TSLA Tesla Inc

By Stephen Wilmot 

Tesla being worth more than Ford or--as of this week-- GM is the most visible implication of the valuation gap between old car tech and new car tech. But a bigger one for executive teams concerns portfolio management: It has become harder to own both in the same listed entity. As long as the gap remains, calls for GM to split will grow only louder.

An example was set this week by component supplier Delphi Automotive, which was itself spun out of GM in 1999. Delphi announced Wednesday that it was splitting its engine-parts business from its other divisions, which are focused on the kind of electronics necessary to turn cars into self-driving mobile devices. The shares jumped 11% as investors factored in a higher stand-alone valuation for the "RemainCo," which doesn't face the same questions around the transition to electric vehicles as the "SpinCo."

The potential for GM to do something similar is on Wall Street's radar. Chief Executive Mary Barra sounded more open to a spinoff last week, when GM announced first-quarter numbers, than she did three months earlier. "We continue to evaluate" the possibilities, she said. Her comments hinted that Cruise Automation, a San Francisco self-driving technology startup GM bought for $581 million last year, might provide a means to do so.

The problem GM faces is its rock-bottom valuation. Its shares trade at 5.5 times prospective earnings, or roughly $5,000 for every car it sold last year. Tesla's almost identical market value is equivalent to about $500,000 a car, based on the annualized first-quarter run-rate of deliveries.

Investors that buy GM stock are inclined to see investments in electric and autonomous vehicles as a cost, while those that buy Tesla stock focus on their potential. Spinning off a chunk of Cruise Automation, together with GM's electric-vehicle projects and perhaps its stake in ride hailing app Lyft, could attract tech-hungry shareholders that would never buy into GM, giving it a much cheaper source of equity capital to compete with Tesla. This capital could also incentivize flighty Silicon Valley staff.

There are risks. A spinoff would incur transaction fees and duplicate some costs, while bringing only minor commercial advantages. It could therefore erode economic value even as it engineered a higher valuation. If the car-tech bubble burst, it would end up looking like an expensive, faddy mistake.

Still, as long as the costs can be contained, it makes sense for GM to pursue the idea. Ms. Barra is under pressure to do something about the company's valuation, not least from activist David Einhorn, who is pushing the less convincing notion of creating two GM share classes. Tesla's valuation partly reflects the extreme scarcity of stocks offering pure-play exposure to the car industry's technological transition. Intel's purchase of self-driving tech leader Mobileye eliminated one of the few alternatives.

By providing a new outlet for investor demand, a GM spinoff might even come with the added bonus of knocking froth out of Tesla's stock.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

May 05, 2017 06:53 ET (10:53 GMT)

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