Saturday, 10 October 2015

Company Focus – Ferrari SpA – Prospective IPO

The news-wires having been buzzing of late reporting the time-line and expectations of the much vaunted Ferrari IPO. (The ticker nominated is 'RACE' on the NYSE, not the expected 'FRRI' and the firm to use a Dutch base, thus the NV suffix).

As part of FIAT Chrysler's own very ambitious expansion efforts - as described in the '5 Year Plan' (itself inferring the importance of China) – the decision has been to release and float 10% or so of the Modena based luxury sports-car maker.

Depending upon ultimate valuation of the firm – presently set at €12.4bn - the rationale is to gain approximately €1.2bn from the partial 10% divestment to help underpin the global hopes of the various mainstream brands. These span from the cornerstone of FIAT to its perceptual opposite Jeep, the two globally immediately relevant full vehicle range marques; with much in between from Alfa Romeo to Abarth to Chrysler.

[NB Alfa's JV with Mazda for its new small Spider illustrates FCA's specific hopes for constrained development costs whilst also gaining best-in-class engineering; and could potentially allow both the Italians and Japanese to continue to develop mutually advantageous models and potentially whole platforms].

Whilst Piero Ferrari and the Agnelli family retain their  holdings,  the remaining 80% of the Ferrari shareholding will be obviously retained within FCA's own share-hold structure. (Although this was 'marketed' in press reports almost as if it were a new gain!)

As with this 'new gain', Ferrari's window-dressing starts here.

The news of the this sent FCA share soaring, now up 28% or so over the last 10 days. However, behind what appears to be speculative, knee-jerk over-reaction.

But perhaps much more interesting has been the major difference of opinion between Ferraris old and new Chairmen, Luca Cordero di Montezemolo and Sergio Marchionne. The former argues that Ferrari should maintain a stance where Ferrari demand outstrips supply, so maintaining an exclusivity and high aspiration for potential buyers, whilst also keeping Ferrari wholly FIAT owned. The latter prefers to see production numbers rise from about 7,000 (7,255 in 2014) to 9-10,000 (by 2019) to satiate growing worldwide hopes, so as to fend-off potential substitutional sales (such as to McLaren), obviously views the increase in profit potential of 25%+ higher volumes, and with reported FIAT capitalisation needs at about €48b for his plan, views both the immediate income of a stake sale, and the ability to tap the markets for more autonomous Ferrari financing, as an optimum route.

[NB FCA very recently issued a convertible bond to the value of €2.5bn to aid that financing requirement]

It is suspected by investment-auto-motives that Ferrari (and Maserati) may well require independent finance routes so as to develop a new era business model. This could be said to be parallel to BMW's model for its i-series, in so much that its use of intensive carbon fibre has meant that it has sought to create a mid-manufacture supply chain, reaching from the sourcing of material to its industrial weaving through to component applications. Ferrari-Maserati may well be seeking to replicate that industrial model, one far removed from the FCA supply demands of mainstream vehicles.

However, whilst this is very probably the case for lightweight sports-cars and super-cars, a notion supported by CEO Amedeo Felisa's words about Ferrari staying sportc-car focused – unlike various rivals (eg Porsche, Jaguar) – this stance ultimately appears unlikely to remain over the medium to long term.

It seems very likely that Ferrari will indeed grow its vehicle portfolio into other realms, indeed be almost expected to as over time FCA releases more and more FRRI shares into the capital markets and Ferrari seeks direct debt financing. The business model then will be to grow, even if more sensitively than Porsche did with its leap-frog into SUVs with Cayenne. More likely is a Ferrari 4-door coupe, akin to VW Group's Porsche Panamera and mooted Bugatti Galibier and Aston Martin's Rapide. Indeed it appears that a 4-door 'FF' may well have been tailor made for a customer.

This approach then would allow Ferrari-Maserati to mix and match a broad range of architectures and components from within their own realm and from the broader availability of FCA.

Hence this IPO heralds a truly new era for Ferrari, as it at last gains greater independence.

Whilst publicly highlighting the “'legendary” status of Ferrari and the hope that it is viewed as a luxury goods company, not simply auto-maker, the personal views of the Agnelli scions (John and Lapo Elkann (and their more publicity shy sister) of exactly how they should like to see Ferrari develop have not been wholly expressed. This perhaps apparent with the departure of Codero di Montezemolo.

Since FIAT's original formation, and its major acquisition moves in the 1950s and 1960s, the Agnelli's have necessarily always had close relations with various Italian-centric and otherwise finance houses; so it come as little surprise that the mutuality of an IPO, gaining income for FIAT aswell as advisory fees and potential proprietary-trading for investment banks has possibly supported an IPO.

The investment banks which sought mandates are: UBS AG, Bank of America Corp, Merrill Lynch, Banco Santander SA, Mediobanca SpA and JP Morgan Chase. It appears that to curry a good relationship with various banks, FCA has preferred to spread the fee structures over a wide contingent.

The firm's EBIT earnings were €389m, on 7,255 cars, giving a per vehicle income of €53,618. This at a relative low point in the economic cycle, yet very probably boosted by the number of V12 cars sold.

It is hardly surprising then, that with the economic renewal of the west under-way, and what may be low-point trough in EM regions now reached, that the potentially strong global pull of the mid-term and beyond creates fertile ground of Ferrari's broad worldwide potential (as seen from Sports Cars to Theme Parks).

At a time when Formula One itself looks possible to undergo a new revolution under potential new ownership seeking greater American and Chinese attraction, it seems more than timely that the Agnelli scions and their bankers see a multitude of business and branding opportunities for the prancing horse. That said, there is a danger that future management, pushed by investors, start to view the great race horse that is Ferrari as a 'show pony'.

So as to avoid any such outcome, as stewards of the marque, they should constantly remind themselves of Enzo Ferrari and the words “Non ci credo!”. It must, in different ways, stay as relevant to those who comb 3rd world beaches, as to those fortunate enough to be at Pebble Beach.

Stop Press

The heavily over-subscribed 17.81m shares got underway as of 21/10/2015 at the high end of $52.00, so on a forecast P/E of x36, very high for automotive, yet on par to luxury goods companies on an EV/EBITDA of 11.2 (FIAT seniors sought). This issue will obviously be watched with interest to see whether in the short term the offer proves to be wholly advantageous to the seller, selling high into generally sombre markets, whilst those perhaps the more amateur retail buyers, happy to own the Ferrari name, experience any short term pain.