Exor preference shares EXP IM
August 03, 2010 - 6:39pm EST by
xanadu972
2010 2011
Price: 12.13 EPS $0.00 $0.00
Shares Out. (in M): 233 P/E 0.0x 0.0x
Market Cap (in $M): 2,826 P/FCF 0.0x 0.0x
Net Debt (in $M): 253 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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Description


We recommend the purchase of Exor preference shares (EXP IM) which could ultimately be worth ~€21, representing ~75% upside from current prices based on a Fiat share price of €15 and a discount to the NAV of Exor's publicly listed holdings of 25%.  Various stub and capital structure arb positions could make some sense but we focused on capitalizing on the undervaluation of Fiat, Exor share price to its' NAV and Exor preference to ordinary shares. Despite recent appreciation, we believe that the shares still afford an investor significant upside.

 

NOTE - Market cap listed above is based on the preference share price.


Exor NAV

Held

Value

Value per Exor share

% upside to 25% discount to NAV in Exor

% upside to 25% discount to NAV in Exor preferred

Publicly listed investments

     

 

Fiat shares

325.94

€ 4,889

€ 20.99

 

 

Fiat preferred shares

31.08

€ 190

€ 0.81

 

 

SGS shares

1.17

€ 1,283

€ 5.51

 

 

Sequana shares

13.20

€ 143

€ 0.61

 

 

Juventes

120.93

€ 104

€ 0.45

 

€ 21.28

Total of publicly listed investments

€ 6,609

€ 28.37

38%

75%

Private investments

       

 

Cushman & Wakefield

 

421.5

€ 1.81

 

 

Other

 

61.2

€ 0.26

 

€ 22.83

Total of all investments

€ 7,091

€ 30.44

48%

88%

 

Thesis summary

  • At current share prices for Fiat (€ 9.89) and Exor preference (€ 12.14), an investor would pay € 2.60, netting out Exor's publicly holdings and Fiat's listed stake in CNH, for Fiat's automobile and commercial truck businesses which are worth over € 9 and should generate over € 3 per share in EBITDA in a pessimistic scenario.

 

Implied cost of Fiat shares

 

 

Exor pref share price

 

€ 12.13

less Exor's public holdings ex-Fiat

-€ 7.38

Exor pref residual cost

 

€ 4.75

 less Fiat's CNH stake

211.87

€ 1,414

-€ 1.11

Cost basis of Exor ex-CNH

 

€ 3.64

Shares of Fiat per Exor share

 

1.40

Cost per share of Fiat ex-CNH

 

€ 2.60

       

 

  • Discounts should continue to close for both the discount of Exor preference to ordinary (currently at 23% down from 40% 3 months ago) and discount of both to NAV.
  • Conglomerate discounts on Fiat and Exor should continue to diminish with the de-merger of Fiat, a rebound in Fiat's performance with economic stabilization and further evidence of corporate governance improvements at Exor. This would be especially true if Agco's publicly expressed interest in CNH were to lead to a bid.
  • Exor preference shares should trade close to parity with its' ordinary shares as investors take note that the Company is aggressively repurchase the preference class, ~2.5% purchase in the last 3 months. The Company treasury now holds over 12% of the preference class. 

Exor share buybacks

 

 

 

7/23/2010

Ordinary shares

Preferred shares

Savings shares

Treasury shares

holdings

3.440

9.250

0.341

13.031

 

2.2%

12.0%

3.7%

5.3%

5/21/2010

Ordinary shares

Preferred shares

Savings shares

 

holdings

3.014

7.4943

0.2296

10.738

 

1.9%

9.8%

2.5%

4.4%

2009

     

 

purchases

Ordinary shares

Preferred shares

Savings shares

 

 

2.98%

2.00%

0.22%

0.05%

 Background

            Exor is the Agnelli (founder of Fiat) family's publicly listed holding company formed out of the merger of IFI and IFIL in early 2009. Fiat has long been a substantial portion of the Net Asset Value, if not dominating it as it does now. The Company is substantially owned (over 51% of combined shares) and controlled by Agnelli descendents. However, the CEO and other executives are the significant decision makers as the Agnelli family takes a deferential stance towards executives whom they trust, especially at portfolio companies, evidenced by Marchionne's threat to leave Fiat had the Agnelli's lost control in 2005 (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azISsGbxSFPo) .

 Current valuation

            At current market prices, Exor preference shares have an NAV of publicly listed holdings 80% higher and a total NAV 109% higher (it is coincidence that current upsides are similar to our targets presented prior).

