Car news

31 October 2014

Fancy buying a bit of Ferrari?

10 per cent of the company is to be sold. Paul Horrell explains what that means…

Paul Horrell
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So, Ferrari is to be split off as a separate business from Fiat Chrysler Automobiles (FCA). And 10 per cent of it is going to be put up for sale as shares. That means you and I could, now, potentially own a chunk of Ferrari. Tempted?

Still, that does not mean that 'Ferrari is for sale'. The vast majority of the company will continue to be owned by same people as now - and that includes Enzo Ferrari's son Piero Ferrari. Subtract the 10 per cent owned by Piero and the 10 per cent being sold and you have 80 per cent. That 80 per cent is being distributed among FCA's existing shareholders. The biggest of which, called EXOR, is the Agnelli family company.

It hasn't yet been published exactly what voting rights the new shares will have, but it's quite likely that EXOR and Piero would still have 51 per cent of the votes between them. Little change then. On the other hand it's also a possibility that they wouldn't, and that the FCA shareholders who were given Ferrari shares would be allowed to sell them immediately... and then, say, VW Group could buy them. But that really is a very slim possibility indeed.

So why is this happening? First and most obvious, to bring in some much-needed cash. FCA plans some big investments, not least the planned revival of Alfa Romeo. The earnings of Fiat and Chrysler are barely sufficient to cover that.

But there's another reason for selling a slice of Ferrari. To find out what it's worth. You can never know the value of a company - or of anything unique - until someone buys it, or a portion of it. Any company boss has the duty to maximise the value of the shares. And that's the great talent of FCA's CEO (and now new Ferrari chairman) Sergio Marchionne. Most car companies are valued pretty low by investors, because they use up vast amounts of capital and return slim margins. That's why Marchionne spun off the industrial and agricultural machinery business Case New Holland - its high valuation was a windfall to shareholders.

Marchionne wants Ferrari to be valued as a luxury goods manufacturer, not as a car company. Typically, the likes of the Louis Vuitton conglomerate are valued a 10 times earnings, while car companies are much less. Now, remember that Ferrari makes 7000 cars a year, the rest of FCA makes four million. Yet here's the thing: if Marchionne is right, Ferrari would be worth as much as the whole of the rest of FCA - somewhere around £8 billion. The news of the Ferrari separation kicked FCA shares sharply upward, because FCA shareholders would get a slice of that Ferrari value.

He's probably being an optimist though. Although there is a huge financial value attached to the brand Ferrari as an abstract entity, the fact is the company is a lot more investment-intensive than, say, a fashion house that makes its cash from handbags, shoes and fragrance. And it's subject to far more costly regulatory compliance. A bottle of scent doesn't need expensive crash-testing.

But this share sale is the only way we'll know exactly how much Ferrari is really worth in 2014.

Oh and there's one other obscure, but vital, reason. FCA doesn't only get money from the share issue. As a better-funded entity it will also be able to borrow other money more cheaply on the bond market. (Currently the Japanese makers and Daimler and BMW's bonds carry much lower issue rates than FCA's). It issued a 2.5bn Euro bond only yesterday, so you can see how this matters.

So there you are: this is primarily about financial engineering of a large and complex corporation, less about the engineering of supercars. But still a significant milestone in the story of Ferrari.

Talking to Maranello people on and off the record, we hear that for the foreseeable future that Ferrari will continue very much on its current path. That's despite the recent departure of visionary chairman Luca di Montezemolo. Well, they'll be hoping to get the Grand Prix team into better shape, but the road car division won't change much.

Ferrari actually gets remarkably little engineering from its common ownership with FCA. There are hardly any shared components any more. There's little purchasing advantage. Ferrari is pretty much a sealed unit doing its own thing. Being formally separated off as a company wouldn't make a whole lot of difference to them.

And you might assume that a standalone Ferrari would eventually need a technical tie-up, just as Aston Martin now has with AMG-Mercedes. But remember Ferrari is a bigger engine maker than the number of cars it sells. It supplies Maserati with turbocharged V6s and V8s, which will soon amount to tens of thousands of engines a year.

But there are traps. For instance, at the moment Ferrari can get around corporate average fuel and CO2 targets by being part of FCA. If it weren't, it couldn't.

Also, because the Ferrari shares are to be listed on the New York stock exchange, there will need to be a lot more transparency. Including of the Formula One team. At the moment Ferrari keeps the finances of the team out of its published financial results. And the finances of Formula One in general have always been opaque, to say the least.

We could also speculate that Luca di Montezemolo may have been pushed out two weeks ago because he disagreed with this move. And his absence is critical. He was, in effect, the modern Enzo Ferrari. He was the source and the vessel of Ferrari's direction and strategy. His charisma carried huge weight with car buyers, staff and suppliers.

The new chairman is Marchionne himself, who doesn't have that same public profile and doesn't have that racing car heritage. The CEO continues to be Amadeo Felisa, but he doesn't see himself as any kind of figurehead and retires soon. It's likely the place will be run more like any other company, with all the implications of a duller and more collegiate management board that implies. Will insanely charismatic cars continue to emerge from such a place?

Still, I'd frame a share certificate and hang it on my wall. You?

Tags: fiat, ferrari, fiat chrysler automobiles

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