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Tickers in this Article: PAG, GMGMQ , MGA, AN, KMX, GPI, SAH, NKE, ICON
On June 5, Penske Automotive Group (NYSE:PAG) announced it was buying the Saturn brand from bankrupt General Motors (OTC:GMGMQ.PK). Roger Penske, former racecar driver and owner of 40% of Penske Automotive stock, is looking to return the once promising brand to its customer service roots. Saturn won't actually make cars; they will leave this to existing manufacturers around the globe. Instead, Saturn will handle the sales, service and marketing. The million dollar bet here is whether the 72-year-old billionaire can turn the stagnant brand into a marketing machine just like Nike (NYSE:NKE) has in the sports business. Given Penske-owned racecars have won 15 times at the Indianapolis 500 over the years, I wouldn't bet against him.

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Why Do This?
The question here isn't whether Penske can make it work (he can) but why he even wants to try. Canadian auto parts maker Magna International (NYSE:MGA) has taken a 20% stake in the consortium buying control of European car manufacturer Opel from GM. This makes sense because it helps ensure Magna continues to do business in Europe and Asia. But what does Penske get from owning Saturn?

Currently, his dealerships run the gamut from Daimler's Smart cars to super-high-end Bentleys; however, there's not one Saturn dealership in its 300-plus network of stores operating in the U.S. and internationally. How will the other car manufacturers (which Penske represents) feel about Penske's new role? And what about its existing dealers? They could easily see this as Penske having its cake and eating it too. Penske will have to tread carefully with the various stakeholders if the company wants to be successful.

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Getting Its Own House In Order
Opportunities like buying Saturn obviously don't come around every day. When they do, interested parties must feel like they have little choice but to act. Nonetheless, is now really the best time to be taking on this herculean task? Penske lost $411.9 million in 2008 on a 9% decline in sales and its first quarter was even worse. In Q1 its total revenues dropped 32% (more than $1 billion) and operating income was off by 48% to just $42.4 million.

It's important to note that $643.5 million in goodwill and asset impairment charges contributed to the loss in 2008, which isn't a normal occurrence. More troubling is the steeper drop in business in the first quarter. It's an indication there will be more quarters like this to come. Which begs the question: shouldn't Penske get its own house in order first? (For more, see Analyzing Auto Stocks.)

Just A Theory
Although Roger Penske and company haven't divulged their motives, here is one theory. The price paid (not yet public) for Saturn may have been more or less the cost of taking over any obligations GM has to current Saturn employees as well as the remaining value of its trademarks, etc. It's a material amount, but not a huge sum.

Penske may then work diligently at doubling sales from the current 2009 estimate of 100,000 vehicles sold and once achieved, it will spin-off Saturn into its own publicly traded company. If all goes smoothly, the new company might just try to duplicate the feat a second time with another orphaned automotive brand.

It might seem far-fetched, but Penske could turn this into the automotive equivalent of the Iconix Brand Group (Nasdaq:ICON), which licenses the manufacturing and distribution components for once-trendy brands like London Fog and Ocean Pacific, while retaining the marketing and ownership. It works for them and it could work for Penske as well.

The Bottom Line
Things aren't perfect at Penske Automotive and there's a lot of communication that needs to take place between all the interested parties. However, as Roger Penske himself would probably tell you, business is like racing: it's not for the faint of heart. If you can wait a couple of years, I'd seriously consider backing this calculated risk. (To learn more, check out our Industry Handbook: Automobiles.)

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