 

Exor NAV

Held

Value

Value per Exor share

% upside to NAV in Exor

% upside to NAV in Exor preferred

Publicly listed investments

     

 

Fiat shares

325.94

€ 3,325

€ 14.27

 

 

Fiat preferred shares

31.08

€ 190

€ 0.81

 

 

SGS shares

1.17

€ 1,283

€ 5.51

 

 

Sequana shares

13.20

€ 143

€ 0.61

 

 

Juventes

120.93

€ 104

€ 0.45

 

 

Total of publicly listed investments

€ 5,044

€ 21.65

40%

79%

Private investments

       

 

Cushman & Wakefield

 

421.5

€ 1.81

 

 

Other

 

61.2

€ 0.26

 

 

Total of all investments

€ 5,527

€ 23.72

53%

96%

Share classes

            The recent, extreme discount of preference shares to ordinary shares is unwarranted and was likely exacerbated by the unwinding share class arbitrage positions. After consulting Italian legal experts, we believe that Exor preference shareholders have adequate legal protections. Preference shareholders have an equal economic claim on the firm, but have priority in dividends and liquidations. Italian securities law stipulates that companies may not take actions that materially disadvantage one share class over another. Despite egregious past examples of unequal treatment, it seems Italian regulators have become more protective of minority shareholders (mentioned later). Despite not having a vote at the annual general meeting, Exor preference shareholders arguably have better voting rights for two reasons: 1. The Agnelli family controls over 50% of the ordinary share class making separate ordinary share class votes meaningless in many circumstances; 2. Preference shareholders have greater influence over an extraordinary shareholders vote, although this may not afford substantial protections. 

 

 

 

Exor management

In spite of mitigating factors, Exor investor's should consider the effects of management influence, namely corporate governance and capital allocation, within a company whose chairman and controlling shareholder representative (John Elkann) is a 34 year old heir to a multibillion €o fortune. However, former business associates and advisors paint a picture of a serious, motivated businessman who is driven by facts and trusting in his appointed executives. Exor's management team consists of individuals with significant experience in operating businesses and within capital markets.  In our discussions with the Company, management has reiterated the Company's stated principle of diligently compounding NAV utilizing its' patient, permanent capital. As far as economic incentive alignment, the Agnelli family has a lot at stake given its' ownership of 51% of Exor equity. We like the fact that both the Company and the Agnelli family are purchasing a greater percentage of the preference class.

Corporate governance

We believe that corporate governance concerns, although present, are mitigated by: 1. The Company's concerted effort to address and reduce conflicts (http://www.exor.com/uploads/683515-CORPORATE%20EXOR%20ING%202009%20internet.pdf ; http://www.exor.com/sito/procedure/en/EXOR_Related_party_transactions-English.pdf); 2. A completion of an IFI-IFIL consolidation which reduces conflicts; 3. Current pressure and undesired scrutiny from CONSOB (Italian securities regulator) on Exor; 4. New Italian regulations protecting minority shareholders such as new related party rules adopted in 2010.  In the context of corporate governance, two episodes warrant mentioning, an equity swap for Fiat stock executed in 2005 and the IFI-IFIL consolidation. Summarily, in 2005, IFIL and Exor executed an equity swap on Fiat to retain control of Fiat after dilution from convertible debt without triggering a mandatory bid for the entire company per CONSOB regulations (http://www.economist.com/node/5026856). We view this simply as a measure for the Company and the family to retain their Fiat legacies with limited cash resources, and do not view this as harmful to Exor/IFIL shareholders per se.


 In 2008, Exor was created by merging IFIL into its' majority shareholder (~70%) IFI whose only material asset were shares in IFIL. IFI had an unlisted class of ordinary shares and a listed class of preference ("preference") shares (which survive as the Exor preference shares), while IFIL had listed ordinary and savings shares. The controversial aspect was the choice of an exchange ratio of 0.265 which was a blend of: 1. The trailing 6 month ratio of IFI preference (now Exor preference) and IFIL ordinary ; 2. The ratio of NAV's between IFI and IFIL. Leonardo & Co. (a holding of IFIL's) and Goldman Sachs advised on the deal. Preference shareholders were unhappy about using the ratio of the trading prices as this incorporated the discount to NAV at which IFI preference shares traded. Had the ratio of NAV's been used the ratio would have been closer to 0.2. We are not overly concerned given that it could be argued that the preference share price discount appropriately reflected different rights and it would have been in the Agnelli's best interest to use only NAV values to the disadvantage of IFIL shareholders. We believe the outcome represented a middle ground.


Capital allocation

            Exor's capital allocation seeks to maximize NAV and outperform the MSCI World Index over a long time horizon by patiently deploying capital into businesses in an active manner to improve long term performance [check recent investments]. While our preference would be for a static portfolio to reduce uncertainty, the Company has made generally good investment decisions over the last 5 years with some notable exceptions like the purchase of a portion of Cushman & Wakefield in 2007.  Interestingly, the glacial investment pace is a reason cited by sellside analysts for their low opinion of the stock. We disagree with a view expressed by HSBC in July 2008: "IFIL missed the golden years of private equity (2002-2005) However, IFIL has not changed its business model from a traditional holding company into a private equity fund model." As mentioned, Exor has increased the rate of share buybacks, although admittedly we would like to see an even faster rate and the deployment of all investment monies into its' existing portfolio at half off.

