The Automotive News report hasn’t been confirmed, and a lot of details are still fuzzy. As I write this on Tuesday, it’s not even clear which Chinese automakers are interested.
But by looking at what we do know, including what we know about FCA from moves it has made over the last couple of years, we can see the outlines of what a deal might look like — and what FCA investors might reasonably expect from such a deal.
What we know about China’s interest in FCA
First, we know that China’s government has been encouraging successful Chinese companies to expand outside of China by investing in or acquiring foreign businesses.
We know (trust me on this) that the combination of FCA’s low valuation and huge, established U.S. presence makes it probably the most intriguing candidate for acquisition by a deep-pocketed Chinese automaker looking to buy a global automaker.
From Automotive News‘ report, we also know that at least one Chinese automaker has already made an offer for FCA. (It was deemed to be too low by FCA’s board and rejected.)
And we know that four of China’s automakers are said to have at least some interest in FCA:
- FCA executives recently traveled to China to meet with executives of Great Wall Motor Company (NASDAQOTH: GWLLY), according to the report. That company, which sold just over 1 million vehicles in 2016 under its own Great Wall brand, has reportedly been looking for a manufacturing site in North America.
- FCA’s joint-venture partner in China is Guangzhou Automobile Group (NASDAQOTH: GNZUF), often known as GAC. That joint venture has two assembly plants that build Fiats and Jeeps for the Chinese market. GAC also has joint ventures with other global automakers including Toyota and Honda. GAC and its joint ventures sold 1.65 million vehicles in 2016.
- Dongfeng Motor Group (NASDAQOTH: DNFGY) is one of China’s automaking heavyweights, having sold 3.16 million vehicles in 2016. In addition to its own substantial operations, it has joint ventures with Nissan, Renault, and Honda.
- Geely Automobile Holdings (NASDAQOTH: GELYF) is perhaps the most ambitious of China’s automakers. It sold a relatively small 766,000 vehicles in China last year — but it also owns Swedish automaker Volvo Cars, and is planning to enter the U.S. and European markets with a new vehicle brand developed in conjunction with Volvo, called Lynk & Co.
So which is the likely suitor? It could well be Geely — or could be any of the others, looking to emulate (or counter) Geely’s aggressive overseas-expansion moves.
What would FCA be willing to sell?
FCA’s brands include the old Chrysler Corporation’s brands (Dodge, Chrysler, Ram, Jeep) and the brands long associated with Fiat (Fiat, Alfa Romeo, and Maserati).
Fiat also owned a 90% stake in supercar maker Ferrari (NYSE: RACE) for many years — but Ferrari was spun off in late 2015. Today, Ferrari is publicly traded, and an investment firm created by the descendants of Fiat founder Giovanni Agnelli owns a controlling stake.
I think FCA’s spinoff of Ferrari might be instructive here. One of Automotive News’ sources raised the possibility that Alfa Romeo and Maserati might be similarly spun off, to separate them from FCA and keep them under the Agnelli family’s umbrella. (Or, put another way, to keep these old Italian brands under Italian control.)
I think that’s likely. To the extent that FCA CEO Sergio Marchionne and FCA’s board of directors want to sell the company, I think they’d prefer to sell everything but Alfa and Maserati (and the factories and facilities in Italy associated with the two brands).
I also think, given that FCA’s stock is trading at just 4.5 times its projected 2017 earnings despite yesterday’s run-up, that FCA’s board will insist on a price that includes a significant premium over the company’s current $19.6 billion market cap (possibly minus the agreed-on value of Alfa and Maserati).
If that’s how a deal ends up being structured, I expect current FCA shareholders to get a significant premium over current prices. But note that part of the payment might consist of stock in a new entity created to house a spinoff of Alfa and Maserati. (And the remainder of the payment might well consist of shares of the acquiring Chinese automaker.)
So what will this deal look like?
We don’t have anything like enough information to know for sure, or to even know how likely a deal might be. For starters, the fact that FCA’s board might like to sell all-of-FCA-minus-Maserati-and-Alfa as a single package doesn’t mean that’s what any of the Chinese suitors will be willing to buy.
But it seems clear that if a sale happens, FCA shareholders are likely to be rewarded. Beyond that, we’ll have to wait and see what happens.
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