FCA Search For Partner Undermined By Chrysler Performance.
“If Chrysler can only make four per cent margins at peak, what will it lose in the next trough?”
Poor underlying profitability at Chrysler, even as its sales boom, has raised doubts from investors. Marchionne might be running out of merger candidates.
FCA has been linked with just about all of the world’s mass car manufacturers over the years including Volkswagen and Peugeot. The list is close to exhaustion given that the latter’s compatriot Renault already has an alliance with Nissan of Japan. Fiat, before it acquired Chrysler and became FCA, had an ill-fated alliance with GM, which also flirted briefly with Peugeot, with which it still has small production agreement.
But Marchionne needn’t give up yet. After all Mazda, Subaru, owned by Fuji Heavy Industries, and family owned Suzuki of Japan are still independent, while Jaguar Land Rover might be in the mood for a merger if it sees the future threatened by lack of size and resources.
If Marchionne is attain his crucial-to-survival six million sales a year, he might have to go for more than just one of these.
FCA sold 4.6 million Jeeps, Chryslers, Dodges, Maseratis, Ferraris, Fiats and Lancias last year.
Call for mergers
Marchionne has called for a new round of mergers in the global auto industry. Last year he said there was potential to form a new leader, and wants other carmakers to join in. The costs of new technology make it imperative that overcapacity is cut. If this isn’t done, the industry won’t be able to earn the returns to support the required investment.
FCA, already burdened by huge debts, will need to raise a huge amount of money if it is to fund the renaissance of Alfa Romeo. Fiat barely breaks even in Europe.
Meanwhile though investors are taking a closer look at the Chrysler component of FCA and they don’t like what they see.
“Chrysler’s profitability is bizarrely poor given that the U.S. market is back near peak, with Chrysler having delivered huge volume and market share gains in recent years,” said Bernstein Research analyst Max Warburton.
Despite having a 80 per cent preponderance of pickup trucks and SUVs and with revenues doubling since 2010 by $40 billion, earnings before interest and tax (EBIT) profits have only increased by $2.7 billion. Margins are stuck at four per cent, Warburton said.
“If Chrysler can only make four per cent margins at peak, what will it lose in the next trough? We see FCA as fundamentally challenged and overvalued at current levels,” Warburton said.
Volume over profit
Warburton said the lack of profitability is down to Chrysler’s aggressive incentives, dealer bonus structures, zero-mile cars, fleet deals and other tactics. Chrysler has prioritized volume over profit.
Warburton said these numbers won’t make FCA a very attractive merger partner.
“We find it hard to see the bull case for FCA when its main engine appears to have such limited earnings power. Marchionne is looking for an M&A (mergers and acquisitions) solution for FCA for a reason. The problem is we don’t think any partners want to join hands,” he said.
Investment researcher Evercore ISI also doubts FCA’s attractiveness, saying the noise created by Marchionne verges on having a “air of desperation”.
Evercore ISI analyst Arndt Ellinghorst didn’t see much chance of a deal with Ford or GM, which also suggested there weren’t any European suitors left. What he called “soft consolidation” was more likely, with agreements to share platforms, engines, and production, which was already common amongst many of the big global players.
Ellinghorst agreed FCA didn’t look in great shape, and its share price was over-valued.
“We continue to believe that the underlying operating performance of FCA’s business remains extremely challenged whilst valuation for the Group looks steep, even when applying a generous multiple to Ferrari,” Ellinghorst said.
Luxury sports-car maker Ferrari is due to be spun off later this year.
Earlier this month Marchionne used a vivid metaphor when talking about the difficulty of finding a merger partner.
Turkeys and eagles
“One of the most difficult things to do is to get the turkey to invite himself to Thanksgiving dinner,” Bloomberg quoted him as saying.
Keith Crain, editor-in-chief of Automotive News, took up the challenge in his weekly column.
“The fundamental problem with mergers is that, historically, they almost always have been of two turkeys rather than two eagles. There are always plenty of turkeys, but it’s hard to find an eagle,” Crain said.