Plan Will Reduce Debt, But Not By Much.
“Spinning off Ferrari is another clever exercise in value maximization. The structure and timing of the deal is genius”
FCA’s Ferrari Move
Fiat Chrysler Automobiles (FCA) shocked investors with its decision to float off 10 per cent of storied luxury sports car manufacturer Ferrari and return the rest of it to shareholders, but as the dust settled on the deal, some investors saw the sale more as a canny way to persuade investors to sign up to the capital raising plan, with little impact on the long-term future of FCA.
Others though enthused about FCA’s long-term prospects.
FCA announced plans to raise about $4.7 billion including an estimated around $1 billion from the sale of the Ferrari stake, a $2.5 billion convertible bond, and the sale of shares. FCA owns 90 per cent of Ferrari. Piero Ferrari, son of the founder Enzi, owns the rest.
Before news of the deal, FCA was seen as the world’s most indebted automobile manufacturer. After the deal is completed some investment banks don’t think much will change.
“FCA will still be left with seven to eight billion euros ($8.8 billion to $10.1 billion) of net debt, over eight billion euros of pensions and healthcare liabilities and massive negative working capital. This still makes FCA the most leveraged automaker in the world, on our reckoning,” said Bernstein Research analyst Max Warburton.
“Spinning off Ferrari is another clever exercise in value maximization. The structure and timing of the deal is genius – as it provides a juicy carrot for shareholders – if they participate in the capital raise, they get to own Ferrari shares too,” Warburton said.
End game?
Warburton asked “what is the real end-game here”, and said it was designed to eventually allow family owners the Elkanns to leave the auto business, which will own about one quarter of FCA after the deal.
Commerzbank analyst Sascha Gommel is a sceptic too,
“While we see the rationale behind the decision to make Ferrari independent, it does not change our cautious view on FCA,” said Gommel.
Gommel said FCA’s inability to reduce financial leverage organically is a major concern, and cut his rating on FCA to “Sell”.
“The initial excitement should soon vanish and we expect the share to go into reverse,” Gommel said.
Citi Research analyst Philip Watkins though saw merit in the deal, in a report headed “Broadly positive with caveats”.
“Though there are negatives in terms of dilution from the planned convertible, we see positives too, most importantly a mechanism for valuing Ferrari and realizing its value. It seems that FCA will at least seek an implied value of five to six billion euros for Ferrari, which is higher than many were prepared to value the business at, including us, and if successful this would create value for FCA shareholders,” Watkins said.
Most under-rated
Even more enthusiastic was Morgan Stanley analyst Adam Jonas, saying FCA could be Detroit’s most under-rated auto firm, adding it was differentiated form the rest by its strategic vision and frugal engineering.
“Mr Marchionne has created a high-performing culture with a strategic and engineering sense of urgency that we see is rivaled only by Tesla Motors, a view we believe is shared by suppliers and the UAW,” Jonas said.
“FCA’s platform efficiencies rival the world’s best (manufacturers). Untapped potential for the Jeep brand and Ferrari valuation add optimality to the industry’s most profitable, fastest growing end markets. Currently very low exposure to China may prove to be an advantage for the next few years,” Jonas said.
“FCA is high risk, but we believe the best risk-reward amongst the D3 (Detroit 3), he said.
Markets were pleasantly surprised by the Ferrari decision because CEO Sergio Marchioness had seemed to rule out such a plan in the summer. Ferrari had been in the news because Marchionne replaced the former chairman Luca Cordero di Montezemolo with himself.
Ferrari sales reached around 7,000 last year, about 0.2 per cent of FCA’s 4.4 million sales, but accounted for about 12 per cent of Fiat’s operating profit. Montezemolo was thought to have been fired because he wanted to keep sales close to 7,000 to hang on to the brand’s exclusivity.
Long-term plan
Marchionne wanted to raise sales and make more money, and earlier this year said sales could reach 10,000 without hurting the brand.
Meanwhile FCA has a long-term plan which includes raising vehicle sales by more than two million by 2018. Alfa Romeo is charged with accounting for 400,000 of the target. Jeep must raise its sales to 1.9 million by 2018 from around 700,000 now. Marchionne wants earnings before interest and tax to increase from €3.5 billion in 2013 to between €8.7 billion and €9.8 billion by 2018.
The Financial Times Lex column pointed out the scale of the Marchionne long-term plan sees an almost doubling in size by producing more than 30 new models and seven million cars overall.
“This was already ambitious when announced in May; it has become much more so as the downturns loom in big markets such as Brazil and Europe. FCA spinning off Ferrari is a buffer against that, along with plans to sell convertible debt,” Lex said.
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