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Fiat Said To Be Over-Valued Compared With Germans

Fiat Might Not Be Able To Access Chrysler Funds After Takeover

“Even if Fiat were to own all of Chrysler, it would not be able to gain access to Chrysler cash”

Fiat’s prospects are under the microscope, and one investor questions Chrysler’s ability to retain its profit margins and doubts that Fiat will ever be able to get its hands on U.S. profits even if it completes its takeover.

Citi Research analyst Harald Hendrikse believes Fiat’s shares are overvalued, and investors should sell, as debt continues to rise.

“(To control debt) We believe Fiat has to sell assets, or it has to sell shares. Either way, sustainable earnings power would fall sharply. Fiat’s enterprise value is close to €25 billion, a ratio similar to the (hugely profitable) German manufacturers. For a business haemorrhaging cash, that makes no sense, in our view. Sell (the shares),” Hendrikse said.

Fiat-Chrysler CEO Sergio Marchionne has said he hopes to complete the full takeover of Chrysler in 2014 by buying the 41.5 per cent of the shares it doesn’t already own from the VEBA trust, owned by the UAW union after the bankruptcy. This would, in theory, enable Fiat to get access to all of Chrysler’s cash-flow and profits.

Goldman Sachs has said this could cost up to €2.23 billion.

But Hendrikse said because of the terms of the VEBA trust, Chrysler can only pay significant sums out of the business if gross cash hits €13 billion, an impossibly high figure for Chrysler to achieve.

“Even if Fiat were to own all of Chrysler, it would not be able to gain access to Chrysler cash,” Hendrikse said.

Meanwhile, according to Hendrikse, Chrysler’s huge profits may be coming to an end.

In a section of the report headed “Chrysler U.S. margins close to peak?”, Hendrikse said the company has benefitted from a 50 per cent recovery in U.S. auto sales, during a period in which incentives have been under control, while Japanese competition was hampered by the strength of the yen.

“During these almost perfect market conditions, Chrysler has only reported EBIT margins of six per cent, versus U.S. peers reporting between eight and 11 per cent. Even then, Chrysler margins have come down to 5.7 per cent in the latest quarter, despite a 60,000 unit inventory build in the quarter,” Hendrikse said.

Without the contribution from Chrysler, Fiat would have lost €1.04 billion in 2012.


Neil Winton – February 20, 2013

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