FCAU - Fiat Chrysler Automobiles

[TwoCitiesCapital]

Nissan wants Renault to reduce stake to revive Renault-FCA deal talks

 

 

https://www.reuters.com/article/us-renault-m-a-fiat-chrysler/nissan-wants-renault-to-reduce-stake-to-revive-renault-fca-deal-talks-wsj-idUSKCN1US2N3

 

Good news! Great price!

 

Obviously nothing is guaranteed, but I like seeing the continued interest in getting a deal done after the very public break-up.

[chesko182]

"Fiat Chrysler, Peugeot Owner PSA in Talks to Combine

Combination could create $50 billion auto giant"

 

https://www.wsj.com/articles/fiat-chrysler-peugeot-owner-psa-in-talks-to-combine-11572373519?mod=breakingnews

[fareastwarriors]

"Fiat Chrysler, Peugeot Owner PSA in Talks to Combine

Combination could create $50 billion auto giant"

 

https://www.wsj.com/articles/fiat-chrysler-peugeot-owner-psa-in-talks-to-combine-11572373519?mod=breakingnews

 

 

https://www.reuters.com/article/us-fiat-chrysler-m-a-psa/fiat-chrysler-and-peugeot-in-talks-over-potential-50-billion-tie-up-idUSKBN1X90LF

[chesko182]

It's happening

 

Prior to the completion of the transaction, FCA would distribute to its shareholders a special

dividend of €5.5 billion, as well as its shareholding in Comau. In addition, prior to completion,

Peugeot would distribute to its shareholders its 46% stake in Faurecia. This would enable the

combined groups’ shareholders to equally share in the synergies and benefits that would flow

from a merger while recognizing the significant value of FCA’s differentiated platform in North

America and strong position in Latin America, including its market-leading margins in those

regions. It would also reflect the added value that FCA’s higher-end global brands Alfa

Romeo and Maserati would bring given their substantial development potential.

 

-3.7B EUR in estimated annual synergies

-looks like the premium is being given to FCAU?

 

https://ml-eu.globenewswire.com/Resource/Download/bbf558fa-9790-48c4-b1a6-ff987186a25e

[vinod1]

It is projected that 80% of the synergies would be achieved after 4 years. The total one-time cost of achieving the synergies is estimated at €2.8 billion.

 

1. It seems like an awfully long time to realize synergies. I am scratching my head as the rationale for the deal seems to be cost savings but those are far into the future.

 

2. Giving up 50% of the business including very well positioned Jeep and N.A. pickup trucks for undifferentiated mass market market in growth challenged Europe. Why? Does PSA have battery/electric vehicle technology that Fiat desperately needs?

 

Anyone have any background info on the new CEO?

 

Vinod

 

[chesko182]

I agree it will take time, but I think in an industry like this one integrations are very complicated so it sounds like they put out realistic targets. These are two very large companies, you can't expect them to realize synergies in year 1.  Fiat CEO said they tried to be conservative with these estimates. Nevertheless if it does playout it is likely to create meaningful value. At 80% of synergies with an 8x multiple you're talking about $26bn of shareholder value created. that's more than 50% of the current value at current share prices (of both the combined entities). Any sort of multiple re-rating is an added benefit on top of that.

 

The market is saying that Fiat is getting a premium (or the better side of the deal) - FCA stock is up ~20% while PSA is down ~15%. Fiat will payout a huge dividend and spinoff Comau which as I understand could be worth more than 2bn USD, so that's almost 40% of the market cap you're getting and then "RemainCo" will be 50% of the merged entity, so I don't think it's a bad deal. In the press release they basically say the deal is accounting for Fiat's North America/SUV strength as well as the premium value of Maseratti and Alfa. It seems to me like PSA is buying Fiat here.

 

I'm still  looking at the numbers and details but what I've seen so far the deal seems to make sense. As a combined entity, FCA is likely to finally make decent profits in Europe. Just look at PSA's CEO, Carlos Tavares, track record. He turnaround Renault (as COO), Peugeot and GM's European business (which been losing money forever) in basically a few months. It makes sense that he stays as CEO. Fiat dominates Brazil while PSA dominates Argentina. PSA wanted to get into the US (and an SUV strategy), so this is their way. PSA knows how to make money in small cars where Fiat has historically lost money. Fiat needs an electrification/hybrid strategy and is facing huge fines for not meeting emission standards in the future, which they now solve by merging with PSA. This deal to me is starting to look better than a merger with Renault.

 

The market may be skeptical as history is full of failed Auto OEM mergers, but if any two have a good track record here, it's FCA and PSA (Chrysler, GM Europe etc.) I think the synergies here on combining R&D, procurement, powertrain/vehicle platform investments etc are very real and realizable. This is really just following Sergio's playbook.

 

I think this also makes sense as a special situation/merger arb trade once if it becomes official (rumors are december).

 

Here's some good articles on the new CEO.

