Why did Fiat Chrysler Automobiles CEO Sergio Marchionne decide to spin off Ferrari? Two weeks after the Ferrari deal was announced, the auto world is still asking. Could it be that he was trying to make life difficult for rival Volkswagen?
Ferrari is 90-per-cent owned by FCA. Late last month, FCA announced it would sell 10 per cent of its Ferrari shares to the public and distribute the rest to FCA shareholders on a one-for-one basis, after which Ferrari will trade as an independent company on the New York Stock Exchange and a European bourse, though not necessarily Milan.
Driving Ferrari out of FCA's garage was done to surface Ferrari's value, which was buried in FCA shares, and provide some capital to finance FCA's expansion drive. That effort will, among other projects, see some €5-billion ($7-billion Canadian) pumped into the ailing Alfa Romeo sports car brand alone in an attempt to transform it into a global marque that can compete with BMW and Audi in the market for low-slung cars that go fast and cost a lot of money.
But Mr. Marchionne is a clever boss, so there may have been an ulterior motive. That motive may have been to fend off Volkswagen or force it to pay full value for FCA and Ferrari if the German auto giant were intent on buying either or both.
Mr. Marchionne has been Fiat's CEO since 2004 and saved it from destruction. Ditto Chrysler, which he bought out of bankruptcy for little more than a promise to the U.S. and Canadian governments to invest in new cars and make it a player again. It worked. Now he is trying to leverage the Chrysler, Fiat, Alfa Romeo and Maserati names in his portfolio into global brands.
The problem is that Volkswagen has similar ambitions and is way ahead of FCA. It is an open secret that Volkswagen covets Alfa Romeo and would love to slot it in between its luxury Audi and the mid-market VW brands. Mr. Marchionne has said repeatedly that Alfa Romeo is not for sale. Ferrari must also appeal to Volkswagen, which has always had a passion for high-end Italian machines. It has owned Lamborghini for years and recently bought motorcycle maker Ducati.
Buying all of FCA would have been the easiest, cleanest and cheapest way for Volkswagen to get Alfa Romeo and Ferrari. At the same time, such a deal would have given Volkswagen a big presence in North America, through Chrysler and Jeep (VWs have not been big sellers in that market since the Beetle era). A Volkswagen-FCA merger would also fulfil Volkswagen's goal of becoming the world's No. 1 car company. Together, Volkswagen and FCA would be substantially bigger than either General Motors or Toyota. (In August, a German magazine reported that Volkswagen had talked to the Agnelli family, which owns about a third of FCA, to test their appetite for a merger).
Now look what Mr. Marchionne has done. By spinning off Ferrari, he has deprived Volkswagen or any other suitor of a two-for-one deal. At the same time, the Ferrari spinoff has turbo-charged FCA shares. When the Ferrari sale was announced last month, the shares rose about 13 per cent and they have kept on going. Over six months, they are up by a third. FCA is no longer the bargain it used to be.
So if Volkswagen wants the Ferrari and Alfa Romeo brands, it will have to pay twice, first for FCA and second for Ferrari, whose enterprise value (debt and equity) is estimated to range from €4-billion to €6-billion. Brilliant! Mr. Marchionne has ensured that neither FCA nor Ferrari would be bargain-basement purchases for any suitor. At the same time, the far higher valuation for FCA ensures that if does do another deal he will be working from a position of power, not weakness. Mr. Marchionne is not considered a "car guy," but he's no slouch when it comes to devising clever financial structures.
Eric Reguly