Is General Motors Company a Takeover Target?
The proceeds from the Ferrari spinoff will add substance to Sergio Marchionne’s plans to expand Fiat Chrysler Automobiles NV (NYSE:FCAU), creating a new mega-group in the automotive sector. The likely target of the takeover, according to Marchionne’s not so veiled hints, is none other than General Motors Company (NYSE:GM). Should owners of GM stock take notice?
Marchionne does not exclude anything. If not GM, Volkswagen Group (OTC:VLKAY) may be mulling a sale of some of its assets and while which, if any, assets will be sold is tough to call, Fiat will likely be a frontrunner to bid for them should GM continue play hard to get.
Fiat remains open to any alliance that addresses its needs, including, or especially, GM, given that, as CEO Marchionne was quoted by the Italian daily La Repubblica in November, “GM is the one that offers more opportunities of all.” (Source: “Marchionne: ‘Comprare da Volkswagen? Dipende da cosa vendono’,” La Repubblica, November 8, 2015.)
GM’s CEO, Mary Barra, has always rejected Fiat’s advancements, but other options have opened up, especially in the wake of VW’s emission scandal, dubbed “Dieselgate.” Still, Marchionne and Barra were chatting in the context of a U.S. government-organized meeting of all automobile industry executives. Nobody should exclude a Fiat-GM union of some kind just yet.
Could Fiat Buy General Motors?
In mid-October, Fiat’s crown jewel, Ferrari NV, or simply Ferrari, made its Wall Street debut. On December 4, Fiat will officially spin off its remaining shares in Ferrari, while a related group, EXOR, retains a controlling interest.
Marchionne has become a major force in the automobile industry and beyond. In recent months the Italian-Canadian manager, who grew up and studied in Toronto before landing in Switzerland and roaming to Italy, continues to press for a takeover of General Motors, even as he is restoring the prestige of the Italian motoring industry.
Marchionne has also secured a strong deal with the United Auto Workers’ (UAW) union in Detroit after weeks of negotiations over working conditions. The union had chosen Fiat Chrysler as a partner and the deal served as the model for the other giants of the car industry in the U.S., such as General Motors and Ford, to strive for. Marchionne has played a master game, using the UAW as a pawn in an effort to reach GM.
Nobody had expected that the UAW would deal with Fiat first. However, by doing so, Marchionne has set the tone for Ford and GM, not to mention the workers in other non-American brands with major production facilities in the U.S., such as VW, Toyota, or Honda, to follow. (Source: “U.A.W. Contracts Change Math for Detroit Automakers,” CNBC, November 25, 2015.)
Fiat and Volkswagen Are Celebrating
Fiat will celebrate for being one of the fastest-growing car companies in the world and VW can celebrate too, because, despite the Dieselgate scandal, it has managed to increase sales in key European markets, even if sales have plummeted in the United States. Nevertheless, Fiat has more reason for optimism; it can attack to gain some of VW’s lost market share due to its recent scandal. Even if the Wolfsburg, Germany–based VW remains one of the largest and most competitive global players in the automotive sector, that might not be enough to stop the Fiat-Chrysler juggernaut, which is in full comeback mode amid market growth and a slew of new models set to hit the markets in 2016.
Fiat is in a sharp comeback mode, having grown by some 17% in key European markets. Across the Atlantic, however, the almost Samson and Goliath-proportioned battle for U.S. market share between Fiat and Volkswagen is starting to get bad for the Wolfsburg company. The Dieselgate scandal, in fact, has translated into 24.7% fewer sales for the German company, putting it out of the competition for the top five American automotive players, which are Honda, Toyota, Fiat, Ford, and GM (not listed in order).
In the United States, Fiat sold 175,974 cars in November under the Chrysler, Jeep, Ram, Dodge, Fiat, Maserati, Alfa Romeo, Abarth, and Ferrari brands. (Source: “US auto sales hit 14-year high in November,” CNBC, December 1, 2015.) Ford registered 187,794 vehicles in the U.S., growing by 0.4%. General Motors, however, has delivered 229,296 vehicles of various brands, including Chevrolet, Buick, GMC, and Cadillac, growing two percent. However, in growth terms, Fiat is the one that has grown the most year-over-year, with an increase of three percent.
On December 4, the Fiat board members are expected to vote in favor of Ferrari NV (NYSE:RACE) stock’s spinoff, which in the order of things, is the second step on the path to its full independence after listing on Wall Street last October. The third and final step will be the distribution of Ferrari stock to Fiat shareholders in January. By the end of that month, according to Marchionne, who is both president of Ferrari and CEO of FCA, “you will see the true value [of Ferrari].” (Source: “Ferrari: Marchionne, vero valore si vedrà dopo spin-off,” Il Sole 24 Ore, November 30, 2015.)
In 2014, Ferrari sold 7,255 models, with revenues of $2.76 billion and net profits increasing to $65.0 million, up from $54.0 million a year earlier. Sales may gradually increase, but “always one less than the market wants,” explained Marchionne, concerned to maintain the exclusivity of the brand. (Source: “Ferrari divorzia da Fca. E si indebita per fornire cassa alla casa madre,” La Repubblica, December 2, 2015.)
The Bottom Line on Fiat
Ferrari stock is now worth around $48.00, about 13% lower than its initial public offering (IPO) debut price. In addition to the proceeds from the IPO, which came to almost $900 million, Ferrari announced the signing of a credit line totaling €2.5 billion on Monday, 80% of which will be used to refinance debt to Fiat and for other business needs. However, aside from the financial technicalities, the loan and the Ferrari spinoff have a direction and a strategy: they will contribute to Fiat’s ambitious $48.0-billion business plan.
As Ferrari’s horse starts to gallop alone in 2016, Fiat’s next move could herald Marchionne’s plan towards a greater consolidation in the auto industry and it is well known he has “courted.”