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Fiat-Chrysler – Hyped-Up Miss-Match Or Canny Combo?

“Fiat’s Great Adventure Of Assimilation” – Wall Street Journal
There’s Frank Sinatra And Snooki, Why Not Fiat And Chrysler

Fiat’s is taking a rest from its stake building in Chrysler, and investors are coming to differing conclusions about the likely success of the planned merger.

Fiat held 52 per cent of Chrysler in early June when it bought the U.S. government’s remaining six per cent stake. By the end of the year this will increase to 57 per cent if and when it fulfils its pledge to provide Chrysler with a fuel-efficient car.

Richard Hilgert, auto analyst with Morningstar of Chicago, sees big benefits accruing to Fiat Chrysler from substantial operating leverage, with big benefits to come from integrating purchasing, development, component, platform and production sharing.

“Distribution synergies and potential cost savings for the combined entity should make any investor tickled pink, or, perhaps even better, Ferrari red,” Hilgert said.

Many investors have been banking on the possibility of Fiat eventually cashing in its Ferrari chips, but investors are divided on its possible value.

Bank of America Merrill Lynch reckons those that see Ferrari as being worth nearly €5 billion are way off the pace. Merrill Lynch analysts say €3.8 billion is nearer the mark. They also question assertions that Chrysler’s U.S. market share will hit 11.5 per cent by 2013 compared with 9.3 per cent last year. Merrill Lynch analysis points to a lower figure of 9.1 per cent by 2014.

In a report headed “Why short Fiat”, Merrill Lynch comes up with these thoughts –

– Fiat-Chrysler CEO Sergio Marchionne’s power is fading – he is clearly an outstanding CEO but his ability to propel his share price is fading (this followed Marchionne’s discussion of a possible flotation of Ferrari, and resulting arguments about its possible worth).

·    Brazil – the carnival is over. The most profitable car market in the world for mass-car makers, where Fiat made 160 per cent of its EBIT (earnings before interest and tax) last year is contracting.

·    High oil prices – are a problem for the whole sector, but if there is one auto business in the world that will feel the pain harder than anyone it is Chrysler, with over 80 per cent of its sales from light trucks.

·    Look beyond the hype – Fiat is an expensive asset with poor free cash flow generation, geared into a falling Italian market and losing share in it, whose arbitrage entry into Chrysler has been all but wiped out by recent moves in U.S. car stocks.

Morningstar’s Hilgert is firmly in the pro camp. Whoever said one man’s meat is another man’s poison, must have been referring to these experts.

“Fiat is on the verge of creating a globally competitive automotive business. Geographical diversity and potential operating leverage should further reduce the company’s dependence on domestic volume. An array of brands, serving multiple segments, reduces reliance on any one vehicle category.”

“For Chrysler, this means international exposure that is sorely needed for this company’s survival. For Fiat, this means re-entering the U.S., one of the world’s largest new vehicle markets and one the company has been conspicuously absent from for many years,” Hilgert said.

Sinatra and Snooki
The Wall Street Journal’s Heard on the Street column throws in a cautionary note. In a piece headed “Fiat’s Great Adventure of Assimilation” in which it invokes crooner Frank Sinatra and Snooki of Jersey Shore (the MTV soap opera) as previous examples of successful Italian-American cultural icons, it calls Fiat shares an option on Chrysler’s renaissance. Integrating the two companies remains Marchionne’s best chance of fixing Fiat’s unprofitable European business.

“But transcontinental auto mergers are notoriously tough, as Daimler found out when it took on Chrysler. Investors buying the story have to believe in a Hollywood ending for Mr Marchionne’s Italian-American adventure,” the column said.


Neil Winton – July 1, 2011

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