Fiat

            As the value is driven by the discount of Exor preference shares, we will be brief in laying out our thesis on Fiat. A previous Fiat write-up covers some additional background.

  • Fiat is in the midst structural and operational changes which could create significant value and lead to a higher collective valuation of the company's assets:
    • Sergio Marchionne, Fiat's much lauded CEO, intends to continue dramatic operational improvements and cost cutting which he started in 2004 and which were partially derailed by the dramatic global recession of 2008 & 2009. In pointing out Marchionne's inability to meet his previous 5 year targets, many sellside analysts fail to mention the attenuating circumstances of a dramatic global recession and credit crisis.
    • Marchionne has extremely ambitious plans to increase Fiat's annual automobile sales from 2.2MM in 2009 to 3.8MM in 2014 which would contribute to the approximate doubling of Fiat automobile's revenue from ~€32bln to €64bln over the same timeframe. Getting less than half of this targeted increase could justify a stock price 130% higher without considering a potential Chrysler turnaround.
    • Fiat struck an extremely advantageous deal for Chrysler which will give the Company 200,000 in incremental car sales and €350mln in cost savings, conservatively. This doesn't include the potential 50-100% upside solely from a Chrysler turnaround through a potential 35% equity stake in Chrysler that Fiat received for nearly zero incremental investment.
  • With no growth and limited rebound, Fiat could be worth €16 assuming fairly conservative margins and multiples [Base case]. Getting even halfway to Marchionne's plan, Fiat could be worth €18-€30 (€25-€40 with a Chrysler turnaround) [Upside]. With the draconian assumption that the auto business is worth zero, Fiat could be worth approximately €5.
  • By year-end 2010, Fiat intends to break-up into 2 companies, Fiat automobiles and Fiat industrial. This separation should reduce the discount associated with Fiat's industrial segments being conglomerated with Fiat's lower-quality automobile assets.

Management

Fiat management centers on the exceptional operational and management talent of Sergio Marchionne. In speaking with contacts, he has wrung costs out of Chrysler in months that no previous operator had found. His enthusiasm for turning around Fiat and building a globally competitive company is apparent.

 

Valuation and financials

            Relative to Fiat circa the previous write-up, Fiat automobiles is significantly more attractive with a leaner operation and more exposure to Brazil. Our conservative base case assumes limited rebound in financial performance and marginal synergies from collaboration with Chrysler. Our valuation by segment is as follows:

Normalized Sum-of-the-Parts

Fiat auto

Maserati

Ferrari

CNH

Iveco

FPT*

Magneti

Revenues

€ 26,000

€ 500

€ 1,700

€ 10,000

€ 7,000

€ 5,000

€ 4,000

Approximate EBITDA

€ 1,820

€ 75

€ 408

€ 1,000

€ 630

€ 350

€ 280

Approximate EBITDA margin

7%

15%

24%

10%

9%

7%

7%

EV/EBITDA Multiple

3.00x

6.00x

8.00x

8.00x

5.00x

5.00x

6.00x

Value

€ 5,460

€ 450

€ 3,264

€ 8,000

€ 3,150

€ 1,750

€ 1,680

Value per share

€ 4.29

€ 0.35

€ 2.57

€ 6.29

€ 2.48

€ 1.38

€ 1.32

 

Teksid

Comau

Other

Revenue synergies

Cost synergies

2010 net debt

Equity in JVs

Equity value

Equity value ex-CNH

€ 600

€ 600

€ 492

€ 2,600

 

 

 

 

 

€ 30

€ 0

-€ 79

€ 390

€ 350

 

 

 

 

5%

0%

-16%

15%

 

 

 

 

 

6.00x

6.00x

6.00x

6.00x

6.00x

 

 

 

 

€ 180

€ 0

-€ 474

€ 2,340

€ 2,100

-€ 9,400

€ 1,500

€ 18,500

€ 10,500

€ 0.14

€ 0.00

-€ 0.37

€ 1.84

€ 1.65

-€ 7.39

€ 1.18

€ 15.73

€ 9.44

 

To support our revenue and margin assumptions, here are segment performance metrics for 2008 and 2009:

Segment data - 2009

Fiat auto

Maserati

Ferrari

CNH

Iveco

FPT

Magneti

Teksid

Comau

Other

Revenues

€ 26,293

€ 448

€ 1,778

€ 10,107

€ 7,183

€ 4,952

€ 4,528

€ 578

€ 728

€ 1,096

Approximate EBITDA margin

6.4%

15.6%

24.3%

6.5%

6.8%

6.7%

6.4%

2.2%

-1.8%

-7.2%

 

