General Motors Rises On Autonomous Vehicle Partnership With Honda

Shares of General Motors (GM) are rising after the company announced a partnership with Honda (HMC) to build a new autonomous vehicle.

AUTONOMOUS VEHICLE PARTNERSHIP: On Wednesday, Cruise and GM announced that they partnered with Honda to work towards large-scale deployment of autonomous vehicle technology. Honda will work jointly with Cruise and General Motors to fund and develop a purpose-built autonomous vehicle for Cruise that can serve a wide variety of use cases and be manufactured at high volume for global deployment. In addition, Cruise, General Motors and Honda will explore opportunities for commercial deployment of the Cruise network. Honda will contribute approximately $2B over 12 years to these initiatives, which, together with a $750M equity investment in Cruise, brings its total commitment to the project to $2.75B. In addition to the recently announced SoftBank (SFTBF) investments, this transaction brings the post-money valuation of Cruise to $14.6B.

EXECUTIVE COMMENTARY: “This is the logical next step in General Motors and Honda’s relationship, given our joint work on electric vehicles, and our close integration with Cruise,” said GM chairman and CEO Mary Barra. “Together, we can provide Cruise with the world’s best design, engineering and manufacturing expertise, and global reach to establish them as the leader in autonomous vehicle technology — while they move to deploy self-driving vehicles at scale.” On a conference call following the announcement, GM said the company has the ability to scale technology quickly and said a “sizable portion” of the $2B Honda contribution will be for funding of development of the vehicle. In addition, GM noted that Honda will invest $750M in cash in GM Cruise in exchange for a 5.7% stake.

WHAT’S NOTABLE: On May 31, General Motors announced that the SoftBank Vision Fund would invest $2.25B in GM Cruise Holdings to strengthen the company’s plans to commercialize autonomous vehicle technology. GM also said it would invest $1.1B in GM Cruise upon closing of the transaction. The company said the investment would result in the SoftBank Vision Fund owning a 19.6% equity stake in GM Cruise and SoftBank would receive one of six GM Cruise directors’ seats. Following the announcement, Evercore ISI analyst George Galliers upgraded GM to Outperform from In-Line saying he had been assigning no value to the Cruise assets previously. Under his new sum-of-the-parts valuation, Galliers applied a 6.0x multiple on GM’s core, attributed a value of about $8 per share for the Cruise assets and about 60c per share for GM’s stake in Lyft before applying a 25% discount to both of the latter. He raised his price target on GM shares to $50 from $47. JPMorgan analyst Ryan Brinkman raised his price target for GM to $58 and reiterated an Overweight on the stock saying the investment is “positive on a number of fronts.” The investment “puts a stake in the ground relative to the value of Cruise” and shows “just how inexpensive GM’s core automotive operations really are,” Brinkman said. In addition, Morgan Stanley analyst Adam Jonas raised his attribution of GM Autonomous value to $9.25B from $2B in his sum-of-the-parts model for GM and increased his sum-of-the-parts valuation of GM to $61. He also increased his price target on GM shares to $50 from $48 and kept an Overweight rating on the stock.