CHRYSLER’S IPO: ARE WE SUPPOSED TO TAKE THIS SERIOUSLY?

9/24/13

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.

MARCHIONNE’S MERGER PLANS: THE SPEED AND MUSCLE OF AN SRT 8, THE AGILITY OF A GIULIETTA…AND PLENTY OF FERRARIS FOR WALL STREET

5/25/13 

This weekend’s (i.e., 5/25-5/26/13’s, page B1) Wall Street Journal featured an article “Fiat Chief Pulls Out the Deal Wrench,” on a topic I’ve been dealing with extensively for at least the last month or so, to wit

CHRYSLER’S QUARTER:   HOW DO YOU SAY “POOR MOUTH” IN ITALIAN? 5/1/13

and

IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13

The Journal emphasizes the complexity of Chrysler and Fiat CEO Sergio Marchionne’s plan to merge Fiat and Chrysler and take the company public on a U.S. exchange.  Indeed, this is a complicated deal.   In grossly simplified terms, Mr. Marchionne and his colleagues must

• Buy out the voluntary employee beneficiary association’s (“VEBA”’s) 41.5% stake in Chrysler.  Estimates on the value range from $1.75 b to $4.27 b.   Not only is that quite a spread (and probably serves as a useful proxy for the bid/asked), but final determination hinges in part on an upcoming court ruling.
• Arrange financing to do the above, or use cash.  But if the company eats into its $14.4 billion cash pile to buy out the VEBA, it imperils it credit rating and strains its development budget; designing and building cars isn’t cheap.
• Merge the operations of the two companies; this step is for the most part completed
• Do an IPO of the merged company on a U.S. exchange to raise cash but, more importantly, to establish a higher market valuation (largely because U.S. car companies trade at higher multiples than European car companies) and thus afford the new company greater financial flexibility.
• Raise some money from the IPO and as a result of the heightened financial flexibility to refinance the $2.9 billion in debt Chrysler incurred to repay the U.S. government and $3.2 of other bonds.  These issues must be refinanced because they both contain covenants restricting the transfer of cash from Chrysler to Fiat.  Any debt used to buy out the VEBA would also be refinanced, presumably at or about this time.

Phew!  And that’s a SIMPLIFIED explanation.

As I have argued in my 4/25/13 post, however, at least as daunting as the deal’s complexity may be its timing.   If Mr. Marchionne moves in the very near future, he may be buying into what has been a very ebullient market for U.S. car company stocks.  (See my 5/23/13 piece, THE CAR SALES BUBBLE:  “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME” for further elucidation on this topic.)   If he buys rich, he will have to move very quickly to do the IPO to avoid selling cheap; to use two trite analogies, he appears to be playing a game of hot potato or musical chairs and wants to avoid getting burned or being left without a chair while holding an expensive Chrysler stake.  If many of the Street analysts are correct, however, and the U.S. car stocks are cheap, as they appear to be based on those analysts’ earnings estimates, there is no concern here.   Gulp.

Further, if Mr. Marchionne is unable to talk down the value of the VEBA stake in Chrysler (See my 5/1/13 post.) and goes ahead and buys rich, not only will he have to move quickly with the IPO, but one would think he would like to make the IPO larger than a symbolic, price establishing issue in order to reap the benefits of a rich price.   Doing so, however, would make it difficult to make the new shareholders happy.

Then we still have the issue of Chrysler’s product line; see my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!, which will take plenty of skill, and money, to get up to the standards set by Chrysler/Fiat’s competition.

So Mr. Marchionne’s plans require skill, speed, timing, and luck.  Doubtless Wall Street will get rich on these plans.  But enriching Fiat’s shareholders, and Chrysler’s new shareholders will strain even the formidable skills of Sergio Marchionne, the auto industry’s current man of the hour.

CHRYSLER’S QUARTER: HOW DO YOU SAY “POOR MOUTH” IN ITALIAN?

5/1/13

Chrysler announced on Monday that its first quarter profits dropped 65% on a year over year basis.   Chrysler, and Fiat, CEO Sergio Marchionne attributed the quarter’s troubles to the extensive down time and retooling costs necessary to revitalize the Chrysler product line.   (See my 1/31/13 post, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!)

More instructive for those of us who have been following Fiat’s desire to buy the 41.5% of Chrysler it doesn’t already own from the UAW Retiree Health Care Trust (“Trust”) (See my 4/25/13 post,  IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8) is the spin Mr. Marchionne put on the quarter and on the heavy burden that upgrading Chrysler’s not ready for prime time product line has placed on the company.  Note some of his comments on the quarter:

--“not so glorious”

--“It wasn’t painless.   It should not have caused the disruption that it did, but it has.”

--“We need to get everything right between now and (year end, if Chrysler is to hit its full year profit target of $2.2 billion.)  There is not a guy in this house that thinks this is going to be a walk in the park.”

--“The amount of investment we’ve made in some of this industrial infrastructure is unusual for any car maker.   We’re redoing body shops and paint shops all over the place.”

