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NYSE: Expected October 2014 Michael Guichon, Columbia Business School

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Presentation on theme: "NYSE: Expected October 2014 Michael Guichon, Columbia Business School"— Presentation transcript:

1 NYSE: Expected October 2014 Michael Guichon, Columbia Business School
IM: F NYSE: Expected October 2014 Michael Guichon, Columbia Business School

2 Investment Thesis Recommend investors buy Fiat shares with a target share price of €16.50; over 90% upside Market significantly underestimating transformative nature of Chrysler consolidation and the value of the company’s business units. Chrysler alone is conservatively worth €16.5bn and Ferrari/Maserati are worth €6.9bn (~90% of current EV), minimizing downside Chrysler acquisition improves the firm by reducing management distraction, leveraging future production and R&D synergies and FCA’s improved credit profile FCA’s value is misunderstood due to a cumbersome capital structure, several obscured assets and economic weakness in key markets FCA has great brands managed by excellent capital allocators and they are taking share in key markets FCA trades at 4.0x normalized earnings Fair Value: €16.50 (8.0x base normalized EPS of €2.05)

3 Company Overview FCA is the 6th largest automobile manufacturer globally1 CEO Sergio Marchionne hired in 2004 by founding Agnelli family (31% owners) and encouraged to sell the Fiat Auto subsidiary Finding no buyers interested in a low margin, Italian focused car company, he began growing the business with the goal of expanding Fiat’s presence globally Fiat acquired 20% of Chrysler after its 2009 bankruptcy. On January 21, 2014 it acquired 100% ownership Fiat and Chrysler have been run by CEO Sergio Marchionne since 2004 and 2009 respectively FCA North America % of Sales: 53% % of EBIT: 77% Europe % of Sales: 19% % of EBIT: -25% LatAm % of Sales: 11% % of EBIT: 17% Asia-Pac % of Sales: 5% % of EBIT: 11% Ferrari/Maserati % of Sales: 4% % of EBIT: 16% Components and Other % of Sales: 8% % of EBIT: 5% Geographical Breakdown of Segment Unit Volumes: Breakdown by Type: 1By revenues Source: Fiat 2013 Annual Report

4 How the Chrysler deal is transformational
The Chrysler purchase was a very value accretive deal; Fiat paid $4.4bn in cash for a business that generated $3.1bn in EBIT in 2013 The addition of Chrysler changed Fiat from a regional car manufacturer into the 6th largest in the world Operational synergies – a larger manufacturing base with a more diverse group of product cycles will allow the combined company to achieve higher average levels of capacity utilization and increase sales in formerly underserved areas around the world The use of common components and vehicle platforms between Fiat and Chrysler will reduce design and manufacturing costs Increased scale allows FCA to generate high ROI from investments in R&D, i.e. R&D synergies with Ferrari and Maserati Marchionne inherited a loss making Italian car/tractor/parts maker in 2004 and created a global automotive giant

5 Key Drivers of Normalized Earnings

6 Normalized Earnings Potential
€2.05 with Europe at Breakeven (base case, expected in 2016) €2.55 long term with modest European recovery Normalized earnings yield of 24%-30% Continued strong performance/market share gains of Chrysler in North America Return to high single digit/low double digit margins in LATAM Cash balance reduced by €10bn to delever. Average weighted cost of debt falls 120bps to 5.3% A return to normal earnings driven by Italian/Brazilian recoveries, Chrysler performance and capital structure rationalization

7 Capital Structure

8 Capital Structure Previously, complicated ownership structure and debt covenants prevented Fiat from accessing Chrysler’s liquidity and led to an excessive cash balance at Chrysler and a highly inefficient overall capital structure With full ownership of Chrysler, cash will start to be more fungible between Fiat and Chrysler, FCA can begin to reduce its gross debt burden The simplified company has a much better credit profile and this has been reflected in an improvement in credit default swap levels FCA’s cost of 7 year debt is currently 4.3% in EUR FCA is rated BB-/B1/BB- (S&P, Moody’s, Fitch) Debt/EBITDA = 3.9x, interest coverage = 1.5x In 2017, Debt/EBITDA = 2.4x, interest coverage = 3.4x Future credit rating upgrades are likely Rationalizing the company’s capital structure will increase pre-tax earnings significantly

