Why Chrysler's Loss Is Fiat's Gain
Fiat and Chrysler just reported combined financials for the first time as a conjoined entity. Fiat's results were positive, and Chrysler again made money in the quarter, but its gains were turned into a loss by the one-time cost of paying off loans to the U.S. and Canadian governments. But what does this all mean for a Chrysler IPO?
Not following GM any time soon
For all the numbers fit to blog on Chrysler's current business, visit The Truth About Cars. A larger question is whether a Chrysler IPO will happen in 2012 -- or at all.
Let's revisit a Reuters story I referenced last week:
By the end of this year [Fiat's Chrysler] holding will have risen to 58.5 percent -- an increase linked to Chrysler developing a car that gets 40 miles per gallon of gasoline.One might have thought that a dramatic return to the U.S. stock market for Chrysler would have echoed General Motors' (GM) earlier IPO, as well as replay the exit-from-bankruptcy drama that both carmakers enjoyed in 2009. But Fiat-Chrysler CEO Sergio Marchionne has other things in mind.But [CEO Sergio Marchionne] needs to decide what to do with the 41.5 percent of Chrysler that is owned by VEBA, the United Auto Workers' healthcare trust.
After initially planning an IPO that would allow VEBA to cash in on its stake, Marchionne now seems to be aiming to buy it -- although he says he is not in talks with VEBA yet.
Where will the money come from?
The VEBA stake in Chrysler could be worth something like $3.3 billion, assuming a (conservative) pre-IPO market valuation of $8 billion. Earlier this year, however, the Wall Street Journal reported that Chrysler could have a market valuation of $15-20 billion.
My thinking is that Fiat doesn't want the IPO any time soon because Chrysler is now undervalued. If it does take the company public, $15 billion looks better than $8 billion.
But what about getting VEBA out of the picture? Fiat spent a chunk of its own cash to get to its current 53.5 percent stake, after refinancing the outstanding government loans. Does it want to spend more of its own money to buy out VEBA on the cheap now? Or...
Ferrari IPO!
There's been too much chatter -- including "doth protest too much" official denials -- about a Ferrari IPO to conclude that it isn't on the table. Fiat owns 90 percent of the iconic Italian carmaker. An IPO could raise as much as $7 billion -- and it would be a fairly risk-free move, as investors would be falling all over themselves to get in.
So, Marchionne takes Ferrari public and uses the money to buy out VEBA at Chrysler's modest market valuation -- then takes Chrysler public when it's merged with Fiat and accesses a valuation that's twice what it is (speculatively, of course) now.
The beauty of this maneuver is that Marchionne could raise something like $20 billion, if he leverages Ferrari now and delays on the Chrysler IPO, exploiting Chrysler's present limited value. We're edging into the outer limits here, but this does make me wonder if VEBA has thought this through. It might just take Fiat's money pre-Chrysler IPO, on the argument that whatever it makes on formerly worthless equity is pure profit. This is a healthcare trust, after all, not a private equity firm.
Ferrari IPO -- the sexiest IPO ever? Stay tuned.
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