Fiat Chrysler to spin off Ferrari, issue $2.5 bln convertible bond

By Agnieszka Flak

MILAN (Reuters) - Fiat Chrysler Automobiles (FCA) said on Wednesday it will spin off its luxury sports car maker Ferrari and list the shares as part of a bigger scheme which includes a $2.5 billion convertible bond issue to help fund its ambitious business plan.

The newly created FCA, which moved its primary share listing to New York earlier this month, wants to invest 48 billion euros ($61 billion) over the next five years to turn Jeep, Maserati and Alfa Romeo into global brands and rival Volkswagen and BMW by strengthening its position in the fast-growing and high-margin market for premium cars.

 

As part of the capital-boosting measures announced on Wednesday FCA will also sell by the end of 2014 up to 100 million of its shares -- including treasury shares and stock that will be issued to offset a share buyback from Fiat investors who opposed the recent merger into FCA -- and repay ahead of maturity some Chrysler bonds to remove restrictions on its access to the cash of the U.S. unit, whose buyout it completed earlier this year.

"Today is a big clean-up day," FCA's chief executive Sergio Marchionne said, adding that together, all the measures would inject a total of 4 billion euros into the company and help it deal with any eventual contraction in car sales volumes.

"It gives us all the comfort to go and execute the plan up to 2018, it is designed to deal with the worst-case scenario," he said.

Under the plan FCA said it will list a 10 percent stake in Ferrari in the United States and possibly in Europe through a public offer, hoping to complete the spin-off next year.

The remaining 80 percent stake held by Fiat Chrysler will be distributed to FCA shareholders, including Fiat's founding Agnelli family which controls 30 percent of FCA.

The other 10 percent of Ferrari is owned by Piero Ferrari, vice chairman and son of the founder Enzo, who died in 1988.

FCA also plans to complete by the end of 2014 the sale of the $2.5 billion bond which later converts into FCA shares, factoring in the prospect of the Ferrari spin-off.

"It is expected that investors participating in the offering, subject to completion of the spin-off of Ferrari being announced today, will be entitled to participate in the spin-off and receive shares of Ferrari pursuant to customary provisions adjusting the conversion terms," FCA said.

CAPITAL SOLUTION

Analysts had questioned FCA's ability to fund its plan to boost sales by 60 percent to 7 million cars and raise net profit five-fold by 2018, given the currently tough market conditions.

"They seem to have sorted out their capital worries in one go," said Roberto Lottici, a fund manager at Ifigest.

After ruling out a Ferrari listing for years, Marchionne had hinted at a possible change of heart in a Reuters interview this month, when he described Ferrari as a "phenomenal carrot" for potential U.S. investors.

The initial response to FCA's Wall Street listing has been muted, with the stock still more heavily traded in Milan.

Ferrari could have a value of between 4.4 and 5.8 billion euros depending on whether it carries any debt or cash, according to brokers. Marchionne only said that all would be "pleasantly surprised" once it is floated.

The move comes just weeks after Marchionne took over at Ferrari, replacing long-serving chairman Luca di Montezemolo after they clashed over strategy and the Formula One racing team's poor results.

Marchionne said he would remain Ferrari's chairman after the spin-off and reiterated that Ferrari sales, capped at around 7,000 vehicles a year, would only be raised significantly if there was sufficient demand from the super rich to not jeopardize the brand's exclusive status.

Milan-listed shares in FCA , the world's seventh-largest carmaker, jumped more than 18 percent to their highest level since April 23. In New York the shares were up 13 percent at $10.96 by 1834 GMT.

The Agnelli's holding company Exor has already said it will invest 600 million euros in the mandatory convertible.

"It looks to me like they've packaged the Ferrari deal as a pill to help sell the convertible (bond) after results that were far from overwhelming," Lottici added.

Earlier on Wednesday, FCA reported a 7 percent rise in third-quarter operating profit to 926 million euros, with revenues up 14 percent at 23.6 billion euros.

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.

But some observers questioned the strategic logic of a Ferrari spin-off, at a time when other luxury carmakers have been increasing their ties with volume brands to spread the costs of meeting ever-tightening emission standards.

"We don't see Ferrari as a sustainable standalone business," said George Galliers, a London-based analyst with ISI Group.

"Porsche and VW's rationale to join forces should serve as a good reminder, not to mention the challenges presently facing Aston Martin," Galliers said - referring to the British sports car maker that has been struggling to fund new model investments without a major industry backer.

A 5 billion-euro enterprise value for Ferrari would price it at nearly 14 times earnings before interest, tax, depreciation and amortisation (EBITDA), a Paris-based trader said, putting it well above high-end auto firms and top luxury goods stocks.

"Investors' appetite for such a high multiple is yet to be tested," he said. "And then, why sell the crown jewels?"

(1 US dollar = 0.7852 euros)

(Additional reporting by Stephen Jewkes and Stefano Rebaudo in Milan, Bernie Woodall in Detroit and Alexandre Boksenbaum and Laurence Frost in Paris; Editing by Mark Potter and Greg Mahlich)