Chrysler filed for an initial public offering (“IPO”)
yesterday, but the whole exercise is something of a sham. As loyal readers remember (See, for example,
my 4/25/13 piece IMPORTED FROM DETROIT: MARCHIONNE BETTER BE AS FAST AS ACHRYSLER 300 SRT8), Fiat and Chrysler CEO
Sergio Marchionne is trying to buy for Fiat the 41.5% of Chrysler that it
doesn’t own, which is currently is owned by a United Auto Worker (“UAW”) health
care trust. Then he plans to merge the
two companies, giving Fiat access to Chrysler’s cash and fully integrating the
two companies’ operations and financial statements. Once that merger is completed, Mr. Marchionne
would like to do an IPO of the new company.
The problem has been the price that Fiat would have to pay
the health care trust for its 41.5% stake in Chrysler. The trust wants $4.3 billion. Fiat wants to pay less than half that amount. The trust, trying to move things along,
insisted on filing for the IPO, hoping to put some pressure on Chrysler and
perhaps establishing a price for its stake in Chrysler. The smart money is indicating that the IPO
will be pulled when Fiat feels the heat, a price is established, or both, but,
at any rate, before the IPO is actually consummated.
A few thoughts come to mind.
First, today’s (Tuesday, 9/24/13’s, page A1) Wall Street Journal reports that Mr.
Marchionne is in an “awkward” position, having to go on a road show for the IPO
to persuade investors to pay big bucks for Chrysler while he is trying to buy
Chrysler for a lower, perhaps far lower, price.
But it is worse than that. As I
explained on 5/1/13
(CHRYSLER’S QUARTER: HOW DO YOU SAY “POOR MOUTH” IN ITALIAN?), even if the IPO is not done, Mr. Marchionne must first
argue to the health care trust that its shares are cheap and then, when the
Chrysler and Fiat are merged and he prepares to IPO the new company, he must then
persuade the public that the new company is worth far more, or at least more,
than the price Fiat paid for Chrysler would indicate. This is possible, but it certainly looks
like Mr. Marchionne will have to go on the road and tell investors that he
really hornswoggled the UAW. This is
not great labor relations and, in any event, would strain his credibility.
Further, as I said back on 4/25, Mr. Marchionne better move
quickly. Much of the “pent up demand”
we are seeing for cars is only pent up because money is so cheap. If and when the Fed decides that bizarro
world is not such a great place in which to live and interest rates return to
reasonably “normal” levels, whatever that is, the car market is in for
trouble. Perhaps, however, Mr.
Marchionne doesn’t have to move all that quickly; he only has to move more
swiftly than the Fed. If last week is
any indication, that shouldn’t be difficult.
Second, how much genuine effort are money managers going to
expend on this IPO if they believe it is all a dance designed to quicken the
negotiations between Fiat and the UAW health care trust? I’ve been out of the professional money
management business for a long time, and perhaps I am so hopelessly old school
(I hate using such trite expressions as “old school,” but this might be one
situation when the trite expression sounds better than the alternative, “old
fashioned.” But I digress.) that my
opinions matter very little. But I
wouldn’t be expending much time or expensive talent looking at an IPO that will
never come. If I were still in the
business and had any authority, I wouldn’t waste my shareholders’ money doing
the bidding of Mr. Marchionne and/or the UAW trust.
If the money managers’ hearts are not in this, how much real
price determination will be done?
Third, how does Mr. Marchionne legitimately argue that the
UAW trust’s stake in Chrysler is worth only a couple billion dollars? Perhaps, again, I am a troglodyte,
hopelessly out of touch with modern finance, but let’s look at simple multiples
of earnings, a quaint old concept that maybe they don’t teach at Harvard any
more.
Chrysler earned $1.6 billion in the twelve months ending 6/30/13 . Ford’s multiple of lagging earnings is about
11 times. GM’s multiple of lagging
earnings is about 13. Let’s agree, or at
least assume for these purposes, that Chrysler is neither Ford nor GM and assign
it a multiple of, say, 8 times. That
would make Chrysler worth $12.8 billion.
The UAW owns 41.5% of Chrysler.
That would make its stake worth $5.3 billion.
I must be missing something because the UAW is only claiming
its stake is worth $4.3 billion and the highly paid car analysts on Wall Street
value the company at $10 to $11 billion.
But even assuming those analysts are right, the UAW has it just about
right when it claims its stake is worth $4.3 billion. No coincidence that, but, again, I digress. So how can Mr. Marchionne say the UAW stake,
and by extension Chrysler, is worth only half that much? This is, to be sure, a negotiating tactic on
Mr. Marchionne’s part, but how can he keep a straight face when making this
argument?
Fourth, perhaps Mr. Marchionne can make such an argument
while resisting the temptation to burst into laughter because he knows what
yours truly and other car enthusiasts know…Chrysler’s product line is, er,
woefully lacking and Chrysler therefore will need to put a LOT
of money into product development. The
Chrysler Grand Cherokee is a big hit.
The new Dodge Durango is
quite a vehicle as well. The Ram pickup
line is pretty good…especially for a third place finisher in a three truck
competition. The good news ends
there. The Dodge Dart is something of a
disappointment and is not up to the competition…the Honda Civic, Ford Focus,
Toyota Corolla, and Mazda 3. As much as
yours truly salivates over the Chrysler 300, it and its cousin, the Dodge
Charger, are getting long in the tooth and are lagging the competition. Finally, Chrysler needs a lot of help in the
mid-sized car segment…the Chrysler 200 and the Dodge Avenger (See THE DODGE AVENGER: CHEAP AND WORTH EVERY PENNY, 6/4/13 )
are pathetic and sell well only because they are being virtually given away by
Chrysler dealers. No one mentions these
cars in the same breath as the Honda Accord, Toyota Camry, Ford Fusion, Nissan
Altima, or even the Chevy Malibu.
This “IPO” will be entertaining to watch…but not as entertaining
as the dance Mr. Marchionne will have to do to buy Chrysler cheap and then sell
it rich...before the car market takes a dive.
