EUR 850.00 For Business Accounts Only

Morningstar | FCA Updated Forecasts and Estimates from 27 Aug 2018

No-moat-rated Fiat Chrysler may be in discussions with KKR to sell its Magneti Marelli parts business according to a report in The Wall Street Journal. Automotive News picked up the story but also reported that a company spokesperson said that, "FCA is pursuing a plan to separate the Magneti Marelli business ... it will evaluate bona fide proposals for alternative transactions that may be in the best interest of the Company." In our view, the company statement does not preclude the possibility that Fiat Chrysler is currently entertaining a deal with KKR.

At this point, we see no reason to change our EUR 25 fair value estimate. There is very little detail for us to base a probability weighting on an estimated enterprise value of Magneti Marelli from unconfirmed media reports. If a spin-off of Magneti Marelli to shareholders were to occur as planned, the enterprise value of Magneti Marelli is already included in our fair value estimate, which would be split between the two separately traded stocks. However, we think that the Magneti Marelli assets would represent potential synergies combined with automotive supplier assets already owned by KKR, leading us to speculate that the investment firm may be able to offer a more attractive value than if the assets were spun-off to shareholders. Even so, in our opinion, Fiat Chrysler shares are already attractively valued, currently trading at a compelling 43% discount to our EUR 25 fair value estimate.

Fiat Chrysler has not reported Magneti Marelli segment information separately since 2015. However, the Magneti Marelli website says that 2016 revenue for the auto parts supplier was EUR 7.9 billion. Fiat Chrysler components group, which includes Teksid foundry operations and Comau industrial robots in addition to Magneti Marelli, had revenue of EUR 10.1 billion before eliminations and EUR 536 million adjusted EBIT for a 5.3% margin in 2017. At 4% annualized revenue growth (based on Fiat Chrysler unit volume growth since 2016 to our estimated 2018 volume) and depreciation at roughly 5% of revenue, we estimate that Magneti Marelli 2018 revenue will be around EUR 8.5 billion with an EBITDA margin in the 10% range based on prior years' profitability and the overall improvement in the components' group EBIT margin. Multiples of enterprise value/EBITDA paid in supplier acquisitions vary widely, depending on the acquirer's estimate of cost savings from revenue synergies, right-sizing operations, and economies-of-scale, with a range between 5 times to 9 times current year estimated EBITDA.

KKR already owns Calsonic Kansei and LS Automotive, which it bought in 2017 and 2018, respectively. Magneti Marelli looks like a good fit with KKR's existing assets. Magneti, Calsonic, and LS all have businesses in automotive electronics like human-machine interface, lighting, sensors, and electronic control units. Magneti and Calsonic both produce complete cockpits and emission control systems. While Magneti has roughly EUR 2.8 billion in Fiat Chrysler revenue, Calsonic, with annual revenue that we estimate at EUR 10.3 billion at current exchange rates, counts the Nissan-Renault-Mitsubishi alliance as its top customer at about 80% of total revenue. We estimate the much smaller South Korea supplier LS's revenue to be in the range of EUR 500 million with its largest customer being Hyundai/Kia.

The combination of Magneti with KKR's assets represents solid opportunity to diversify customer base and geographic exposure, optimize cross-selling opportunities, while bolstering economies-of-scale. Consequently, greater synergies might exist for KKR relative to other suitors, enabling the investment holding company to potentially pay a higher multiple than competing bidders. If our assumptions are accurate, KKR might be willing to pay between 7 and 9 times for Magneti Marelli, resulting in an enterprise value between EUR 5.9 and EUR 7.6 billion. In our opinion, this might make a sale to KKR more attractive to Fiat Chrysler than a spin-off to shareholders of the Magneti Marelli assets.