Fiat Chrysler Automobiles; Market Cap: $18.90bn (as of 29/10/2015)
Ferrari; Market Cap: $9.53bn (as of 29/10/2015)
On October 21, Ferrari, a Super Luxury carmaker rated the world’s most powerful brand by Brand Finance, got to start a new life as a public company trading on NYSE, the world’s leading stock exchange. Fiat Chrysler Automobiles, the parent company of Ferrari, successfully raised c.$4bn by selling a 10% stake of the Prancing Horse business cashing in $893m as well as receiving a cash payment of $3.2bn from the Maranello-based unit as part of the transaction.
About Fiat Chrysler Automobiles (FCA)
FCA (NYSE:FCAU), an Italian-American multinational automobile manufacturer headquartered in London, UK, was formed in 2014 through the merger of Fiat (founded in 1899) and Chrysler (founded in 1925), ranking the seventh largest carmaker by revenue in the world. The group designs, engineers, manufactures and sells passenger cars, light commercial vehicles, components and production systems worldwide. Its automotive brands are: Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram, SRT, Maserati, the parts and service brand Mopar and the in the spotlight Ferrari.
Ferrari (NYSE:RACE) is an Italian super luxury sports car manufacturer headquartered in Maranello, Italy. It started its story with 125S, Enzo Ferrari’s first automobile, successfully creating an awe-inspiring combination of style and energy. Ferrari, with the core ingredients of its models being power, flawless design and high technology has a 25% market share in the luxury automobile sector. Throughout its history, the automobile marque has been noted for its racing team division, Scuderia Ferrari, which is the most successful team in the history of Formula 1. Ferrari is also renowned for its personalization program creating a unique car for unique drivers by offering “Atelier”, “Tailor-made” and “One-off” exceptional, made-to-order services.
FCA’s public offering of the 10% stake in Ferrari is a part of its restructuring plan to divest the company by the beginning of 2016. The FCA’s divestment of Ferrari can be analyzed through 2 steps described below.
Step 1: Equity Carve-Out ⇔ IPO
In an equity carve-out, the parent firm sells a portion of subsidiary through an IPO in the equity market. In our case, FCA raised about $1bn in proceeds from the IPO as well as anunatantum $3.2bn payment from Ferrari as part of the operation due to the loss of control. FCA will use the proceeds from the IPO to help fund a $53bn investment program, which focuses on global expansion of the Jeep, Alfa Romeo and Maserati brands.
FCA, which initially owned 90% of Ferrari, sold on the market 10% of the company and, as a consequence, now owns 80%. Apart from the 10% stake held by Piero Ferrari, the son of the founder, and the 10% stake sold on the market through the IPO, FCA will keep the remaining 80% stake in Ferrari only for a few more months. The ownership structure post IPO is presented below.
Step 2: Spin-Off
In a spin-off, the parent company distributes the shares of the spun-off subsidiary to parent shareholders. In fact, in the beginning of 2016, FCA is going to distribute its remaining 80% stake in Ferrari to its shareholders, Exor (the investment arm of the Agnelli family) and other FCA shareholders. FCA’s shareholder base composition is presented below.
As a result, Ferrari’s ownership post spin-off will look as follows.
Ferrari’s ownership following the spin-off:
Exor 24% (=30%*80%)
Piero Ferrari 10%
Ferrari SHs 10%
Other FCA SHs 56% (=70%*80%)
Loyalty Voting Program
As part of the divestment strategy, a Loyalty Voting Program will be implemented. According to the program, «Long term» or «Loyal» investors will be awarded enhanced voting shares. This way Exor and Piero Ferrari will ultimately keep direct voting control in Ferrari by enjoying absolute majority in voting power. Other retail investors will have to hold their shares for 3 years before qualifying as «Loyal investor». The distribution of the voting rights is presented below.
Ferrari’s voting rights following the Loyalty Program:
Piero Ferrari 14.9%
Other SHs 49.3%
Is The Deal Expensive?
Ferrari’s over-subscribed IPO can be considered an outlier in the recent sluggish trend of new offerings. In fact, amid current market volatility several companies such as the grocery chain Albertson postponed its scheduled offering as well as this year’s largest US IPO of First Data resulted in shares trading below the indicated range.
According to the CEO of FCA and Ferrari, Mr. Marchionne, Ferrari, was valued as a luxury-goods maker, such as Prada or Hermes rather than a car manufacturer, receiving a $11.1bn valuation.
