Fiat Shareholders Approve Demerger Plan

Fiat SpA has announced that it has passed another milestone in its plans to demerge its industrial operations from its core light-vehicle manufacturing business. Following an extraordinary shareholder meeting in Turin (Italy) yesterday, the automaker said in a statement that it had won approval from its stockholders for the move, which would see it spin off its truck-making business Iveco, agricultural machinery unit Case New Holland (CNH), and the heavy powertrain business of Fiat Power Train (FPT) from the group into a separate listed entity known as Fiat Industrial. The move would see shareholders receive one share each in Fiat Industrial and the newly light-vehicle-focused Fiat SpA in return for one share in the current entity. Regulatory approval is set to be applied for by the end of September, according to Fiat chief executive officer (CEO) Sergio Marchionne, who spoke to reporters after the meeting yesterday. He added that approval is expected to be secured by the end of November. This would in turn result in the split being completed by 1 January 2011, with stock starting trading on the Milan stock exchange two days later. The Wall Street Journal (WSJ) reports that Marchionne also stated that the new companies would share the current industrial debt levels equally, amounting to around 2.5 billion euro (US$3.26 billion), while 9 billion euro of the group's current bonds would be held by Fiat, with the remaining 2 billion euro going to Fiat Industrial. The senior executive also added that there would be management changes on both the industrial and auto-making sides of the business and that these would take place during the next three to four months.

Marchionne was quoted by Associated Press Newswires as saying during the event that, "From an industrial and financial point of view, this is the only way to assure to each business the best strategic development…It is a solution that responds to the logic of growth, of autonomy and efficiency. The two groups that emerge from the demerger will have the maximum freedom of movement, also in the case of future alliances." He then added to journalists: "Fiat Auto finally can choose its destiny without worrying about the impact it will have on CNH and Iveco…It is a great day for [Fiat] Auto."

Fiat chairman John Elkmann also stated: "The assembly will give life to two strong Fiats, with ambition and goals that the people who work here are ready to realise."

On a related note, Marchionne also told Automotive New Europe (ANE) after the event that Chrysler could undertake an initial public offering (IPO) during 2011, stating, "I don't think it's the first part; I think it's a second part of the year event." He also said that Fiat could receive its latest 5% stake in the U.S. automaker by the end of this year as a result of it beginning production of the Fiat 500, saying that this would fulfil "the first of our three obligations to grow our stake to 35%". However, the senior executive, who is also CEO of Chrysler, added that he is not particularly worried about when the automaker receives its 5% instalments, stating, "What is important to me is to reach the goals we are set [on] reaching; share transferring is just a consequence of the fulfilling of our obligations with the U.S. and Canadian governments."

Marchionne was also asked by the trade publication about Fiat's stake in Ferrari, following a report earlier this week suggesting that the automaker was looking at acquiring a 5% share in the sports-car manufacturer from Abu Dhabi-based investment fund Mubadala (see Italy: 16 September 2010: Fiat Asked for Further Details on Debts by Regulator, Eyeing Larger Ferrari Stake—Report). He said it was "natural" for Fiat to return to its 90% ownership of Ferrari, but stated that it was looking for a "creative way to return to 90% without hurting our very good relationship with Mubadala". Marchionne was also asked about the possibility of a Ferrari IPO taking place before 2014, and although he said that such a plan is not currently on the agenda, he added: "On such a long time frame, I cannot exclude anything."

Outlook and Implications

This is the latest step in a process first announced in April as part of Fiat's five-year strategy (see Italy: 22 April 2010: Fiat Reports Q1 Net Loss, Announces Demerger of Industrial Units). It has already passed other milestones such as agreeing financing for the move from financial institutions and securing the approval of the board, and the omens for a completion of the deal by the end of this year are good. As previously mentioned, the move would ensure independence for each new entity. Other than the basic commodity synergies that would remain in place following the demerger, the two units would share very little. The move would also be likely to unlock greater value for shareholders and allow each unit to take advantage of the differing earnings cycles, market volatility, capital requirements, and returns on capital employed. The company anticipates that without the units to be spun off into Fiat Industrial, the automaker will see an increase in its sales revenues from less than 32 billion euro this year to 64 billion euro by 2014, if it achieves its targets, with a rise in its trading margin from 2.0% to 7.2%. Fiat Industrial is also expected to see a great improvement in its fortunes, with its revenues expected to grow by around 50% from 2010 levels to around 29 billion euro and its trading margin increasing from around 3% to over 11%. The move is also ultimately likely to lead to an increasing closeness between Fiat's automotive operations and Chrysler in the longer term, with Marchionne expecting the creation of a business that will eventually produce 6 million units per annum (upa) on shared architectures and utilise the strengths of each group to create a stronger entity.

Although Fiat's shareholders have been convinced by the plan, there are others who are not so easily swayed. Yesterday's meeting was marred by protests from the independent CUB union outside the Fiat headquarters in the city, with members stating that the move would effectively see the shift of Fiat to the United States, adding that the company had not maintained its promises to workers. However, CISL union Raffaele Bonnani told ANSA English Corporate News Service that the demerger would not change union relations with Fiat. He added that, ''The real problem is how much they will invest. That is, whether they will confirm the promised 20 billion [euro] for factories in Italy. If they hive off the groups without making investments, then that is in fact negative, but if they confirm their investments then this is a very understandable rationalisation in my eyes''. Fiat is looking to the unions to agree to concessions before it agrees to investment in the light-vehicle business in the country. The success of the split is partly likely to depend on this and talks are undoubtedly set to restart soon.