October 26, 2017

Breakingviews: Stuck in traffic

by Breakingviews.

Forty billion euros. That’s what it would take to bring the Agnelli family to the table to discuss selling Fiat Chrysler Automobiles, some industry insiders reckon. Chief Executive Sergio Marchionne’s overhaul is picking up speed, as shown by the 5.5 percent pre-tax margin the carmaker cranked out in the third quarter, according to results released on Tuesday, up from 3 percent in the same period last year. But even after an 80 percent-plus run-up in the stock this year, Fiat Chrysler is worth barely more than half the magic M&A number.

The Italian-American carmaker now trades at some 6.7 times estimated earnings in 2018, according to Thomson Reuters data. It lags Ford Motor and General Motors, whose multiples are just shy of eight times earnings, but the gap has narrowed.

It’s hard to justify Fiat Chrysler being worth much more. A 40 billion-euro sale would value the company at more than 12 times next year’s forecast profit. Even industry leader Toyota trades at under 11 times. Fiat is also a laggard in the race to develop connected and autonomous cars. It initially outsourced much of the work to Alphabet’s Waymo, and only recently joined a consortium led by BMW and Intel .

While the gain in Fiat Chrysler’s shares owes much to acquisition interest from Great Wall Motor, that price tag is out of reach for the Chinese company. Even buying just Jeep would be a stretch – it’s worth around $23 billion, according to Morgan Stanley, against the Chinese carmaker’s $16 billion. Hiving off Jeep would also strip out perhaps three-quarters of Fiat Chrysler’s EBITDA, leaving a smaller, much less profitable – possibly money-losing – company.

General Motors might be able to reach the Agnellis’ figure on paper. A merger with Fiat Chrysler could generate $5 billion of annual cost savings, Marchionne hinted in 2015. Those could be worth $35 billion to shareholders, taxed and capitalized. But they might take a decade to fully materialize and cost $10 billion or more to implement. And that doesn’t even factor in antitrust concerns and cultural conflict.

The Agnellis – who own 29 percent of Fiat Chrysler – and the company’s board might of course settle for less. Unless it’s a lot less, though, the company’s M&A options look limited.


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