Reports surfaced earlier this week that an unspecified Chinese company had made an offer for automaker Fiat Chrysler Automobiles N.V. (NYSE: FCAU). The stock price jumped sharply and traded in the noon hour Tuesday up more than a dollar from its Friday closing price of $11.60 a share.
Analysts at Jefferies wrote in a note to investors Tuesday that the firm believes consolidation “is a positive for auto investors and future capital allocation as industry change accelerates.” The hardest nut to crack may be the voting control in FCA held by Exor, a Netherlands-based holding company of the Agnelli family, original founders of Fiat.
Jefferies thinks that there would be relatively little objection to a Chinese takeover of FCA given that Chrysler has had two foreign owners in the past 20 years — Germany’s Daimler and now Fiat — and “low market and industrial overlap with any China-based OEM.”
FCA CEO Sergio Marchionne has previously talked about a transaction that would involve all or just a part of the company and has even discussed the potential separation of the company’s brands. The successful spin-off of Ferrari N.V. (NYSE: RACE) received the blessing of FCA’s chairman and the head of Exor, John Elkann, who said at the time that the separation would “preserve the cherished Italian heritage unique position of the Ferrari business.”
Not every part of FCA is as strong a brand as Ferrari, but Jeep certainly stands out, as do Alfa Romeo and Maserati. Jeep sales in China in the first half of this year were more than double the comparable period last year. July sales were down slightly year over year. In the United States, Jeep sales are down 12% year over year through July on volume four times that of China sales.
Jefferies noted that press reports of a stand-alone premium group comprising Alfa Romeo and Maserati may not be able to hold its own. The analysts estimate based on the company’s sales forecasts that a stand-alone group would post 2017 revenues of €9 billion and EBIT of €640 million, with 2018 revenues of €15 billion to €17 billion and EBIT of more than €1 billion. The goal would be to approach Porsche’s 2016 revenues of €22.3 billion and EBIT of €3.9 billion.
At the same time as the Alfa/Maserati group would be aiming high, the company has announced a high-end all-electric Maserati to go head-to-head with Tesla’s high-end Model S. Marchionne has said that Maserati will begin launching only all-electric cars after 2019.
Selling off pieces of FCA will raise some immediate cash, but a continuing cash flow to pay for all that EV development is a must. If most of the cash generation parts of the business are gone, where will the cash come from? Or, as Jefferies puts it: “Compliance/electrification costs would be material challenges at the scale of the business.”
Jefferies appears to favor the buyout plan, partly due to the voting power of Exor: “In a part[ial] disposal of the 30% economic but 42.6% voting stake, Exor would lose control which argues for a clean exit.”
Jefferies maintains a Buy rating on FCA stock with price target of $14. Shares traded at $12.69 in the early afternoon Tuesday, in a 52-week range of $6.05 to $12.91. The high was posted earlier in the morning. The consensus 12-month price target on the stock is $15.86. At the latest trading price, FCA’s market cap is $19.53 billion.
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