Whether the price of $51.80 per share for Ferrari can be justified to investors depends on many different aspects, including Ferrari’s business model, competitors, the role Ferrari’s shares can play in investor’s portfolios and the motivation behind the spin-off. Each of these components can tell a different, and sometimes controversial story, but together they can shed light on the overall pricing of Ferrari.
Ferrari’s Business Model
Ferrari operates in the Super Luxury market for automobiles. As a result it follows a strategy based on the four “S’s”: Styling, Speed, Story and Scarcity. This translates into producing small amount of automobiles that are super exclusive and fetch a high price. This, together with the limited need for reinvestments into advertising campaigns or production capacity allows Ferrari to maintain one of the highest operating margins in the industry (18% vis-a-vis the average of the automotive industry of 5%) despite elevated R&D costs. To justify Ferrari’s Super Luxury status and its premium pricing, just a glance at the balance sheet’s composition can bring clarification: the company’s brand value, represented by intangible assets and goodwill, accounts for about 50% of its current assets. The other element to Ferrari’s business strategy with which some investors justify the high price is that of partnerships, licensing, and royalties, which account for some 17% of net revenues. Although it is said that “Ferrari is more of a Status Symbol rather than an Car Maker’’, can this really be enough to separate Ferrari from the rest of the pack and justify P/E ratios of 33.30 compared to the average of 15 in the automotive industry or 20 in the luxury industry? One could say that the dependence on brand name, and low production volumes (Ferrari sold 7,255 cars while Maserati 36,500 in 2014) is incompatible with the high growth expected by the firm. This is especially true in the context of slowing automotive sales, where the compounded annual growth rate in aggregate revenues for auto companies between 2005 and 2014 was only 5.63%.
Looking into competitors and their performance over the last years however reveals another interesting quality to Ferrari, which might otherwise go overlooked.
While the automobile industry has been the victim of strong macroeconomic factors such as the 2008 recession, Ferrari has weathered the storm in an impressive manor, as can be seen above. Operating in the super luxury market, and maintaining surplus demand for its four-wheeled-vehicles (two years waitlist for the 458 Italia) has allowed Ferrari to capture a counter-intuitive effect by which the world’s extreme high net worth individuals actually gain during times of economic uncertainty.
Although low volumes, brand name and exclusivity have protected Ferrari and investors from downturns it remains yet to be seen if the very same factors will limit Ferrari’s ambitions in the future.
Role of Shareholders on the Price
Although it is easy to dispel any reallocation of controlling interest as paranoia, we should never stop to consider the importance of strategic shifts from major shareholders. By way of the new loyalty voting rights in Ferrari, it is possible that the Agnelli family may be eyeing a strategic divestment from FCA, while maintaining control over Ferrari. It should not be seen as a coincidence that both the Piero Ferrari and Exor have increased their voting rights, especially relative to overall ownership. This arrangement is well suited to block new investors from having any effectual say in the company’s direction. Only time will tell if this can be seen as a positive stabilizing factor, or a constraint to flexibility.
We believe that one of the main reasons for the spin-off is the maximization of value for the company’s shareholders, mainly Exor, which is successfully pursuing a diversification strategy for its portfolio. In fact, the investment arm of Agnelli Family pursues a balanced allocation of resources among the three key pillars of business – industry, financial services and other investments, including publishing. Upon the completion of the spin-off, the industry allocation will remain a crucial part within its portfolio, as FCA and tractor maker CNH Industrial together will account for 50%. Exor’s portfolio with an international soul and a well-defined profile has a gross asset value of more than €18bn.
According to the theory, there is a tendency for the stock market to undervalue conglomerates by applying a discount to its value while by separating the businesses; the overall value of the independent companies can result in a higher valuation. Activist investors therefore often push for a spin-off strategy. For instance, Carl Icahn ended up being right when he was vocal about the spin-off of PayPal from eBay to create two independent companies that would be more focused and competitive as leading, standalone companies in their respective market. On the one hand, it is clear that the deal benefits FCA in the short term since it will allow the company to pursue its restructuring program. On the other hand, we will be able to better judge only in the medium term whether the company will lose a valuable contribution to its bottom-line by undertaking such a divestment plan.
The IPO was led by UBS, Bank of America Merrill Lynch, Santander, Mediobanca and JP Morgan.
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