9 North America

10 Chrysler/North America (Value: €16.6bn)
Given Chrysler’s 2013 EBITDA of approximately €4.4bn, FCA’s EV is trading at 5.8x Chrysler’s LTM EBITDA Chrysler has maintained steady margins in recent years while growing revenue in the US and Canada by taking market share Since Marchionne took control, North American market share grew from 9.2% in 2009 to 11.5% in 2013, which is still below 2007 pre-crisis level of 12.6% Chrysler’s previous underperformance can largely be attributable to management, which is no longer a concern given Marchionne’s strong track record 1US, Canada and Mexico respectively represent 83%, 12% and 5% of North American Chrysler vehicles sold Chrysler has steadily improved operations in North America versus Ford and GM …

11 Chrysler/North America (Value: €16.6bn)
Were Chrysler to trade in the market on a standalone basis at peer multiples, it would be valued significantly higher than 16.6bn From 2010 to 2013, Chrysler grew EBITDA at a 21.0% CAGR versus -5% for Ford and -1% for GM Ford and GM’s TEV/EBITDA LTM are 11.5x and 4.8x respectively Given EV/EBIT and EV/EBITDA multiples for Ford and GM, Chrysler would be worth between €24.0bn and €37.1bn, or 90% to 138% of FCA’s current EV with net pension obligations … yet still trades at a discounted valuation

12 How you improve a brand Chrysler’s reorganization strategy is focused on improving its products and relying on existing brands to drive consumer demand and take market share FCA’s global reach will help Chrysler sell into new markets and increase penetration in emerging markets Producing Chrysler brands for European markets in Italy will reduce idle capacity and have a meaningful impact on profitability 2007 Jeep Grand Cherokee V8 Base price: $34,690 13 mpg city, 20 mpg highway 0-60 in 9 seconds 2014 Jeep Grand Cherokee V8 Base price: $36,790 18 mpg city, 26 mpg highway 0-60 in 7 seconds Chrysler does not need to completely reinvent itself in order to succeed

13 Valuation of North America
Chrysler has steadily gained market share and maintained consistent margins since Marchionne took over in 2009 Jeep is the #1 SUV brand in the US; Ram trucks sales have experience double digit growth rates since 2009 New Jeep and Ram models will help Chrysler continue top line growth

14 International

15 Fiat - Focus on Capacity Utilization
A recovery in European automotive demand, particularly in Italy, will naturally increase Fiat’s capacity utilization and lead to margin expansion Increasing demand of higher margin luxury brands in Italy will improve profitability significantly Plans to shut high cost production facilities in Italy will remove the only assets that are losing money on an operating basis The forecast shown incorporates a further 12% drop in Brazilian sales, after a 10% drop in 2013 from 2012, and a significant decrease in EBIT margin Marchionne becomes CEO In this high fixed cost business, utilization = profitability

16 Europe

17 Fiat Europe (Value: €4.2bn) Italian Recovery
Automotive demand has fallen more in Italy than in peer countries that avoided severe dislocation in local credit markets Fiat’s Italian sales were worth €7bn in (29% market share), making it the most exposed to the European PIIGS among large auto manufacturers Reduced banking solvency concerns will lead to a recovery in automotive financing Fiat is very well placed to benefit from the recovery in Italian demand for durable goods A recovery to 2.2mn sales per year would imply a €5bn increase in Fiat’s revenue if market share remains roughly constant A return to normalcy in Italian credit markets will drive a recovery in automotive demand

18 How to relaunch Alfa Romeo
Increasing volumes of higher margin luxury brands by employing idle capacity in Italian plants will have a meaningful impact on profitability Goal of tripling production to 300,000 units/year would add nearly €1bn of EBIT 2007 Alfa Romeo GT Q2 Base price: $42,400 0-60 in 8.2 seconds 2014 Alfa Romeo 4C Base price: $55,000 0-60 in 4.2 seconds A timeless brand and key technology from Ferrari/Maserati gives Marchionne the wherewithal to turn around Alfa Romeo

19 Valuation of Europe Improved capacity utilization and gradual rollbacks of sales incentives should lead a return to profitability Operational synergies with Chrysler will improve overall efficiency and allow for higher normalized EBIT margins in the future

20 Latin America

21 Latin America/Brazil (Value: €5.5bn)
Fiat is the largest auto manufacturer in Brazil and had the highest reported profit in the region in 2013 In Brazil, low interest rates led to unsustainable growth in consumer and business lending The coming recession will likely involve sharp increases in non- performing loans and a significant reduction in the availability of credit Long-term fundamentals of Brazilian automotive demand (growing population and gradually increasing living standards) remain positive Fiat has a dominant position in Brazil where long term fundamentals remain positive

