Marchionne Speed Dating Spurs Frenzied Takeover Speculation.
“It would be a big, big mistake for General Motors to expose itself to such a damaged player”
Sergio Marchionne’s determination to do a deal, any deal, to ensure the future of Fiat Chrysler Automobiles (FCA) was becoming borderline farcical as reports of possible deals included FCA bidding for GM.
Max Warburton, analyst with Bernstein Research, wondered if CEO Marchionne might launch a hostile bid for GM, after it rebuffed his initial approach. Warburton, never afraid to think the unthinkable himself, didn’t think this was very likely.
Warburton suggested Marchionne could buy a small stake in GM and demand a board seat to persuade GM from the inside that his plans made sense.
“But might Marchionne consider something much bolder? Might he be willing to risk launching a hostile bid for GM, with the promise of his leadership and claims of huge synergies,” Warburton said.
General Motors earlier agreed that it had received an email from CEO Marchionne about a merger but also felt the need to announce that not only had it seen the email, but its board had given it due consideration before rejecting it. The Wall Street Journal reported Marchionne was urging hedge funds and activist shareholders to persuade GM that a merger was a good idea. Bloomberg News said because of GM’s lack of interest Marchionne had moved on to plan B, which meant that now France’s PSA Peugeot Citroen was in the frame.
Evercore ISI analyst Arndt Ellinghorst had a colorful metaphor to describe Marchionne’s tactics.
“Fiat’s speed dating continues after having been dumped by GM, courting Peugeot and even news this morning from Bloomberg that Toyota doesn’t even recall a phone call,” Ellinghorst said in a report.
“It would be a big, big mistake for General Motors to expose itself to such a damaged player (as FCA),” Ellinghorst said later in a speech to the Automotive New Europe Congress in Birmingham, England.
Marchionne set this frenzy rolling with his remarks earlier this year about the value-destroying nature of the automotive industry which could only be solved by more takeovers and mergers to reduce costs. Marchionne said FCA needed to go down this route.
Investment banks disagree about FCA’s future.
Bernstein’s Warburton and Evercore ISI’s Ellinghorst take a pessimistic view of its future. Morgan Stanley analyst Adam Jonas takes the opposite view.
As well as the upcoming float of its Ferrari subsidiary, Jonas pointed to three reasons why FCA had a bright future: Jeep, Alfa Romeo, and Sergio Marchionne himself.
“Jeep’s market potential may still be deeply underestimated, and may be the world’s best positioned auto brand over the next three to five years,” Jonas said.
Alfa Romeo, which is expected to unveil its new rear-wheel drive Maserati Ghibli-based Giulia later this month, is valued at a negative $1.5 billion by Jonas, but he thought it could have a significant positive value within FCA, or in the hands of a strategic partner. He said FCA plan to spend $5 billion on Alfa Romeo by 2018 on nine new Alfas including a new Giulietta in 2016 and Ammiraglia flagship probably in 2017.
And then there’s Marchionne.
“Sergio (has the) ability to effect change on industry peers through a potential combination. Aside from perhaps Elon Musk (CEO of Tesla Motors), is there anyone besides Sergio Marchionne who stands at the focal point of a broader investor debate about the strategic direction and future of the global auto industry,” Jonas said.
Bernstein’s Warburton might not be a big fan of FCA, but does admire Marchionne.
“FCA makes little money and has the industry’s worst balance sheet. It’s hardly the ideal launch pad for a hostile bid. But FCA has one valuable asset – even if that assert has shelf life: Marchionne himself,” Warburton said.
“Could the world’s biggest ever auto merger – made all the more exciting with a high risk, pioneering hostile bid – be his parting glory,” Warburton said, adding that the alternative wasn’t very appealing.
“(with) FCA (is) likely to deteriorate stage by stage through to the man’s retirement date – then probably destined eventually to fall apart when he hands over to a lesser CE0,” he said.
Evercore ISI’s Ellinghorst said any merger with General Motors would dilute GM’s earnings in North America, substantially reduce its cash position, provide it with no incremental earnings in Europe, but plenty of excess capacity and offer little in South America. FCA structurally burns cash and has substantial net debt.
“Only time will tell whether Marchionne is able to successfully hook a shark to help fight his cause,” Ellinghorst said.