                 

 

 

                 

 

Segment data - 2008

Fiat auto

Maserati

Ferrari

CNH

Iveco

FPT

Magneti

Teksid

Comau

Other

Revenues

€ 26,937

€ 825

€ 1,921

€ 12,781

€ 10,894

€ 7,000

€ 5,447

€ 837

€ 1,123

€ 1,394

Approximate EBITDA margin

7.8%

17.6%

25.9%

11.1%

11.6%

7.3%

7.9%

8.0%

3.7%

-4.7%

 

 

 

In thinking about the optionality on the upside, we assume that Fiat achieves a lower percentage of Marchionne's goal with shortfalls deducting from margins at 15% incremental rate. Here are our assumptions as a percentage of TOTAL revenue (eg, 70% of 2014 is about halfway to the targeted increase):

 

These assumptions generate the following forecasts for the respective segments:

Fiat auto

2010

2011

2012

2013

2014

Revs

€ 32,000

€ 37,000

€ 38,250

€ 42,750

€ 44,800

Trading profit

€ 550

€ 900

€ 1,360

€ 1,875

€ 2,240

EBITDA

€ 2,900

€ 3,600

€ 3,688

€ 3,863

€ 4,020

Chrysler

2010

2011

2012

2013

2014

Revs (net)

€ 32,000

€ 35,100

€ 36,000

€ 36,000

€ 36,000

EBITDA (net)

€ 2,200

€ 2,808

€ 3,240

€ 3,240

€ 3,240

 

Fiat industrial

2010

2011

2012

2013

2014

Revs

€ 19,000

€ 22,000

€ 21,600

€ 22,950

€ 23,200

Trading profit

€ 600

€ 1,200

€ 1,710

€ 2,125

€ 2,560

EBITDA

€ 1,298

€ 1,764

€ 2,067

€ 2,487

€ 2,983

 

In valuation, we utilize 2014 estimates discounted back to 2010 at a 10% discount rate. We chose this method as we believe that significant upside in the stock rests on the relative success of Marchionne's plan.

 

 

 

 

 

 

 

Fiat auto

2010

2011

2012

2013

2014

EBITDA

€ 2,900

€ 3,600

€ 3,688

€ 3,863

€ 4,020

Fiat industrial

2010

2011

2012

2013

2014

EBITDA

€ 1,298

€ 1,764

€ 2,067

€ 2,487

€ 2,983

Chrysler

2010

2011

2012

2013

2014

EBITDA

€ 2,200

€ 563

€ 1,155

€ 1,435

€ 2,499

Total value ex-Chrysler

     

 

Total value

 

 

 

 

 

 

Present value of Fiat segments based on multiples of 2014 EBITDA

Fiat auto

2x

4x

5x

7x

10x

Value per share

€ 4.32

€ 8.64

€ 10.80

€ 15.12

€ 21.60

Fiat industrial

4x

6x

8x

10x

12x

Value per share

€ 6.41

€ 9.62

€ 12.82

€ 16.03

€ 19.23

Chrysler

2x

4x

5x

7x

10x

Value per share

€ 2.69

€ 5.37

€ 6.71

€ 9.40

€ 13.43

 

€ 10.70

€ 18.23

€ 23.59

€ 31.12

€ 40.80

 

€ 13.39

€ 23.60

€ 30.31

€ 40.52

€ 54.23

 

 

 

 

We valued the automobile business at 4x -7x  EBITDA multiple and the industrial business at a 6-10x EBITDA multiple which we believe are substantially justified as upside multiples given comparable company multiples over long periods of time. However, this admittedly translates into a 5-6% free cash flow yield assuming capex scales down with EBITDA on a 1 to 3 basis.

 

 

Average EV/EBITDA multiples

Average EV/Sales multiples

 

10 years

20 years

10 years

20 years

Ford

11.0x

10.4x

1.04x

1.04x

GM

10.3x

8.1x

0.79x

0.82x

Renault

11.1x

11.0x

0.87x

0.96x

 

Low

High

   

Fiat auto valuation (grayed)

4.0x

7.0x

 

 

 

 

Fiat industrial comps

Average EV/EBITDA multiples

Average EV/Sales multiples

CNH comps

10 years

20 years

10 years

20 years

Ceterpillar

13.1x

12.3x

1.69x

1.47x

Deere

12.9x

12.8x

1.57x

1.41x

Agco

7.9x

8.1x

0.58x

0.68x

Iveco comps

     

 

MAN

5.7x

5.7x

0.52x

0.40x

Scania

9.2x

9.7x

1.41x

1.40x

 

Low

High

   

Fiat industrial valuation (grayed)

8.00x

10.00x

   

 

 

