Fiat’s Marchionne gets auto deal of the century

May 3, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It may not look it at first glance, but Fiat’s Sergio Marchionne may have engineered the auto deal of the century. When the Italian automaker agreed to take bankrupt Chrysler into its workshop two years ago, it looked like a relatively risk-free, if out-of-the-money, bet on a turnaround: the U.S. government gave Fiat management control and a 20 percent stake — since increased to 30 percent — for nothing. Had Detroit’s number three proved unsalvageable, Fiat would have lost little but time spent.

Only now is it becoming clear how good a bargain Marchionne negotiated. The catalyst is Chrysler’s financial performance, which has now improved enough for it to be able to refinance the $7.5 billion of U.S. and Canadian government debt that kept the company afloat in 2009. Doing that allows Fiat to buy a 16 percent stake, for $1.3 billion.

On its own, that’s hardly a steal. It values the Motown manufacturer at $7.9 billion by using Fiat’s multiple of enterprise value to trailing EBITDA — a calculation stipulated in the 2009 agreement with the U.S. Treasury. As a standalone entity, Chrysler shouldn’t command such a sum. Using Ford’s multiple of 8.2 times 2011 earnings, for example, would value Chrysler’s equity at just $7.4 billion. And Chrysler only ekes out a 1.6 percent pre-tax margin — around a fifth of far-stronger Ford’s.

But overpaying is hardly a concern for Fiat. For starters, it got 30 percent as a freebie and should add another 5 percent later this year. Fold in the stake it’s paying for, and Fiat becomes the majority owner. That’s when the real juice should appear — from squeezing costs. Marchionne has doubtless found synergies already. But imagine if he can slash 3 percent, or $3 billion, of the two firms’ combined costs, just as Daimler and Chrysler promised when announcing their 1998 merger. That may even be too conservative: 18 months ago Fiat talked about saving $3 billion in purchasing costs alone by 2014.

Once taxed, discounted and capitalized, those are currently worth some $17 billion to shareholders — more than double Chrysler’s implied value. True, the car sector’s recent past (Fiat included) is littered with similar promises that never materialized. But with such a large margin for error, only extraordinary incompetence on Marchionne’s part can prevent turning the Chrysler deal into the industry’s shining exception.

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