Monday 6 September 2010

Companies Focus – Exor, IFIL & Agnelli e C.Sapaz – The 'Flaming Ferrari' effect on Dynastic investment planning and FIAT Auto's intended IPO.

As investment-auto-motives constantly voices: it is the ability to 'connect the dots' that represent short, medium and long-term issues that makes for deep intelligence and relative competitive advantage in both the identification of investment potential, and the formation of company strategy itself.

As such recent events could not have been more prosaic in weaving two stories together to provide an almost allegorical ethical tale.

Just at the time the time that Wall Street remonstrated that the endemic 'bonus culture' will no longer be as be deployed to lure employees (recognising the basic economics of staffing and managerial supply-demand dis-equilibrium), so the end of that era of excess is prophetically and demonstrably marked by the case of 5 Ferrari 458 Italia models suffering from vehicle fires in various worldwide cities.

The cause of the combustion was tracked down as a type of glue used to attach the wheel-arch liner to the body underside, which when exposed to “extreme temperatures” in use dripped onto the hot exhaust and created flame. [NB this chemical fixing was used as a substitute for the more normal mechanical fix].

The press were always bound to strike upon the headline 'Flaming Ferraris', which beyond a literal description of events, overtly alludes to the self-styled, self-named band of young stock brokers led by James Archer (son of novelist Jeffrey) in the late 90s who consumed the rum-cocktail. The juxtaposition of events could not have been prosaic even if written as a subplot into the current suite of popular financial-based books explaining the recent past. An allusion that could even lend a Daniel Steel air to the modest Vince Cable...though improbably leading to DaVince plot threads the size of steel cables! More likely is the obvious possibility that 'Archer the Younger' seize on the fortunate coincidence - it could not have been better scripted to evolve an infamous literary genealogical line.

However, beyond the literary conjecture, of rather more important nature is the impact of the 'Flaming Ferrari' events on the closely knit Italian dynastic clans of the Elkanns and Agnellis.

They of course have primary interests in FIAT SpA, the broad-spread conglomerate which has a plethora of interests from the FIAT-centric of: cars, trucks, agricultural and construction machinery, component parts, factory automation machinery, to aeronautical and popular Italian press. Both families' investment vehicles are 'Giovanni Agnelli e C. Sapaz' and 'IFIL', which control major shares in FIAT SpA (>30%) aswell as other national and international industrial, service and financial interests. As such John Elkann acts as Vice-Chair to both investment companies, as well as Chair at FIAT itself; after Luca Cordero di Montezemolo's recent resignation.

'Agnelli-Sapaz' essentially acts as the umbrella company, with a number of sub-holding companies working under its wing. Importantly, the previously 'once removed' Exor – under IFIL and in which John Elkann was closely involved – has now been directly 100% acquired by the parent company.

Thus as is the case for all investment holding companies, the role of Agnelli-Sapaz is to maximise the interests and synergies of its holdings; for directly both the families themselves and indirectly toward the 'Italian good'.

[NB. Critically, although obviously privately own, they are viewed as guiding investment lights – almost national champions. A factor which may increasingly gain attention as national economic pathfinders, as Italy's own Finance Minister Giulio Tremonti (at the Ambrosetti Forum) presently highlights the need for the country to re-structure, diversify its own industrial base and extend outside interests].

The 'Flaming Ferrari's' episode - and the necessary recall of all 1,250 458 Italia models - spotlights the probably need for improved quality measures at Ferrari and probably at Maserati, given their historical organisational, supplier-chain and assembly interdependence; even if Maserati notionally sits under Alfa Romeo division today.

Thus in effect a re-consideration of quality assessment across the board at Ferrari's home in Maranello, in Modena/Bologna for Maserati and given the extended Alfa connection and Alfa's own export drive intentions, into the design, build and inspection centres for that marque aswell.

[NB this would be seen as a necessary action by the FIAT board given the rumour of VW's interest in acquiring the brand so as to add vital engineering integrity to its “coure-sportif”].

Thus from the 'cause' of 5 or so separate events in the USA, France, Switzerland and China, the ultimate 'effect' may be a top-down re-evaluation of methods and participants for quality assessment. The methods being more stringent to ensure full process quality and the participants being necessarily independent to ensure time and cost pressures do not interfere with the core initiative of re-building FIAT's quality perceptions.

As such the Elkann's and Agnelli's are well ahead of the game given their diverse sector interests, specifically with interests in SGS Group – the Swiss based 'inspection, verification, testing and certification company'. Founded in 1878, SGS is recognized as a (perhaps 'the') benchmark assessor in quality and integrity, with 46,000 employees, and 1,000 offices and laboratories world-wide.

investment-auto-motives has undertaken basic desk research in reviewing the 'Agnelli-Sapaz' portfolio and noted that at the end of 2006 the sub-company of IFIL Investissements SA (based in Geneva) extended its 10% ownership, that portion presumably rolled-into Exor's current 15% stake-holding in SGS. (This stake only paralleled by the German Von Finck family holding).

Thus for some time the Elkanns and Agnellis have noted the growing importance of SGS Group as a credibility tool and ultimately international enabler for FIAT Auto.

However, the fact is - as seen by GM's increasingly demure IPO expectancy – that FIAT Auto may have trouble reaching its book-run MarketCap target, given the short time-line for its split from the newly created FIAT Industrials division. The well reported large number of postponed 2010 IPOs, plus the under-performance of those that have appeared and thereafter traded at typically 10-20% below launch price, has troubled corporations, book-running banks and of course investors seeking partial exits – such as 'Agnelli-Sapaz' and its affiliated investment companies.

Ferrari was always to be separated from the FIAT offering, maintained by Elkann as a separate family-esque entity; an action that makes total sense given this low point of the economic cycle and the continued commercial potential of the brand. But the interesting point here, is that potentially Ferrari could be the gate-keeper for SGS Group's trickle-down through FIAT, after first being proven via Ferrari application to create a workable quality control system: perhaps a hybrid of SGS methods and FIAT practice; attuned to different bias depending upon the application time-frame.

Thus Maranello – and by default 'Agnelli-Sapaz' could take a notional managerial fee to oversee SGS service application throughout Maserati and Alfa Romeo, thereafter possibly Abarth and FIAT cars.

At the end of the day, the high profile embarrassment of 5 'Flaming Ferraris' could conceivably help FIAT improve its consumer credentials at home and in time across the world; and in the meantime add a much needed addition to the liquidity feed of the family fund.

Such an arrangement should bring financial and practical reward to both FIAT and the Elkann & Agnelli tribes. But future FIAT Auto investors placed in institutionals and private funds should demand to know exactly what internal price in terms of Euros and managerial time absorption such a quality improvement regime will cost.

Moreover, given their undoubted interest in the Industrials side of the business, raise the idea that FIAT-SGS could viably create a new Industrials sub-division alongside Magnetti, Teksid and perhaps twinned to Comau, that adds a 'high-value' international income stream string to its bow.

Beyond the immediate fire-fighting at Ferrari PR, that is the real task Elkann and his team must attend.