Fiat Chrysler Automobiles NV (FCA), Market Cap (as of 31/10/2014): €10.56bn

This week Fiat Chrysler Automobiles announced its plans to spin-off Ferrari S.p.A. – a luxury carmaker owned by Fiat since 1969. The separation will be conducted partially through a public offering in New York, and possibly Europe, worth 10% of FCA’s interest while the remaining equity will be distributed to shareholders. Sergio Marchionne, FCA CEO, believes that “to secure the 2014-2018 Business Plan and work towards maximizing value, it is proper that FCA and Ferrari pursue separate paths.” Ferrari’s listing is a part of an ambitious refinancing scheme, which also includes $2.5bn convertible bond issue.

FCA tries to grab market share and increase unit production while competing with rivals like Volkswagen and BMW in the fast growing and high-margin market for premium cars. By combining the spinoff of Ferrari, valued at approximately €4bn to €6bn by analysts, and issuing 100m new shares, FCA hopes to ease its €11.4bn debt burden and raise €48bn for planned investments.

Despite contributing to 13% of FCA’s profit before interest and tax, Ferrari has always stood out as an odd brand in FCA’s portfolio since Fiat merged with Chrysler after American giant bankruptcy and government bailout in 2009. Amidst a collection of cars produced on mass scale such as Jeep, Dodge and Fiat, Ferrari’s exclusivity has been a point of contention and the root of corporate governance issues. In September, Luca de Montezemolo quit as chairman after 23 years following a disagreement with Sergio Marchionne on Ferrari’s production quota. While Mr. Marchionne wanted to increase production to 10,000 units to satiate surplus demand, Mr. Montezemolo wanted manufacturing to be capped at 7,000 to maintain the brand’s exclusivity. This dispute ultimately led to Ferrari’s CEO resignation. As Ferrari becomes a separate entity, its primary challenge will be balancing shareholder pressure to increase cash flows by reducing its famously long waiting list and maintaining its exclusive perception.

The combined FCA firm that started listing on NYSE from October 12th reported third quarter revenues of €23.6bn which is a 14% increase vis-à-vis the same period last year while the net income fell 1% to €188m. For Ferrari specifically, Q3 revenues increased 24% year-on-year as a result of strong growth in the Asia-Pacific region – shipments were up by 81% – and the introduction of LaFerrari, Ferrari’s first mild hybrid supercar model.

After the prospective deal announcement FCA shares increased almost 15%, which confirms the positive outlook regarding the decision of this automaker.

The enterprise value of Ferrari assigned to it during the IPO process will strongly depend on the amount of debt and cash on the books and on how the investors perceive the company – as a car manufacturer or as a luxury goods maker. Ferrari sports car on average costs about €250,000 while its limited edition cars can top €1m. Analysts’ preliminary valuation range is between $7.59bn and $12.65bn for this iconic car producer. However, Mr. Marchionne promised that investors will be “pleasantly surprised” once Ferrari goes public.

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