This could simply be a case of Mr. Marchionne displaying some of his characteristic  candor.   However, given that he is trying to buy from the Trust the 41.5% of Chrysler that Fiat doesn’t own, and that he would like to do so, naturally, as cheaply as possible (Again, see my very instructive, nearly instantly seminal 4/25 piece.), it sounds like Mr. Marchionne is talking his position; i.e., short 41.5% of Chrysler.

On another, only ancillarily related note, I recently requested and received the brochure for the Chrysler 300, the car that yours truly has long lusted after but will probably never own due to its lack of a manual transmission.   The brochure is possibly the coolest car brochure I have ever seen and, believe me, I have seen plenty of such brochures over the years.   The faint, unlabelled map of Detroit on one cover and New York on the other, the great shots of the cities of Detroit and New York inside, and the car itself made reading the piece a genuine treat.   You might want to check it out.  

This brochure goes hand in hand with Chrysler’s, for the most part, terrific advertising and marketing campaigns for most of its products; see my 2/7/11 post on the Insightful Pontificator entitled “THIS ISN’T NEW YORK CITY, OR THE SECOND CITY, OR SIN CITY, AND WE’RE CERTAINLY NO ONE’S EMERALD CITY”.   Further, if every Chrysler product were as competitive (terrific, really) as the Chrysler 300, Mr. Marchionne’s only problem would be the astronomical price he would have to pay the Trust for the piece of the Chrysler action Fiat doesn’t already own.

IMPORTED FROM DETROIT: MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8

4/25/13

This morning’s (i.e., Thursday, 4/25/13, page B1) Wall Street Journal reports that Fiat is considering buying from the UAW Retiree Health Care Trust (“Trust”) the 41.5% of Chrysler Fiat doesn’t already own, effectively merging the companies.

The idea seems to make sense…use Fiat’s cash horde to buy out the Trust, merge the companies, do an IPO of the new company and list it in the States (presumably on the New York Stock Exchange) and get a higher valuation as a U.S. car company than Fiat does as a European car company. 

There is a problem here, though.   Fiat’s $14 billion cash horde would be run down considerably by buying the company; Fiat would be left with about $10 to $12 billion after buying out the trust.  That sounds like a lot of money, but designing, manufacturing, and marketing cars is a capital and cash intensive exercise.   The bet is that money raised in the IPO, along with being able to borrow more cheaply as a presumably more financially sound merged company, would allow Fiat to replenish its cash horde.   To win this gamble, however, Fiat would have to show especially adroit market timing.

U.S. car companies, and their stocks, are doing quite well, thank you, of late.   European car companies and their stocks are not doing nearly as well, to say the least.   And to the extent the Big Two publicly traded U.S. car companies are having problems, those problems emerge primarily from Europe, for obvious reasons.   Given that GM and F are doing well, it would seem at this juncture that Fiat would have to pay the Trust top dollar for its stake in Chrysler.   Valuations on the stake range from $1.75 billion to $4.27 billion (How’s that for a spread?) and presumably will be settled in court, but one has to think that the final price tag for the stake, should this deal go through, will be much closer to the top of that range than to the bottom.

That would be fine for Fiat since it plans to turn around and sell some shares in the IPO and establish a higher valuation.   But the new company might have to move very quickly to effectively immunize itself buy both buying and selling at high prices.  

While I’m not the expert on the car companies and their stocks that I used to be, I get the distinct impression that both profits and stock prices are being artificially inflated by what I like to call Ben Bernanke’s war on the elderly, i.e., the artificially low interest rates designed to encourage spending, borrowing, and taking financial risk to solve a problem born of too much spending, borrowing, and financial risk.   (See, inter alia, my 1/29/13 post, BEN BERNANKE VS. THE DOLLAR AND THE ELDERLY.)  What industry, other than housing, benefits from lower interest rates more than the car business?   All this talk of pent-up demand and the age of the fleet has some surface validity, but you can be sure that if money were not so cheap and readily available for vehicle financing, and payments thus so low, people would be able to satisfactorily, and perhaps happily, drive their old cars for many more miles, given how well cars are built nowadays.  In other words, if financing cars were not so cheap and readily available, so called pent-up demand would stay pent-up.

So yours truly suspects that, once (if ever?) the low interest rate punch bowl is taken away, car sales will plummet.   And such sales may fall even if we are stuck in a Twilight Zone of cheap money more or less forever; even artificially juiced demand gets satisfied eventually and, the way cars have been selling of late, that day may come sooner than later.   So if the very talented and clever Fiat CEO Sergio Marchionne is to pull off this financial maneuver, he better move quickly.   He doesn’t want to pay a high price to the Trust for Chrysler and then be left holding the hot potato when car company valuations deflate; he has to buy at a high price and nearly immediately sell at a high price and/or borrow based on the higher valuations that result from an artificially inflated price.    