Operations and competition

In the interest of brevity, we will touch on the critical Fiat automobile issues of low Italian capacity utilization and market share in Brazil and Italy, and will address the critical drivers of CNH. These are the principal issues which should drive performance. Fiat's ultimate operational goal is to drive up Italian plant utilization through the Company's growth plan. To the extent that this is not successful, Fiat will continue to clash with obstinate labor interests. We have been relieved by Fiat's recent tough stance with its' Italian base, threatening to not move Panda production without an agreement by labor unions and a public shaming that Italy is Fiat's only loss making operation. Brazil is now one of Fiat's largest markets where the Company has a leading passenger car market share at 24-25%. Fiat assumes deterioration in market share of close to 1%. Any surprising share losses or downturn in Brazil would dramatically affect financial performance. In Italy, Fiat Auto retains above a 30% market share in Italy. With a drop in subsidies, especially for CNG vehicles, we are hesitant to read much into a recent drop in overall sales and market share in Italy. North American and South American agricultural equipment are the critical divisions within CNH, given the size of their North American business and the expected growth in South America. It will be critical that CNH maintain its' top 2 presence in these markets.

 

 

 

Risks

Exor related

Pernicious treatment of minority shareholders through unequal share class treatment or improper transactions.

 

Destruction of value through ill-advised investment decisions

 

 

 

Fiat related

Increased investment in Italy without reaching appropriate terms with unions.

 

Slowdown or increasing competition in Brazil.

 

Severe Italian recession possibly precipitated by a debt crisis.


 

Catalyst

Continued repurchases of Exor preference shares.

Separation of Fiat automobile and Fiat industrial.

 

    sort by    

    Description


    We recommend the purchase of Exor preference shares (EXP IM) which could ultimately be worth ~€21, representing ~75% upside from current prices based on a Fiat share price of €15 and a discount to the NAV of Exor's publicly listed holdings of 25%.  Various stub and capital structure arb positions could make some sense but we focused on capitalizing on the undervaluation of Fiat, Exor share price to its' NAV and Exor preference to ordinary shares. Despite recent appreciation, we believe that the shares still afford an investor significant upside.

     

    NOTE - Market cap listed above is based on the preference share price.


    Exor NAV

    Held

    Value

    Value per Exor share

    % upside to 25% discount to NAV in Exor

    % upside to 25% discount to NAV in Exor preferred

    Publicly listed investments

         

     

    Fiat shares

    325.94

    € 4,889

    € 20.99

     

     

    Fiat preferred shares

    31.08

    € 190

    € 0.81

     

     

    SGS shares

    1.17

    € 1,283

    € 5.51

     

     

    Sequana shares

    13.20

    € 143

    € 0.61

     

     

    Juventes

    120.93

    € 104

    € 0.45

     

    € 21.28

    Total of publicly listed investments

    € 6,609

    € 28.37

    38%

    75%

    Private investments

           

     

    Cushman & Wakefield

     

    421.5

    € 1.81

     

     

    Other

     

    61.2

    € 0.26

     

    € 22.83

    Total of all investments

    € 7,091

    € 30.44

    48%

    88%

     

    Thesis summary

    • At current share prices for Fiat (€ 9.89) and Exor preference (€ 12.14), an investor would pay € 2.60, netting out Exor's publicly holdings and Fiat's listed stake in CNH, for Fiat's automobile and commercial truck businesses which are worth over € 9 and should generate over € 3 per share in EBITDA in a pessimistic scenario.

     

    Implied cost of Fiat shares

     

     

    Exor pref share price

     

    € 12.13

    less Exor's public holdings ex-Fiat

    -€ 7.38

    Exor pref residual cost

     

    € 4.75

     less Fiat's CNH stake

    211.87

    € 1,414

    -€ 1.11

    Cost basis of Exor ex-CNH

     

    € 3.64

    Shares of Fiat per Exor share

     

    1.40

    Cost per share of Fiat ex-CNH

     

    € 2.60

           

     

    • Discounts should continue to close for both the discount of Exor preference to ordinary (currently at 23% down from 40% 3 months ago) and discount of both to NAV.
    • Conglomerate discounts on Fiat and Exor should continue to diminish with the de-merger of Fiat, a rebound in Fiat's performance with economic stabilization and further evidence of corporate governance improvements at Exor. This would be especially true if Agco's publicly expressed interest in CNH were to lead to a bid.
    • Exor preference shares should trade close to parity with its' ordinary shares as investors take note that the Company is aggressively repurchase the preference class, ~2.5% purchase in the last 3 months. The Company treasury now holds over 12% of the preference class. 

