Marchionne's Fiat-GM merger plan may wait for Ferrari spinoff

MILAN (Bloomberg) -- While Fiat Chrysler Automobiles CEO Sergio Marchionne isn’t known for his patience, he’s likely to wait until next year before making a bid for General Motors after months of talk about the potential of a deal.

The spinoff of Ferrari SpA, which is slated for early 2016, could be the catalyst for Marchionne to make an offer for the U.S. automaker. Ferrari’s separation would raise money for the debt-laden company. The move is also key for the Agnelli family, Fiat’s dominant shareholder, which is keen to keep control of the Italian supercar maker.

Marchionne has been crusading for consolidation in the auto industry, including an April presentation called “Confessions of Capital Junkie.” He argues that automakers waste money by developing multiple versions of the same technology and so should merge.

He’s largely narrowed his focus to GM as a potential target because the two automakers share a multi-brand strategy and GM doesn’t have family shareholders to defend it like Ford Motor Co. GM and Fiat also have a shared history, almost combining a decade ago until GM bought itself out of the deal. Marchionne’s persistent chatter is seen as part of the plan to prod GM into a combination, while GM’s position has been that it’s seeking savings internally and doesn’t need Fiat.

“As a real poker player, Marchionne won’t settle for winning just one hand and getting Chrysler; he wants to go for the jackpot of merging with GM,” said Vincenzo Longo, a strategist at IG Group in Milan. “He’s luring GM investors with talk of multi-billions in savings before making a final push.”

Fiat is committed to spinning off Ferrari and has no plan to include it in a deal, people familiar with the matter said. The supercar unit wouldn’t contribute to cost savings from a merger, and the Agnellis want control of the maker of the $320,000 F12berlinetta sports car, said the people. Fiat declined to comment.

By contrast, the family is ready to have its 29 percent stake in Fiat diluted in a potential deal to expand the company, John Elkann, a descendant of Fiat founder Giovanni Agnelli and the head of the family’s business activities, told Bloomberg in a joint interview with Marchionne in October.

Ferrari control

Elkann, 39, hired Marchionne in 2004 to save Fiat from bankruptcy and plays a key role in what the outspoken CEO does. And for the next few months, the Agnelli heir has a lot on his plate after emerging as a deal-maker in his own right this year.

As CEO of the family’s holding company Exor SpA, he won a takeover battle for PartnerRe Ltd. and then swooped in for a stake in The Economist Group to become the 172-year-old magazine’s largest investor. Both deals should be closed by the first quarter of 2016.

After Ferrari’s planned initial public offering in October and subsequent spinoff, the Agnelli family will control more than 30 percent of the supercar maker’s voting rights, thanks to a loyalty shareholder program put in place by Marchionne.

In the meantime, the executive is stepping up pressure on GM, which said in June it had vetted and rejected his advances. In an August interview with Automotive News, Marchionne said he’s analyzed a merger of GM and Fiat and that the combined entity could generate $30 billion a year in cash.

He stopped short of saying he’d consider a hostile bid if GM doesn’t change its tune, but he alluded to being ready to strong-arm a deal.

“There are varying degrees of hugs,” Marchionne said in the Automotive News interview published Monday. “I can hug you nicely, I can hug you tightly, I can hug you like a bear.”

The Ferrari spinoff could generate more than 3 billion euros ($3.3 billion) for Fiat, including proceeds from the IPO and a 2.25 billion-euro cash payment from Ferrari. After that’s done, the company will have a more stable valuation to determine a potential offer. At the moment, Fiat has a market capitalization of $17.9 billion, compared with GM’s $46.1 billion.

Potential transaction

In an all-share transaction, without any premium, GM’s investors would currently get 72 percent of the combined entity. But Fiat’s value is going to be lower after the separation of Ferrari, which Marchionne expects to be worth at least $11 billion, boosting the ratio GM investors will get in a combined entity.

Regardless of the split, the Agnellis would likely end up being at least the second biggest shareholder in what could be the world’s largest automaker, a reversal from a decade ago. At the time, their wealth was tied to Fiat’s unprofitable auto business. Marchionne started to turn things around, with reluctant help from GM. In 2005, the U.S. automaker paid $2 billion to get out of a deal that would have forced it to buy Fiat.

“With the help of Marchionne, John managed to detangle the Agnelli family from the uncertainties of the car business,” said Giuseppe Berta, a professor at Bocconi University and the former head of Fiat’s archives. “A combination with GM will help John complete the reshuffle.”