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Morningstar | Fiat Chrysler Agrees to Sell Magneti Marelli to Calsonic Kansei; EUR 25 FVE Unchanged

No-moat-rated Fiat Chrysler has announced an agreement to sell its Magneti Marelli parts business to Calsonic Kansei, which is owned by investment firm KKR. The company said that the transaction value is EUR 6.2 billion but did not provide details on cash or the assumption of debt. The stock rallied only 4% on the news, a disappointing market reaction, since the EUR 6.2 billion price tag was better than market expectations but within our estimated range of EUR 5.9 billion to EUR 7.6 billion. Management expects the deal to be completed in the first half of 2019. In our opinion, Fiat Chrysler shares are already attractively valued, currently trading at a compelling 45% discount to our EUR 25 fair value estimate.

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' components group profitability and the overall improvement in the segment's 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, rightsizing operations, and economies of scale, with a range between 5 times to 9 times current-year estimated EBITDA.

The combination of Magneti with KKR's assets represents a solid opportunity to diversify its customer base and geographic exposure, optimize cross-selling opportunities, while bolstering economies of scale. Consequently, we had told investors that greater synergies might exist for KKR relative to other suitors, enabling the investment holding company to potentially pay a higher multiple than competing bidders.

We said in an Aug. 22 note that KKR might be willing to pay between 7 and 9 times EBITDA for Magneti Marelli, resulting in an enterprise value of between EUR 5.9 billion and EUR 7.6 billion. At a transaction value of EUR 6.2 billion, we estimate KKR paid 7.3 times on an EV/EBITDA basis, making a sale to KKR more attractive to Fiat Chrysler shareholders than the previously planned spin-off of Magneti Marelli.

KKR 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 we estimate Magneti generates roughly EUR 2.8 billion in revenue from Fiat Chrysler, 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.