 

https://www.reuters.com/article/us-fiat-chrysler-m-a-psa-tavares/peugeots-turnaround-driver-tavares-faces-his-biggest-challenge-idUSKBN1XA2HJ

 

https://www.autonews.com/executives/how-tavares-turned-around-psa-and-gms-former-opel-unit

 

https://www.forbes.com/sites/neilwinton/2019/10/31/psa-fca-plan-merger-as-investors-applaud/#5d764e6160f6

 

Anyone else have thoughts please share!

[TwoCitiesCapital]

I like it. As pointed out, synergies are reasonable estimates and likely lower/longer than many expected due to commitments to keep headcount and factories.

 

A prolonged global slowdown could provide political coverage for more synergies, but what they currently have slated is not small. Particularly considering the EV of the combined companies after dividends.

 

The big winner here is Exor. Another $1+ billion in cash for liquidity/repurchases and a more diversified auto-unit that is likely to trade significantly higher in 5-years.

[orion]

What´s the value of Comau?

 

I think there are two numbers floating around. One is up to $2.3 billion ( https://www.bloomberg.com/news/articles/2018-11-26/fiat-is-said-to-weigh-robotics-arm-sale-for-up-to-2-3-billion ) and the other one is from the Renault-FCA merger proposal (" In addition, prior to closing, there would be a distribution of Comau’s shares to FCA’s shareholders or an incremental €250 million dividend if the Comau spin-off does not occur.")

 

 

[chesko182]

I saw the 250mm figure thrown around in different places these past couple of days, and it's most certainly wrong. Probably the confusion derived from the statement you mention which to me reads as: if a spinoff does not occur, shareholders would receive a 250mm dividend as compensation, but that doesn't mean the business is worth 250mm.

 

The components business (magneti, comau and teksid) did 10bn in revenues in 2017, 7.5bn of which came from magneti, so that leaves 2.5bn between comau and teksid of which teksid is very likely a smaller portion.

 

Owler cites revenues of 1.6bn USD for Comau which sound realistic and could prob be higher. At 10% EBITDA margin and 12X multiple would value it at just below 2bn. This does not seem like a stretch considering robotics is a pretty hot space right now and there's not a lot of public companies out there (ABB,KUKA,FANUC being the rest)

 

https://www.owler.com/company/comau

[NBL0303]

 

I think this also makes sense as a special situation/merger arb trade once if it becomes official (rumors are december).

 

 

What special situation/merger arb angle is most interesting to you? I.e. how do you think investors could play this?

[vinod1]

chesko182 - Thanks for your thoughts and links. Do not disagree at all.

 

Vinod

[chesko182]

It's official: FCA/PSA to combine in 50/50 merger of equals

 

Just running some quick math, FCA market cap (in EUR) is 21B, which will represent 50% of the combined entity and be entitled to receive a one time 5.5B special dividend as well as a 1.1B ordinary dividend. The combined entity will generate almost 170B in revenues and 14.7B EBIT including synergies. A 6.5 EBIT multiple would get you to ~100B market cap, or 50B for FCA shareholders vs the current 21B. Inclusive of the expected dividend payments, I'm getting to a ~2.6X return in roughly 5 years (to fully account for synergies), or 21% IRR. Not including Comau spinoff here, which is now expected to happen some time after the merger.

 

Another way to look at it is to subtract the dividend payments from the market cap and you're left with 14.4B post divs, and comparing that to the combined entity WITHOUT synergies and using a lower EBIT multiple (5X * 11B) gets you a market cap of 55B, or ~28B for FCA shareholders. That's double the amount of the market cap post divs. An important point I think is that FCA will be able to make such a big dividend payment because they will now be investment grade rated so they don't need to hold as much cash on the balance sheet. 

 

Anyone else have thoughts on how to think about this? Looks attractive to me.

 

https://ml-eu.globenewswire.com/Resource/Download/1f77d5a3-11bf-4362-87da-df612bdc8770

 

https://www.fcagroup.com/en-US/investors/events/FCA_PSA_Merger/PSA_FCA_Proposed_Merger_Presentation_Dec_18_19.pdf

[vpagano]

Quick and dirty, I had a similar approach getting to about $25 in value looking at the presentation and dealing with currency conversions, not perfect of course:

 

https://www.fcagroup.com/en-US/investors/events/FCA_PSA_Merger/psa_fca_proposed_merger_presentation_dec_18_19.pdf

 

- we know the combined pre-synergy FCF is 7.5B EUR and we know the blended FCF multiple of the two entities is 5.7x I believe, applying that gets us to $14.57/share for just the FCAU piece today

- $0.78 / share annual dividend

- $3.89 / share one-off dividend

- Comau? Let's call it worth $1B and take half or $0.32 a share

- Synergies: the big one - we know the eventual annual value is 3.7B EUR and we know the cumulative cost is 2.8B EUR. We also know they plan on getting 80% by year 4, or 3.0B. What I did was a 3.7B terminal benefit scaling from 0 to year 5, same with the cost, and then discounted back at an arbitrary 15% rate for a DCF of 17B EUR or $19B or $5.83 a share

 

Adding it all up about $25 per share in value today. The distributions coming help de-risk the big lever of operational execution over the next few years.