    Exor share buybacks

     

     

     

    7/23/2010

    Ordinary shares

    Preferred shares

    Savings shares

    Treasury shares

    holdings

    3.440

    9.250

    0.341

    13.031

     

    2.2%

    12.0%

    3.7%

    5.3%

    5/21/2010

    Ordinary shares

    Preferred shares

    Savings shares

     

    holdings

    3.014

    7.4943

    0.2296

    10.738

     

    1.9%

    9.8%

    2.5%

    4.4%

    2009

         

     

    purchases

    Ordinary shares

    Preferred shares

    Savings shares

     

     

    2.98%

    2.00%

    0.22%

    0.05%

     Background

                Exor is the Agnelli (founder of Fiat) family's publicly listed holding company formed out of the merger of IFI and IFIL in early 2009. Fiat has long been a substantial portion of the Net Asset Value, if not dominating it as it does now. The Company is substantially owned (over 51% of combined shares) and controlled by Agnelli descendents. However, the CEO and other executives are the significant decision makers as the Agnelli family takes a deferential stance towards executives whom they trust, especially at portfolio companies, evidenced by Marchionne's threat to leave Fiat had the Agnelli's lost control in 2005 (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azISsGbxSFPo) .

     Current valuation

                At current market prices, Exor preference shares have an NAV of publicly listed holdings 80% higher and a total NAV 109% higher (it is coincidence that current upsides are similar to our targets presented prior).

     

    Exor NAV

    Held

    Value

    Value per Exor share

    % upside to NAV in Exor

    % upside to NAV in Exor preferred

    Publicly listed investments

         

     

    Fiat shares

    325.94

    € 3,325

    € 14.27

     

     

    Fiat preferred shares

    31.08

    € 190

    € 0.81

     

     

    SGS shares

    1.17

    € 1,283

    € 5.51

     

     

    Sequana shares

    13.20

    € 143

    € 0.61

     

     

    Juventes

    120.93

    € 104

    € 0.45

     

     

    Total of publicly listed investments

    € 5,044

    € 21.65

    40%

    79%

    Private investments

           

     

    Cushman & Wakefield

     

    421.5

    € 1.81

     

     

    Other

     

    61.2

    € 0.26

     

     

    Total of all investments

    € 5,527

    € 23.72

    53%

    96%

    Share classes

                The recent, extreme discount of preference shares to ordinary shares is unwarranted and was likely exacerbated by the unwinding share class arbitrage positions. After consulting Italian legal experts, we believe that Exor preference shareholders have adequate legal protections. Preference shareholders have an equal economic claim on the firm, but have priority in dividends and liquidations. Italian securities law stipulates that companies may not take actions that materially disadvantage one share class over another. Despite egregious past examples of unequal treatment, it seems Italian regulators have become more protective of minority shareholders (mentioned later). Despite not having a vote at the annual general meeting, Exor preference shareholders arguably have better voting rights for two reasons: 1. The Agnelli family controls over 50% of the ordinary share class making separate ordinary share class votes meaningless in many circumstances; 2. Preference shareholders have greater influence over an extraordinary shareholders vote, although this may not afford substantial protections. 

     

     

     

    Exor management

    In spite of mitigating factors, Exor investor's should consider the effects of management influence, namely corporate governance and capital allocation, within a company whose chairman and controlling shareholder representative (John Elkann) is a 34 year old heir to a multibillion €o fortune. However, former business associates and advisors paint a picture of a serious, motivated businessman who is driven by facts and trusting in his appointed executives. Exor's management team consists of individuals with significant experience in operating businesses and within capital markets.  In our discussions with the Company, management has reiterated the Company's stated principle of diligently compounding NAV utilizing its' patient, permanent capital. As far as economic incentive alignment, the Agnelli family has a lot at stake given its' ownership of 51% of Exor equity. We like the fact that both the Company and the Agnelli family are purchasing a greater percentage of the preference class.

    Corporate governance

    We believe that corporate governance concerns, although present, are mitigated by: 1. The Company's concerted effort to address and reduce conflicts (http://www.exor.com/uploads/683515-CORPORATE%20EXOR%20ING%202009%20internet.pdf ; http://www.exor.com/sito/procedure/en/EXOR_Related_party_transactions-English.pdf); 2. A completion of an IFI-IFIL consolidation which reduces conflicts; 3. Current pressure and undesired scrutiny from CONSOB (Italian securities regulator) on Exor; 4. New Italian regulations protecting minority shareholders such as new related party rules adopted in 2010.  In the context of corporate governance, two episodes warrant mentioning, an equity swap for Fiat stock executed in 2005 and the IFI-IFIL consolidation. Summarily, in 2005, IFIL and Exor executed an equity swap on Fiat to retain control of Fiat after dilution from convertible debt without triggering a mandatory bid for the entire company per CONSOB regulations (http://www.economist.com/node/5026856). We view this simply as a measure for the Company and the family to retain their Fiat legacies with limited cash resources, and do not view this as harmful to Exor/IFIL shareholders per se.