22 Valuation of Latin America
Fiat’s Brazilian business has a history of being fast growing and consistently profitable with high returns on capital, and it deserves a higher multiple Fiat has 22% market share in Brazil and a large domestic manufacturing base – a necessity in a country with high local content requirements While 2011 EBIT margins may not be sustainable, the Brazilian business is very profitable and total market demand will grow

23 Luxury & Performance Brands

24 Luxury Brands – Ferrari & Maserati (Value: €6.9bn)
Stable, high margin business with real pricing power Very attractive R&D synergies found using 2-3 year old Ferrari technology in Maserati cars Uncertain if Fiat willing to monetize but given margin, growth and pricing power Ferrari is a €4bn - €7bn asset (€3.50- €5.50/sh) 1,2 Agnelli family has been supportive of value maximizing spinoffs (Fiat Industrial spun off to shareholders in late 2010) Using the valuation of Ferrari peer Aston Martin’s sale of 37.5% of the company to Investindustrial in 2013 would value Ferrari alone at €7bn 3 Successful relaunching of Maserati in 2002 gives confidence in Fiat’s ability to reestablish the Alfa Romeo brand outside of Europe 1Net to Fiat’s 90% ownership of Ferrari. 2No true public comparable companies exist. Toyota and BMW have the highest margins of public automakers ( %) and trade at x EBIT Multiples 3 /investindustrial-to-purchase-37-5-stake-in-aston-martin.html A unique, obscured asset with the best operating and financial performance in the industry

25 Luxury Brands – Ferrari & Maserati (Value: €6.9bn)
EBIT to grow from €535mm in 2013 to €923mm in as Maserati production increases from 15,400 units/year – 50,000 units/year (all capacity is online and Maserati gross margins now higher than Ferrari) Pricing power: 12% and growing EBIT margin business (vs. 3.5% for FCA) Two year waiting list for Ferrari (intentionally limiting sales to 7,000 units/year) 22,500 orders outstanding for Maserati1 Maserati currently participates in only 22% of luxury market segments Launch of Luxury SUV and E segment high end sedan in 2015 provides exposure to 100% of 1 million unit/year market 1October 15, 2013 Fiat Group Luxury and Finance – Borsa Italiana, Milan After relaunching in the US in 2002, Maserati has now primed the market for even more rapid, profitable growth

26 Valuation of Luxury Brands - Ferrari
Business deserves premium multiple given brand is one of the few with real pricing power Margins are highly resilient Ferrari intentionally supplying below actual demand, models assumes no growth in units 1Net to Fiat’s 90% ownership Conservative multiples relative to peers yields significant value

27 Valuation of Luxury Brands - Maserati
Maserati was relaunched in the US in 2002, and after absorbing several years of start up costs now exhibits similar gross margins as Ferrari Capacity has been expanded to support 50,000 units/year in 2015 from 15,400 last year Significantly higher room for growth in this segment of the market A highly profitable, high growth business

28 Asia

29 Valuation of Asian Business
Despite being late to Asia, the Jeep products have been hugely successful in recent years and consumer demand remains very strong Shipments increased 58% year over year to 163,000 in 2013 FCA has sales points in 126 Chinese cities and there are nearly 500 cities with populations over 500,000 Current penetration only focused on 1st tier cities, future growth to be driven by build out in 2nd and 3rd tier cities

30 Management Track Record

31 Management & Track Record
Fiat under Marchionne has a great track record of creating value for shareholders Some market participants point to missed goals from the year plan as a sign that management is unreliable, but this is unfair because the Euro crisis could not have been predicted by management a year in advance Marchionne’s incentives are fully aligned with shareholders as he has vested options on 5mn shares with a strike price of €13.37 in addition to 10.7mn shares with a strike of €6.583 Under Marchionne’s stewardship, FCA has generated best in class financial performance

32 Valuation

33 Sum-of-the-Parts Recommend investors buy Fiat shares with a target share price of €16.50; over 90% upside Market significantly underestimating transformative nature of Chrysler consolidation. Chrysler alone is conservatively worth €16.5bn and Ferrari/Maserati are worth €6.9bn, which minimizes downside Chrysler acquisition improves the firm by reducing management distraction, leveraging future production and R&D synergies and FCA’s improved credit profile FCA’s value is misunderstood due to a complicated capital structure and several obscured assets FCA has great brands managed by excellent capital allocators and they are taking share in key markets FCA trades at sub 4.0x normalized earnings Fair Value: €16.50 (8.0x base normalized EPS of €2.05) 1Net to Fiat’s 90% ownership of Ferrari

