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Wrong lane

14 January 2013 By Antony Currie

Fiat Chief Executive Sergio Marchionne seems to want Chrysler to be the most undervalued automaker. That’s the implication of his latest offer to buy a slice of the Motown manufacturer from the United Auto Workers’ retiree healthcare trust. Marchionne has put $198 million on the table for 3.3 percent, valuing 100 percent of Chrysler’s stock at $6 billion. It’s worth much more.

The Fiat boss says the offer follows from the agreement struck with the UAW trust in 2009 when the U.S. government divvied up ownership after bailing Chrysler out. Fiat took control, now owns 58.5 percent, and wants to fully integrate its American subsidiary. Marchionne’s price, though, assumes the deal contained a clerical error pegging any acquisitions from the trust to Chrysler’s performance. He says that should have referred instead to Fiat which, like other European automakers, is suffering.

The trust, which owns the other 41.5 percent of the carmaker, has rejected the offer and asked Fiat to prepare to sell up to 16.6 percent of Chrysler on the open market. If that’s a ploy to establish a higher valuation, it should work. Marchionne’s offer values Chrysler at just four times his own expectation of the company’s 2012 net income. General Motors, meanwhile trades above nine times expected earnings for last year, and Ford’s multiple is just over 10 times.

The Fiat proposal also pegs the enterprise value of Chrysler at $6.7 billion, scarcely more than the company’s $5.5 billion of potential EBITDA in 2012 if the first three quarters are anything to go by. Ford’s EV-to-EBITDA multiple is over five times; GM’s is just 2.6 times, partly thanks to $20 billion of net cash. That makes Marchionne look mighty cheap.

Granted, Chrysler’s two rivals are more profitable. Ford regularly cranks out a pre-tax margin above 10 percent in North America, with GM’s around 8 percent. Chrysler managed just 2.7 percent in the first nine months of last year. Both also have more cash than debt, allowing Ford to double its dividend last week and GM to buy back a chunk of shares from the U.S. Treasury. Chrysler, meanwhile, has $700 million of net debt.

But the Detroit number three is a purer play on the recovering U.S. market, and it isn’t burdened with a big money-losing European operation. And Chrysler is growing, with sales up 21 percent last year as it gained market share. Suppose, then, that Chrysler is worth at least seven times 2012 earnings, or $10.5 billion. That would mean Fiat needs to up its offer by 75 percent. Considering the European industry environment, the Italian group’s parsimony is understandable – but it’s misplaced.


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