Jeep Takeover Rumour Ignites FCA Investor Friendly Scenarios.
Stock Price Zooms; Will It Be Jeep, Maserati/Alfa, Or All Of FCA?
Chinese Possibilities Quickly Run Out Of Road Though.
“For FCA’s part, we wonder if these plans are part of a strategy to tease out Detroit – and Washington – support for an America First solution to the FCA problem”
Fiat Chrysler Automobiles’ (FCA) stock price zoomed more than 30 per cent in the last half of August as a succession of conflicting rumours excited investors.
Would FCA sell off some of its subsidiaries like Maserati, Alfa Romeo, Jeep and Magneti Marelli? Would Jeep be taken over by a Chinese one? Or would a global operator step in to deny Chinese operators ownership of a company which give them a massive presence in U.S. and European markets at a stroke? If a credible Chinese bid was forthcoming, would the Trump administration veto it, as part of its America First policy?
The rumours seemed credible given CEO Sergio Marchionne’s declared aims of either seeking to be taken over by a bigger company or selling off bits of FCA. Marchionne is preparing his final 5-year business plan before he retires in 2019.
The frenzy started with reports a Chinese company was about to bid for Jeep. After a succession of Chinese denials, Great Wall Motors declared interest in acquiring Jeep, but this quickly cooled as investors saw big hurdles to the deal. The stock price powered on as investors wondered if it might ignite a takeover from a top western company.
Volkswagen is said to covet Jeep because the German company lacks the broad range of big SUVs required in the U.S. market. Reports VW was in early talks to jointly make light vans added fuel to the fire.
Alfa Romeo worth minus numbers?
Meanwhile Morgan Stanley said a spin-off of FCA’s luxury Maserati subsidiary, along with Alfa Romeo and components too, made sense to investors. Morgan Stanley valued Maserati at nearly €7 billion, while it reckons Alfa Romeo is worth minus €2 billion.
Berenberg Bank values a spin-off of Maserati, Alfa Romeo and components business including Magneti Marelli at €11.6 billion, valuing Maserati at €4.3 billion, Alfa Romeo at (plus) €3.2 billion and Components at €4.1 billion.
Unlike Morgan Stanley, Berenberg feels Alfa Romeo is an under-appreciated asset.
“The biggest upside from unlocking value from the potential spin-offs is likely to be at Alfa Romeo for which the market currently does not give much value. FCA targets total Alfa volumes of 400,000 by 2020, up from the 170,000 targeted in 2017,” Berenberg Bank analyst Alexander Haissl said.
“Assuming 300,000 units with an average selling price of €35,000, Alfa revenues could be around €10.5 billion,” he said.
When news first broke that FCA might up for a deal investors remembered Marchionne’s long expressed wish to be taken over either by General Motors in particular, or anyone with enough money in general. The fact Marchionne has recently played down any talk of a takeover, saying he was concentrating on meeting his ambitious targets for FCA, didn’t stop the stock market excitement.
Robin Zhu, Hong-Kong-based analyst for Bernstein Research, didn’t think a deal was likely because Great Wall couldn’t afford it, and if it could raise the finance, the Trump administration might well oppose it. FCA might be in on the act because it might inspire an American bid for the company, Zhu said.
Zhu reckons Jeep generates currently about €3 to €4 billion of EBIT (earnings before interest and tax) valuing it at between €12 to €15 billion. By selling off Jeep, the remainder of FCA’s mass market assets would look weak.
“Third, would the U.S. sanction a deal, given the Trump administration just launched its investigation into China’s IP practices,” Zhu said in a report.
Other negatives included FCA’s struggle with fuel consumption regulation, the need to spend much more on new technology, the state of the global auto cycle, and Great Wall’s lack of expertise.
Citi Research thinks there might well be a deal for FCA, but it won’t be a western carmaker and the potential bidder list is limited.
“U.S. distribution makes Jeep more attractive to would-be exporters. In 2017 we estimate Jeep will generate revenues in the order of €42 billion and an EBIT of about €4.4 billion. It is the number one selling SUV brand globally and by our reckoning the most profitable part of FCA, excluding Maserati, so we understand why it would be attractive in its own right. However Jeep also has over 2,000 dealers stateside, which might be of limited value to a carmaker that is already present in the U.S., but to a new entrant this could give meaningful exposure in the market in very short order,” Citi Research analyst Michael Tyndall said.
Tyndall wasn’t convinced a viable bid was imminent, and pointed out that if Jeep was sold it would remove a key support for FCA.
Investment bank Jefferies said FCA’s owners, the Exor family company, were looking to leave the mass car market and agreed that the Chinese interest might ignite interest from western rivals. Jefferies analyst Philippe Houchois said Jeep has more potential too because it has yet to enter the highest profit segment with vehicles like the GMC Yukon or Lincoln Navigator. He estimates Jeep is worth an enterprise value of €17 billion, assuming 2018 sales of €42 billion, €4 billion of EBIT and a 9.5 per cent profit margin.
Bernstein Research’s Zhu also likes the theory that the action from China might persuade a traditional rival to bid for Jeep, or all of FCA.
“For FCA’s part, we wonder if these plans are part of a strategy to tease out Detroit – and Washington – support for an America First solution to the FCA problem. The last thing Ford and GM would want is a Chinese-owned Jeep in Detroit. Marchionne will know this – perhaps Washington will now realize this too,” he said.