34 Special Thanks To Thomas Schweitzer Sam White

35 Appendix

36 Relative Valuation Source: Bloomberg as of 5/2/ Luxury Brands valued at €6.952bn Across most metrics, Fiat trades at a sizeable discount to peers

37 Bear Case Despite success of Chrysler, FCA remains free cash flow negative and the company needs a recovery in Europe to return to positive cash flow FCA is operating in a cyclical and capital intensive industry and the company carries substantial leverage Obstructive European labor laws will prevent FCA from rationalizing production and achieving high levels of capacity utilization Credit overhang and rising non-performing loans could lead to a funding stop in Brazil High expectations for Jeep and Maserati leave room to disappoint

38 Risks and Mitigants Continued troubles in the global economy, particularly Italy and Brazil, could hurt automobile sales Consumers will eventually need to purchase new cars as maintaining older ones becomes prohibitively expensive Large ownership by Agnelli family – approximately 31% of the company. If they look to exit their position, problems could arise John Elkann, who is Gianni Agnelli’s grandson, is Chairman of the company. The family has mostly been passive, but is looking to maintain its large stake. Elkann has demonstrated considerable faith in Marchionne’s abilities Marchionne has said he will stay through 2016, but it is uncertain what will happen if he decides to leave then. He said it is highly likely that his successor will be an internal candidate Marchionne’s options give him substantial incentives to stay and improve shareholder value There are large pension liabilities, with approximately €6bn in unfunded employee benefits and other provisions The trend here is positive as unfunded amount decreased from €8bn in 2012 to €6bn in 2013 Should the company issue convertible debt, there could be potential dilution in share value Unsubstantiated rumor, no real need for additional equity in the business

39 Chrysler Acquisition Fiat Ownership Stake 20%
Fiat acquired Chrysler through a series of transactions between June and January 2014 for a total cash outlay of approximately $4.4bn The initial transaction was a Section 363 bankruptcy sale for 20% of Chrysler, which occurred after it declared Chapter 11 bankruptcy Creditors appealed the sale, but were eventually overruled to preserve going concern value and prevent liquidation Fiat increased its ownership by meeting performance targets and shrewd negotiating with the US Treasury, Canadian Government and VEBA Trust Fiat purchased the remaining 41.5% from VEBA trust for $4.35bn in January 2014, which included $1.75bn in cash from Fiat, $1.9bn from Chrysler and an additional $700mn in contributions over the next four years Fiat’s cash outlay of approximately $4.4bn compares with $7.4bn that Cerberus paid for 80% of the company in 2006 and $37bn that Daimler- Benz paid in 1998, although these amounts include Chrysler Financial, which Cerberus sold to TD for $6.3bn in December 2010 20% 363 Bankruptcy Sale (4/30/2009) Performance Event 1 (1/10/2011) 5% Performance Event 2 (4/11/2011) 5% 16% UST Call Options (5/24/2011) 7.5% Remaining Call Options (7/21/2011) Performance Event 3 (1/5/2012) 5% 41.5% Purchase From VEBA Trust (1/5/2014) Marchionne’s negotiating prowess secured Chrysler at an extremely attractive valuation

40 Overview of Ownership The Agnelli family is the largest shareholder in the company, holding just under 31% Once the firm lists on the NYSE (expected in October), there will likely be a large shift in shareholder base Source: Capital IQ Agnelli family has a history of supporting value creative initiatives at its companies

41 Overview of Management
Sergio Marchionne: Has been CEO of Fiat since 2004 and has led Chrysler since 2009 Oversaw the turnaround of SGS1, which is the world’s leading inspection, verification, testing and certification company, over 13 years. The Agnelli family sold its 15 percent SGS holding in 2013 at a 14x EBITDA valuation for €2bn, netting a capital gain of €1.5bn Unusually nonconformist style and acts as an owner of the business Focuses on creating a more collaborative culture between units to enhance shareholder value John Elkann: Grandson of Gianni Agnelli and current scion of the Agnelli dynasty Has served as Chairman of Fiat SpA since 2010 He is currently CEO and Chairman of Exor2 Member of the Board of Directors of News Corp and is a board member of Fiat Industrial, The Economist Group and Banca Leonardo 1Agnelli family portfolio company 2Agnelli family holding company for Fiat, Fiat Industrial shares Best in class management operating business as an owner

42 CEO Incentives Marchionne currently has options to purchase 10,670,000 shares at a strike of €6.583 per share with expiration of January 1, 2016 and other options to purchase 5,000,000 shares at a strike of €13.37 per share with expiration of November 3, 2014 Management’s interests are well aligned with shareholders

43 Debt Maturity Schedule

44 Summary Model






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