[RadMan24]

Possible, but no Sergio and you have to deal with the risks of integration. Which are nothing to sneeze at. It's not a slam dunk, it's in a horrible industry fraught with change, and I think the market will likely take a wait and see approach before valuations adjust.

[vinod1]

You guys are coming up with a value of about $35 to $40 in 5 years or about $25 now.

 

But, as per the new 4 year plan earnings are supposed to be €5.9 to €7.3 per share in 2022.

 

Even if (a pretty big IF) Fiat gets to only €5.0 ($6) and at 5 PE it would be worth $30 within 2-3 years. And arguable more.

 

So how is the merger more attractive than being standalone, given all the additional risks that come along?

 

Vinod

[rolling]

You guys are coming up with a value of about $35 to $40 in 5 years or about $25 now.

 

But, as per the new 4 year plan earnings are supposed to be €5.9 to €7.3 per share in 2022.

 

Even if (a pretty big IF) Fiat gets to only €5.0 ($6) and at 5 PE it would be worth $30 within 2-3 years. And arguable more.

 

So how is the merger more attractive than being standalone, given all the additional risks that come along?

 

Vinod

What story makes most sense?

1- fcau getting those earnings as a standalone

2- synergies and scale from merger

 

I think the 2nd one especially because:

A) option 2 does not exclude option 1 possibility (those earnings can go right and you still get 50% of those plus the extraordinary dividends)

B) estimated synergies do not include factory closings. If a recession comes, those "unplanned" synergies will materialize even if those 3.7B turn out to be lower. If a recession comes, least efficient factories will probably close.

 

So my take is: significant de-risking and higher (real) upside.

 

[RadMan24]

I mean, operationally, you will have a guy who turned GM Europe from a loss maker of 20 years to $1 billion EBIT in 9 months.

 

Carlos Tavares is the best operator in the business, now at the helm (in 12 months or so). It's worth to see how this plays out in my opinion.

 

 

 

[DTEJD1997]

Hey all:

 

FCAU came out with earnings the other day.

 

Seems to be a slight let down.  Apparently they were $.02/share off of what was expected and the stock promptly went way down.

 

Would be interesting to see/know the balance sheet and what the status is of the robotics division sale.

 

I think TSLA is sucking all the oxygen & attention out of the automotive area.

 

Anybody else still in FCAU or has everybody liquidated and moved to TSLA?

[rkbabang]

Hey all:

 

FCAU came out with earnings the other day.

 

Seems to be a slight let down.  Apparently they were $.02/share off of what was expected and the stock promptly went way down.

 

Would be interesting to see/know the balance sheet and what the status is of the robotics division sale.

 

I think TSLA is sucking all the oxygen & attention out of the automotive area.

 

Anybody else still in FCAU or has everybody liquidated and moved to TSLA?

 

I haven't sold FCAU yet to move to TSLA.  Maybe if TSLA ever hits $1000/share I'll sell FCAU and everything else and go all in.

 

[RadMan24]

FCF was underwhelming due to electric vehicle spend. 2021-2022 with merger synergies is what will propel this investment up. Otherwise, it’s a waiting gamw.

[DCG]

Stock is getting destroyed on the announcement that they're ceasing all production for now.

[TwoCitiesCapital]

Thinking about buying more but am curious - at this point can the boards cancel the aforementioned special dividends to shore up liquidity? I don't see the special dividend/merger up for vote on the docket @ the April meeting suggesting to me that they're already approved, but honestly would rather they both hold onto the cash for now and distribute at a later date.

 

Secondly, I know option strike prices aren't updated for "regular dividends" and are for "special" dividends. Does anyone know if an annual dividend qualifies as "regular" or "special" when it comes to adjusting options strikes?  Am considering rolling back into LEAPS to free up liquidity but want to understand what that means for the April dividend.

 

Thanks!

[ukvalueinvestment]

It was just a memorandum of understanding and, yes, I wouldn’t be surprised if dividends are cancelled in the medium term.

[nikhil25]

How are folks thinking about long-term effects to the auto industry?

 

The demand side will likely get deeply affected if a recession persists for a while since consumers will focus on cash preservation and avoid making big-ticket purchases. The supply side is obv affected with disruptions in the global supply chain and manufacturing facilities going offline. OEMs with financing arms will also see default rates go up.

 

That said, as countries recover from CoVid-19, part of me feels we might see an uptick in new car purchase intent. I'm assuming the lack of trust in public transportation (both safety and scarcity during times of need) might lead to an increase in demand from folks who don't own a car today.

[Edward]

How are folks thinking about long-term effects to the auto industry?

A horrible industry since the 70's. There are short-medium term opportunities such as:

https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/rno-renault-sa/

 

But otherwise I would avoid like the plague. It's that bad. Even in relatively "good" times.

 

When the industry consolidates significantly, maybe it would make a bit of sense, and even then it is still a hugely cash consuming, labor union happy, investor soul crushing industry. :)