I wonder if the rumored plan by Fiat S.p.A. CEO Sergio Marchionne to spin off the company's auto activities could happen in the opposite direction – Italy's largest industrial group keeps its car business and instead spins off its truck and tractor divisions?
For years, financial markets have been asking Fiat to separate its auto business to avoid the conglomerate discount applied to a highly diversified industrial group.
In simple words, Fiat's heavy truck unit Iveco and its agricultural and construction machinery maker Case New Holland (CNH) would have more value for their shareholders if they are not controlled by a holding company that is evaluated mainly on multiples of the auto business.
Marchionne said on March 3 that the subject of a spinoff may be addressed when he presents a five-year strategic plan on April 21.
Three figures from a recent Goldman Sachs report give a better understanding on how financial markets view Fiat: Fiat auto business is evaluated at 20 percent of its revenues, Iveco trucks at 34 percent and CNH at 46 percent. In other words, the 34.4 percent of group revenues generated by Iveco and CNH is adversely impacted by the multiples of the auto business, which covers over half of total revenues.
So why move automotive out of the Fiat group? I think the best solution could be to spin off non-automotive activities into a new, separate company. Such a solution would offer three main advantages:
• Financial markets would get an easy, clean way to re-rating Fiat's non-automotive business which will become an independent listed company.
• Fiat S.p.A. owns the Fiat trademark, which is used by its Fiat Group Automobiles S.p.A. subsidiary. The trademark would remain where it is actually used, avoiding confusion if the group is still called Fiat S.p.A. even after its auto sector is spun off.
• Fiat S.p.A. owns 20 percent of Chrysler Group, a stake which could grow to 35 percent if specific targets are reached. As Fiat Auto and Chrysler would be “inextricably intertwined,” as Marchionne says, with such a spin off the two controlling auto stakes would remain in the same holding company, an ideal prelude to a possible, stronger capital integration.
In such a scenario, Fiat Group Automobiles would remain the core asset in Fiat S.p.A.
With its Fiat passenger car, Alfa Romeo, Lancia and Fiat Professional light commercial vehicle brands, Fiat Group Automobiles accounted for 52.5 percent of last year's Fiat S.p.A. revenues of 50.1 billion euros ($68.7 billion) and 44.4 percent of trading profits.
Maserati would also remain within Fiat S.p.A. The luxury sports car brand is owned by Fiat Group Automobiles but reports separate financial results (it had 448 million euros in revenues last year and 11 million in trading profit).
The portion of Fiat Powertrain Technologies that makes engines and transmissions for Fiat cars would have to remain in Fiat S.p.A. to avoid any future transfer price conflicts between the powertrain supplier and the business unit that integrates it into the complete vehicle.
An open question would be the future positioning of the parts subsidiary Magneti Marelli and production equipment maker Comau. They supply the entire Fiat industrial universe and could fit in the new auto-oriented Fiat S.p.A. or the more diversified, spun off new company.
Finally, in any spinoff scenario at Fiat, the joker is Ferrari. Goldman Sachs attributed a 2.3 billion euro value to Fiat's 85 percent stake in Ferrari.
Despite selling just 6,235 cars last year, Ferrari reported 238 million euros trading profit, just half of the 470 million euros that Fiat Group Automobiles generated from selling 2.15 million vehicles. Operationally, Ferrari is a stand alone company, where it lands after a spinoff scenario is a matter of financial, rather than industrial strategy.
My recommendation would be for Ferrari to be placed in the spinoff company to add a little glamour and passion to Iveco's solid trucks and CNH's efficient tractors.