Also note that Chrysler may be especially susceptible to artificial inflation and to the resultant corrective deflation in car company prices because of the relative weaknesses in its product line.   See my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!   This situation is like anything else; a rising tide lifts all boats, but when the tide goes out, the leaky boats sink first.

I sincerely hope that Mr. Marchionne can pull this one off; Chrysler is one of the bedrocks of American industry, has a substantial presence in my home state of Illinois, and, as I recounted in my 1/31 piece, I may be a Chrysler owner again some day relatively soon.   But if this deal is done, Mr. Marchionne will be going in at a rich price and must move quickly to get out, or established, at a rich price.

CHRYSLER’S PROBLEM: IT’S (MOST OF) THE PRODUCT, STUPID!

1/31/13

The Wall Street Journal reported this (i.e., Thursday, 1/31/13, page B6) morning that “Chrysler’s Aging Cars Pose Hurdle.”  It seems that the Fiat miracle is taking more time, money, and effort than expected; while net income is increasing smartly at Chrysler, free cash flow over the next two years is expected to fall by half to $2 billion.  The primary reason for this relentless drain of company cash is the need to refurbish a tired and relatively sorry product line.

None of this comes as a surprise to my regular readers, who recall the following posts on one of this site’s precursors, The Insightful Pontificator:

“THIS ISN’T NEW YORK CITY, OR THE SECOND CITY, OR SIN CITY, AND WE’RE CERTAINLY NO ONE’S EMERALD CITY”, 2/7/11

WALTER P., LEE, AND ME?,  1/10/11

“UH OH, SERGIO…”, 7/3/10

“CAN THEY MAKE IT?  CAN THEY MAKE IT?”,  5/1/09, and

“WE ARE NOT AMUSED”, also of 5/1/09

The main point of those articles is that without good product, you don’t have a good company.   And Chrysler’s product has been wanting for years.   The Journal article has simply confirmed, and events and numbers have borne out, what my readers have known for years now.

Not all the Chrysler product is bad.   Jeep is selling briskly, and the Grand Cherokee is a hot and supposedly stellar product.  But the Grand Cherokee can’t be that good; its updated iteration was to be one of the eight new products Fiat/Chrysler’s CEO, the very capable Sergio Marchionne, wanted to introduce this year before money got too tight.  As I’ve said before, only Wall Street believes that the Jeep line is a great asset, probably because it is one of the few American brands that a Wall Street analyst would consider buying 

The Chrysler 300 is a truly great product, but that might be yours truly’s personal taste, and undying quest to find a product that would replace my long gone but still pined for 1990 Pontiac Bonneville SSE (aka “The Batmobile,” the last car with an automatic transmission that I truly loved), talking.   One of the few American sedans still available with a V8 (One of the others is the Dodge Charger, obviously another Chrysler product..), the Chrysler 300 is distinctive, powerful, safe, relatively fuel efficient, quiet luxurious, fun to drive, and a relative bargain.  And it’s a car that shows one means business.   But even the great Chrysler 300 is in a market segment characterized by (almost) equally great competition.   Still, if I ever get over what my friends and family deride as my manual transmission “fetish,” and start making some real money again, I’ll be driving one of these most testicular of automobiles.  But I digress.

The Ram pickup line also is a more than decent product, but still places third of three in its very competitive and profitable market segment.

Once one gets beyond Jeep, Ram, and the 300, one finds awfully slim pickings at Chrysler…and Mr. Marchionne knows it.   It is his urgent efforts to apply to Chrysler some of the product wizardry Fiat has displayed under his tutelage that are causing financial strain at the third of the Big 3.

One final, and somewhat personal, note:  the first of Mr. Marchionne’s efforts to produce some product fruit from Fiat’s purchase of Chrysler is the Dodge Dart, which seems to have fallen far short of expectations.   This Dart is built on the Alfa Romeo Giulietta platform and is supposed to ride and handle somewhat like an Alfa while providing a level of luxury, and an amount of room, beyond its competitors in the U.S. compact car market.   The car has, to put it only a bit too strongly, bombed, with poor sales and bloated inventories crowding dealer lots.   At first, the Dart’s problems were ascribed to the first few copies’ being available only with manual transmissions.   That problem was solved when Chrysler shipped subsequent, and much larger, batches of cars with slushboxes (i.e., automatic transmissions).  Still the car doesn’t sell.   Why?   Mr. Marchionne opined on Wednesday that there are too many variations and expensive features available of or on the Dart.

Mr. Marchionne is absolutely right.  Yours truly is interested in the Dart for the two reasons it isn’t selling:   It offers a manual transmission combined with some luxury features.  But I have all but given up my admittedly casual search for a Dart because I am confused by the baffling array of model combinations available and find that, when I have figured out what will meet my needs, I can buy a Honda Accord, which is one size larger and is, after all, a Honda, not a Dodge, for the same money.  At anything like the offered side, the otherwise excellent, or at least very good, Dart makes no sense.

However, if I could get a good enough deal on a Dart….

But it is difficult to prosper selling products nearly exclusively to people looking for, and insisting on, a great deal.