     In 2008, Exor was created by merging IFIL into its' majority shareholder (~70%) IFI whose only material asset were shares in IFIL. IFI had an unlisted class of ordinary shares and a listed class of preference ("preference") shares (which survive as the Exor preference shares), while IFIL had listed ordinary and savings shares. The controversial aspect was the choice of an exchange ratio of 0.265 which was a blend of: 1. The trailing 6 month ratio of IFI preference (now Exor preference) and IFIL ordinary ; 2. The ratio of NAV's between IFI and IFIL. Leonardo & Co. (a holding of IFIL's) and Goldman Sachs advised on the deal. Preference shareholders were unhappy about using the ratio of the trading prices as this incorporated the discount to NAV at which IFI preference shares traded. Had the ratio of NAV's been used the ratio would have been closer to 0.2. We are not overly concerned given that it could be argued that the preference share price discount appropriately reflected different rights and it would have been in the Agnelli's best interest to use only NAV values to the disadvantage of IFIL shareholders. We believe the outcome represented a middle ground.


    Capital allocation

                Exor's capital allocation seeks to maximize NAV and outperform the MSCI World Index over a long time horizon by patiently deploying capital into businesses in an active manner to improve long term performance [check recent investments]. While our preference would be for a static portfolio to reduce uncertainty, the Company has made generally good investment decisions over the last 5 years with some notable exceptions like the purchase of a portion of Cushman & Wakefield in 2007.  Interestingly, the glacial investment pace is a reason cited by sellside analysts for their low opinion of the stock. We disagree with a view expressed by HSBC in July 2008: "IFIL missed the golden years of private equity (2002-2005) However, IFIL has not changed its business model from a traditional holding company into a private equity fund model." As mentioned, Exor has increased the rate of share buybacks, although admittedly we would like to see an even faster rate and the deployment of all investment monies into its' existing portfolio at half off.

    Fiat

                As the value is driven by the discount of Exor preference shares, we will be brief in laying out our thesis on Fiat. A previous Fiat write-up covers some additional background.

    • Fiat is in the midst structural and operational changes which could create significant value and lead to a higher collective valuation of the company's assets:
      • Sergio Marchionne, Fiat's much lauded CEO, intends to continue dramatic operational improvements and cost cutting which he started in 2004 and which were partially derailed by the dramatic global recession of 2008 & 2009. In pointing out Marchionne's inability to meet his previous 5 year targets, many sellside analysts fail to mention the attenuating circumstances of a dramatic global recession and credit crisis.
      • Marchionne has extremely ambitious plans to increase Fiat's annual automobile sales from 2.2MM in 2009 to 3.8MM in 2014 which would contribute to the approximate doubling of Fiat automobile's revenue from ~€32bln to €64bln over the same timeframe. Getting less than half of this targeted increase could justify a stock price 130% higher without considering a potential Chrysler turnaround.
      • Fiat struck an extremely advantageous deal for Chrysler which will give the Company 200,000 in incremental car sales and €350mln in cost savings, conservatively. This doesn't include the potential 50-100% upside solely from a Chrysler turnaround through a potential 35% equity stake in Chrysler that Fiat received for nearly zero incremental investment.
    • With no growth and limited rebound, Fiat could be worth €16 assuming fairly conservative margins and multiples [Base case]. Getting even halfway to Marchionne's plan, Fiat could be worth €18-€30 (€25-€40 with a Chrysler turnaround) [Upside]. With the draconian assumption that the auto business is worth zero, Fiat could be worth approximately €5.
    • By year-end 2010, Fiat intends to break-up into 2 companies, Fiat automobiles and Fiat industrial. This separation should reduce the discount associated with Fiat's industrial segments being conglomerated with Fiat's lower-quality automobile assets.

    Management

    Fiat management centers on the exceptional operational and management talent of Sergio Marchionne. In speaking with contacts, he has wrung costs out of Chrysler in months that no previous operator had found. His enthusiasm for turning around Fiat and building a globally competitive company is apparent.

     

    Valuation and financials

                Relative to Fiat circa the previous write-up, Fiat automobiles is significantly more attractive with a leaner operation and more exposure to Brazil. Our conservative base case assumes limited rebound in financial performance and marginal synergies from collaboration with Chrysler. Our valuation by segment is as follows:

    Normalized Sum-of-the-Parts

    Fiat auto

    Maserati

    Ferrari

    CNH

    Iveco

    FPT*

    Magneti

    Revenues

    € 26,000

    € 500

    € 1,700

    € 10,000

    € 7,000

    € 5,000

    € 4,000

    Approximate EBITDA

    € 1,820

    € 75

    € 408

    € 1,000

    € 630

    € 350

    € 280

    Approximate EBITDA margin

    7%

    15%

    24%

    10%

    9%

    7%

    7%

    EV/EBITDA Multiple

    3.00x

    6.00x

    8.00x

    8.00x

    5.00x

    5.00x

    6.00x

    Value

    € 5,460

    € 450

    € 3,264

    € 8,000

    € 3,150

    € 1,750

    € 1,680

    Value per share

    € 4.29

    € 0.35

    € 2.57

    € 6.29

    € 2.48

    € 1.38

    € 1.32

     

