Matt NeillSwedish car maker Volvo is going public as the company looks to tap into increased demand for electric car manufacturers and make its mark on the increasingly competitive automotive market.
The firm has had a rocky road to returning to the public markets amid concerns over its ownership structure and how it can compete against the likes of Tesla in the race to electrify its lineup. However, as one of the industry’s best-known brands, Volvo is still set to attract a lot of interest from investors.
This article will examine how and why Volvo is listing a portion of its shares publicly and what it means for the company as well as the broader automotive sector.
When will Volvo go public?
Volvo shares are set to begin trading on the Nasdaq Stockholm exchange under the ticker VOLV on Friday 29 October in one of the biggest initial public offerings (IPOs) in Europe so far this year.
The company’s owner, Chinese automotive manufacturer Zhejiang Geely, bought the firm from Ford back in 2010 for a total consideration of $1.8bn at a time when Volvo had suffered repeated losses. It has since turned it around and reported a record profit of $1bn in full-year 2020.
Geely tried to float a portion of its stake in Volvo back in 2018, but that deal was scuppered amid geopolitical tension between the Swedish and Chinese governments.
What is the latest on the IPO?
The Volvo cars IPO has attracted the support of Swedish institutional investors and other European funds. But Geely was forced to drop its target Volvo valuation from the float from $23bn to around $18 bn, with the shares set to float at SEK53 ($6.21) per share, at the bottom of its initial range of SEK53 to SEK63.
That means that it is aiming for a total capital raise of around $2.3bn from the offering.
The concession came over concerns surrounding a proposal that Geely would retain outsized voting rights in the company relative to its shareholding after the IPO, with the Chinese parent opting to instead convert its stake into all Class B shares to ensure it had one type of stock holding.
The amendments mean that the free float in the firm was increased from 16% to 17.9%, depending on demand.
In a statement, Geely Sweden said that the issue had been raised by potential investors while building the book for the offering ahead of the Volvo IPO date.
“In interactions with potential investors in Volvo Cars’ initial public offering, it has become clear that investors regard the voting power of the shares to be an important matter,” the company said.
“Geely Sweden agrees that having only one share class will emphasize the strong and independent governance of Volvo Cars and has consequently initiated the conversion.”
Why is Volvo going public?
Like other companies in the automotive industry, the offering faces a significant challenge in meeting the goals of transition to a net-zero emissions economy and needs to convert its product offering into more electric vehicles.
The firm has one of the most advanced plans among large car makers to sell more electric-powered units. It has committed to a sales target of 35% of its total as electric vehicles by 2030 when a ban on the sale of new petrol and diesel vehicles becomes law in the UK.
On the path to full electrification, the manufacturer is aiming to sell 50% of its total units as electric vehicles (EVs) by mid decade. It has also rapidly upped its production of electric vehicles to over 171,000 in the year ending 30 June 2021 from a base of below 40,000 a few years earlier.
However, this still represents only around a quarter of the company’s total cars sold.
Volvo revenue in the six months to 30 June 2021 totalled SEK141.1bn, up from SEK111.8 in the prior year period, while operating income swung from a loss of SEK989m in the pandemic-impacted first half of 2020 to SEK9.6bn this year.
Main selling points
Volvo is one of the most well-recognised and competitive firms in the global automotive industry, with a history stretching back to 1927 and its founding in Gothenburg and a reputation for innovation and safety.
Since it languished in the first decade of the 2000s under the ownership of Ford, the Volvo valuation has gone from strength to strength under the ownership of Geely, and is ahead of other traditional rivals in the march towards a fully electric and sustainable future.
The role of Geely goes beyond owning a stake, as well as the firm’s share research and development costs it is able to use the enhanced scale of Geely to lower the overall expenditure needed to introduce new models for both parties. Geely also provides a foothold for the brand in the steadily growing Chinese market, which could become a more important source of sales in the future.
Main risks for Volvo
While the ties with Geely bring multiple advantages for Volvo, it also has its downsides.
Geopolitical tensions between Sweden and China scuppered the previous push for a Volvo IPO back in 2018, and the issue of Chinese company ownership has also been raised by various investors during this process.
Geely seeking voting control larger than its stake has even forced the parent company to grant the concession of lowering the target IPO price to the very bottom of its initial range, and further tensions between Sweden and China could prove problematic in future.
Additionally, Volvo is having to make wholesale changes to its business in order to meet its targets of electrifying its line up and the consumer demand for EVs in future.
While it is competing with larger traditional companies such as Volkswagen, Volvo is also having to go up against EV-native firms such as Tesla, which attract much larger consumer and investor attention.
This preference for newer companies with an electric focus from the very beginning is exemplified by the fact that Volvo’s former performance subsidiary Polestar, which floated as an independent company earlier this year, attracted a valuation of $20bn, similar to the proposed value of Volvo shares now.
The post-pandemic supply chain crisis may also prove to be challenging for Volvo, according to Scholar.
