Ferrari's spin-off looks great but lacks oomph. Fiat Chrysler Automobile wants to sell 10 per cent of the hottest name in sports cars to new investors and hand its remaining 80 per cent stake to shareholders. This plan, plus decent results and a clever convertible bond, were enough to lift Fiat's market cap by about 13 per cent, or $1.5 billion, on October 29. That seems excessive. This has mostly symbolic value and will not do much for Fiat's fundamentals.
The spin-off bandwagon is getting crowded. Blue chips from P&G to Bayer and eBay are handing businesses to investors, hoping to improve their focus and win higher valuations. Here Chief Executive Sergio Marchionne's scheme serves to highlight the power of Fiat's best brand. With its top-end supercars fetching euro 1 million each, Ferrari generates 12 per cent of Fiat's total earnings before interest and tax, on less than three per cent of revenue.
Assuming Ferrari can lift operating margins as planned to 18 per cent and meet Marchionne's growth ambitions, the brand may generate an Ebit of euro 600 million by 2018. On a generous 7.5 times multiple that would imply an enterprise value of euro 4.8 billion, or 17 per cent of Fiat's EV. Still, Fiat has net financial debt of euro 11.4 billion and aims to invest euro 48 billion over five years. So cashing in euro 480 million is no game-changer.
Nor will Ferrari make too much noise as a stand-alone outfit. By industry standards, Ferrari is tiny. And rapid growth would endanger its appeal. Ferrari deliberately limits production to 7,000 cars a year to keep the brand exclusive, and the price of old Ferraris high. Marchionne thinks annual production of 10,000 would be fine. Maybe so - but this appears to have contributed to the departure of Ferrari's long-standing chairman.
A full sale of Ferrari also looks unlikely. Perhaps Volkswagen could come knocking one day. But the idea of, say, a private equity firm or sovereign wealth fund taking the company private is far-fetched. Fiat needs Ferrari technology for its premium brands; Ferrari needs the economies of scale a bigger partner offers. Ferraris set petrolheads' hearts pounding. Investors should stay calmer.
The spin-off bandwagon is getting crowded. Blue chips from P&G to Bayer and eBay are handing businesses to investors, hoping to improve their focus and win higher valuations. Here Chief Executive Sergio Marchionne's scheme serves to highlight the power of Fiat's best brand. With its top-end supercars fetching euro 1 million each, Ferrari generates 12 per cent of Fiat's total earnings before interest and tax, on less than three per cent of revenue.
Assuming Ferrari can lift operating margins as planned to 18 per cent and meet Marchionne's growth ambitions, the brand may generate an Ebit of euro 600 million by 2018. On a generous 7.5 times multiple that would imply an enterprise value of euro 4.8 billion, or 17 per cent of Fiat's EV. Still, Fiat has net financial debt of euro 11.4 billion and aims to invest euro 48 billion over five years. So cashing in euro 480 million is no game-changer.
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A full sale of Ferrari also looks unlikely. Perhaps Volkswagen could come knocking one day. But the idea of, say, a private equity firm or sovereign wealth fund taking the company private is far-fetched. Fiat needs Ferrari technology for its premium brands; Ferrari needs the economies of scale a bigger partner offers. Ferraris set petrolheads' hearts pounding. Investors should stay calmer.