can hit the market for the first time eight years from now, rather than the 10 years that Ballard was previously projecting. So to speed up the introduction by maybe two years, Ballard is giving up more than 2/3 of the potential profits. That implies that either Ballard's management is stupid, which we know it is not, or it was excessively optimistic in past projections when it neglected to mention just how much shareholders must sacrifice.
To put it another way, let us suppose you are a Ballard shareholder because you want to share in its potential vehicle profits. Before this deal, every dollar in profit would have been divided by 17 million fully diluted shares. After the deal, each dollar in profit gets $0.67 taken out by Daimler, and your $0.33 gets divided by 23 million shares. On a per share basis, you have just lost 75% of your potential profits.
So Ballard must have figured out that it could never commercialize vehicle fuel cells on its own. As I said, a small piece of something is better than all of nothing. But does anyone remember Ballard mentioning that it would have to give up so much to do what, supposedly, it was making such great progress doing on its own? Great news going forward, but it sure looks like you were lied to in the past. |
