MILAN (Bloomberg) -- Fiat Chrysler Automobiles plans to spin off the Ferrari supercar brand, underpinning efforts to raise about $4.7 billion as the Italian-American carmaker counters rising debt.
Fiat Chrysler will spin off 10% of Ferrari
FCA will list 10 percent of Ferrari in the U.S. and possibly Europe and plans to complete the deal next year, the company said Wednesday in a statement. The sale will raise about $1.15 billion, according to an estimate from Mediobanca.
The company, formed from the merger of Italy’s Fiat and U.S. automaker Chrysler, will distribute its remaining shares in the maker of cars like the $319,000 F12 Berlinetta to its own investors.
With the move, CEO Sergio Marchionne has ensured demand for a planned $2.5 billion mandatory convertible bond as well as the sale of as many as 100 million shares, which would raise about $1.1 billion at current prices.
“Ferrari’s spinoff is the market-moving news investors were looking for,” Vincenzo Longo, a strategist with IG Markets in Milan, said by phone. “Fiat is putting its jewel on the market.”
Under the plan, FCA will distribute 80 percent of Ferrari stock to current FCA shareholders with another 10 percent being offered to the public.
Piero Ferrari, son of company founder Enzo, will retain his current 10 percent stake in the automaker.
FCA’s board met Wednesday for the first time at its new headquarters in London’s West End to discuss FCA’s financing needs as it embarks on 48 billion euro ($61 billion) expansion plan that’s set to run through 2018. By expanding the Jeep and Alfa Romeo brands globally, the company aims to increase net income fivefold to about 5 billion euros.
While Marchionne has said the company didn’t need to raise money for the plan, high debt makes it vulnerable to volatility in key markets such as Brazil and Europe.
“FCA does not have the balance sheet to weather a potential cyclical downturn, of which the probability has clearly increased in recent months,” Stuart Pearson, a London-based analyst with Exane BNP Paribas, said in a note before results were released.
Marchionne merged Fiat and Chrysler into the world’s seventh-largest carmaker to better compete with auto industry leaders such as General Motors, Volkswagen Group and Toyota Motor Corp. The manufacturer stuck to its target for 2014 EBIT, excluding one-time items, of 3.6 billion euros to 4 billion euros.
The share sale is higher than expected. The company had already indicated that it had 89 million shares available for investors. That includes treasury shares and Fiat stock bought back during the merger process.
The carmaker said the board had mandated its management to complete the spinoff next year. The group, which moved its own primary listing to New York on Oct. 13, expects the Ferrari shares to be listed in the U.S. and possibly a European exchange.
"As we move forward to secure the 2014-2018 Business Plan and work toward maximizing the value of our businesses to our shareholders, it is proper that we pursue separate paths for FCA and Ferrari," Marchionne said in a statement.
The carmaker said the board had mandated its management to complete the spinoff next year. It said the remaining 90 percent would be distributed among FCA shareholders -- who include the Agnelli family that founded Fiat.
Fiat Chrysler, which also posted quarterly earnings on Wednesday, plans to issue $2.5 billion in convertible bonds to help fund the company's plans.
"They seem to have sorted out their capital worries in one go," Roberto Lottici, a Milan-based fund manager for Ifigest, said, adding that a spin-off of Ferrari should help to boost FCA's valuation.
"It looks to me like they've packaged the Ferrari deal as a pill to help sell the convertible [bonds] after results that were far from overwhelming," Lottici added.
FCA reported a 7 percent rise in third-quarter operating profit to 926 million euros ($1.18 billion). This included one-off expenses of 36 million euros.
After ruling out a separate Ferrari listing for years, Marchionne had hinted at a possible change of heart in a Reuters interview this month, when he described the sports car maker as a "phenomenal carrot" for prospective U.S. investors.
Ferrari could have an equity value of between 5 billion euros and 5.8 billion euros, according to brokers.
FCA said on Wednesday it would also sell up to 100 million of its shares, including treasury shares and stock that will be issued to offset a buyback from investors who opposed the recent merger into Fiat Chrysler Automobiles.
The company also plans to repay ahead of maturity Chrysler bonds due in 2018 and 2019.
Analysts have long said FCA, with net industrial debt of 11.4 billion euros at the end of September, needed to raise capital to strengthen its balance sheet, especially as it is battling losses in Europe and weakening Latin American markets.
Luca Ciferri and Reuters contributed to this report