< Back to News

Fiat May Need to Convince on Chrysler Before Seeking Auto IPO


March 11 (Bloomberg) — Fiat SpA, the Italian carmaker that helped Chrysler Group LLC emerge from bankruptcy, may wait to turn around the U.S. business before deciding on a share sale or spinoff for its automotive division.

The Italian company’s stock has risen 19 percent this month on speculation that Chief Executive Officer Sergio Marchionne may carve out Fiat’s biggest unit as a new company. Fiat executives have so far sent mixed signals about whether an initial public offering of the division will take place.

A separation of the auto manufacturing operations, which generated 56 percent of Fiat’s revenue last year, would give Marchionne an entity to facilitate future alliances, and a share sale would generate cash for international expansion. The maker of Puntos and Ferraris must show progress at Chrysler, of which it owns 20 percent, before convincing investors to buy shares in the unit, said Royal Bank of Scotland analyst Jose Asumendi.

“Fiat has too much on its hands right now to think about a possible spinoff,” said London-based Asumendi, who advises holding Fiat’s stock. “The priority is to resurrect Chrysler, make it profitable and repay its government loans.”

Fiat Automobile, not including Fiat’s 20 percent stake in Chrysler, is worth about 5.9 billion euros ($8 billion), or 53 percent of Fiat’s market value, said Stephen Pope, chief global equity strategist at Cantor Fitzgerald in London. “Get the U.S. strategy right and in six years time, Fiat Auto could be worth 20 percent more.”

Holding Pattern

Fiat derives the remainder of its revenue from units including truckmaker Iveco SpA and CNH Global NV, an agricultural and construction machinery maker.

Marchionne plans to detail on April 21 in Turin, Italy, how Chrysler, which he also runs, will improve Fiat’s profitability through shared sales efforts and technology. The CEO is trying to shore up both companies as government incentives to buy new cars end in Europe and Chrysler’s U.S. market share lags a 10.5 percent target for 2010.

Chrysler is “in a year of hibernation” and talk of a separate Fiat Auto is “premature,” Kristina Church, an analyst at Barclays Capital, wrote in a March 8 note. Barclays upgraded Fiat to “equal weight” from “underweight” in part because the shares may benefit from the speculation.

Fiat’s surge this month is more than triple that of the Bloomberg World Auto Manufacturers Index, which includes Fiat and has risen 5.4 percent. Ford Motor Co., the only major U.S. carmaker that didn’t take a government bailout, has jumped sevenfold in 12 months and is up 28 percent since the beginning of the year, compared with a 10 percent decline by Fiat.

Partial Sale

That recent share gain might persuade executives to press ahead with a share sale sooner rather than later, said Pierre Bergeron, a credit analyst at Societe Generale SA in Paris. The company’s perceived value is unlikely to rise soon because Fiat and Chrysler offer a weak product lineup in a challenging U.S. market, he said.

A partial sale or spinoff this year, of a 30 percent stake, could give Fiat additional options for consolidating its debt, Bergeron said. Fiat could also sell more after that, he said.

A spinoff “is not dead,” Marchionne told reporters March 3 in Geneva. A day earlier, Chairman Luca Cordero di Montezemolo told Bloomberg News that he didn’t foresee a share sale.

‘Conjecture’

Responding to a request from Italy’s stock market regulator, Fiat said March 6 that media reports about an IPO or spinoff are “conjecture” and that it isn’t planning any “extraordinary transactions.” A company spokesman declined to comment further yesterday. Marchionne said last year that the creation of a separate auto company may take several years.

Fiat will be held back this year by declining car sales, pricing pressure and industry overcapacity, Barclays’s Church wrote. Fiat makes about 2 million cars annually, while Chrysler manufactured 1.3 million last year. That’s short of Marchionne’s contention that to survive as a global automaker, a company needs production of at least 5 million vehicles.

Last year, the carve-out speculation centered on Fiat’s bid for General Motors Co.’s Opel because a purchase could have given Fiat the scale Marchionne says is necessary to survive. GM eventually decided to keep the European operations.

Marchionne needs to show success with current strategic plans before he considers creating one automotive group, analysts at Goldman Sachs Group Inc. led by Stefan Burgstaller said March 8 as they added Fiat to a “conviction buy” list.

Dodge Chargers, 300s

Fiat acquired the 20 percent stake in Auburn Hills, Michigan-based Chrysler in June as part of a plan to help the U.S. carmaker emerge from bankruptcy. The Italian company can lift the holding to 35 percent in increments by meeting targets such as building an engine in the U.S., and can win control after government loans are repaid.

Chrysler is refreshing most models, including the Jeep Grand Cherokee. New Chrysler 300s and Dodge Chargers will use the first platform developed jointly with Fiat, which plans to begin selling its 500 subcompact in the U.S. in early 2011. Marchionne has said Chrysler may have an IPO after 2010.

Tesla Motors Inc., the Palo Alto, California-based producer of a $109,000 electric Roadster, filed in January for an initial public offering to raise as much as $100 million. Detroit-based GM, which emerged from bankruptcy July 10, could hold an IPO by late 2010, Chairman Ed Whitacre has said.

Fiat may have earnings before interest, taxes, depreciation and amortization of 4.26 billion euros this year, a 14 percent increase from 2009, according to the average estimate of 26 analysts surveyed by Bloomberg. Chrysler had Ebitda of $200 million in 2009’s third quarter and posted a sales gain in February, its first in 26 months.

Bondholders

One hurdle to a separate Fiat Auto is how the carmaker will apportion its bonds, according to Alessandro Frigerio, a fund manager at RMJ Sgr, which oversees about 100 million euros and owns Fiat shares. Fiat’s bonds totaled 11.4 billion euros at the end of 2009, according to its annual report.

“It’s a complicated transaction that has to satisfy both the bondholders and the shareholders,” Frigerio said. “The transaction is also very much tied to how things go at Chrysler, which is still in the preliminary stages of the restructuring.”