Fiat pegs Chrysler as most undervalued carmaker
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Fiat Chief Executive Sergio Marchionne seems to want Chrysler to be the most undervalued automaker. That‚Äôs the implication of his latest offer to buy a slice of the Motown manufacturer from the United Auto Workers‚Äô retiree healthcare trust. Marchionne has put $198 million on the table for 3.3 percent, valuing 100 percent of Chrysler‚Äôs stock at $6 billion. It‚Äôs 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‚Äôs price, though, assumes the deal contained a clerical error pegging any acquisitions from the trust to Chrysler‚Äôs 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‚Äôs a ploy to establish a higher valuation, it should work. Marchionne‚Äôs offer values Chrysler at just four times his own expectation of the company‚Äôs 2012 net income. General Motors, meanwhile trades above nine times expected earnings for last year, and Ford‚Äôs 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‚Äôs $5.5 billion of potential EBITDA in 2012 if the first three quarters are anything to go by. Ford‚Äôs EV-to-EBITDA multiple is over five times; GM‚Äôs is just 2.6 times, partly thanks to $20 billion of net cash. That makes Marchionne look mighty cheap.
Granted, Chrysler‚Äôs two rivals are more profitable. Ford regularly cranks out a pre-tax margin above 10 percent in North America, with GM‚Äôs 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‚Äôt 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‚Äôs parsimony is understandable – but it‚Äôs misplaced.