    Teksid

    Comau

    Other

    Revenue synergies

    Cost synergies

    2010 net debt

    Equity in JVs

    Equity value

    Equity value ex-CNH

    € 600

    € 600

    € 492

    € 2,600

     

     

     

     

     

    € 30

    € 0

    -€ 79

    € 390

    € 350

     

     

     

     

    5%

    0%

    -16%

    15%

     

     

     

     

     

    6.00x

    6.00x

    6.00x

    6.00x

    6.00x

     

     

     

     

    € 180

    € 0

    -€ 474

    € 2,340

    € 2,100

    -€ 9,400

    € 1,500

    € 18,500

    € 10,500

    € 0.14

    € 0.00

    -€ 0.37

    € 1.84

    € 1.65

    -€ 7.39

    € 1.18

    € 15.73

    € 9.44

     

    To support our revenue and margin assumptions, here are segment performance metrics for 2008 and 2009:

    Segment data - 2009

    Fiat auto

    Maserati

    Ferrari

    CNH

    Iveco

    FPT

    Magneti

    Teksid

    Comau

    Other

    Revenues

    € 26,293

    € 448

    € 1,778

    € 10,107

    € 7,183

    € 4,952

    € 4,528

    € 578

    € 728

    € 1,096

    Approximate EBITDA margin

    6.4%

    15.6%

    24.3%

    6.5%

    6.8%

    6.7%

    6.4%

    2.2%

    -1.8%

    -7.2%

     

                     

     

     

                     

     

    Segment data - 2008

    Fiat auto

    Maserati

    Ferrari

    CNH

    Iveco

    FPT

    Magneti

    Teksid

    Comau

    Other

    Revenues

    € 26,937

    € 825

    € 1,921

    € 12,781

    € 10,894

    € 7,000

    € 5,447

    € 837

    € 1,123

    € 1,394

    Approximate EBITDA margin

    7.8%

    17.6%

    25.9%

    11.1%

    11.6%

    7.3%

    7.9%

    8.0%

    3.7%

    -4.7%

     

     

     

    In thinking about the optionality on the upside, we assume that Fiat achieves a lower percentage of Marchionne's goal with shortfalls deducting from margins at 15% incremental rate. Here are our assumptions as a percentage of TOTAL revenue (eg, 70% of 2014 is about halfway to the targeted increase):

     

    These assumptions generate the following forecasts for the respective segments:

    Fiat auto

    2010

    2011

    2012

    2013

    2014

    Revs

    € 32,000

    € 37,000

    € 38,250

    € 42,750

    € 44,800

    Trading profit

    € 550

    € 900

    € 1,360

    € 1,875

    € 2,240

    EBITDA

    € 2,900

    € 3,600

    € 3,688

    € 3,863

    € 4,020

    Chrysler

    2010

    2011

    2012

    2013

    2014

    Revs (net)

    € 32,000

    € 35,100

    € 36,000

    € 36,000

    € 36,000

    EBITDA (net)

    € 2,200

    € 2,808

    € 3,240

    € 3,240

    € 3,240

     

    Fiat industrial

    2010

    2011

    2012

    2013

    2014

    Revs

    € 19,000

    € 22,000

    € 21,600

    € 22,950

    € 23,200

    Trading profit

    € 600

    € 1,200

    € 1,710

    € 2,125

    € 2,560

    EBITDA

    € 1,298

    € 1,764

    € 2,067

    € 2,487

    € 2,983

     

    In valuation, we utilize 2014 estimates discounted back to 2010 at a 10% discount rate. We chose this method as we believe that significant upside in the stock rests on the relative success of Marchionne's plan.

     

     

     

     

     

     

     

    Fiat auto

    2010

    2011

    2012

    2013

    2014

    EBITDA

    € 2,900

    € 3,600

    € 3,688

    € 3,863

    € 4,020

    Fiat industrial

    2010

    2011

    2012

    2013

    2014

    EBITDA

    € 1,298

    € 1,764

    € 2,067

    € 2,487

    € 2,983

    Chrysler

    2010

    2011

    2012

    2013

    2014

    EBITDA

    € 2,200

    € 563

    € 1,155

    € 1,435

    € 2,499

    Total value ex-Chrysler

         

     

    Total value

     

     

     

     

     

     

    Present value of Fiat segments based on multiples of 2014 EBITDA

    Fiat auto

    2x

    4x

    5x

    7x

    10x

    Value per share

    € 4.32

    € 8.64

    € 10.80

    € 15.12

    € 21.60

    Fiat industrial

    4x

    6x

    8x

    10x

    12x

    Value per share

    € 6.41

    € 9.62

    € 12.82

    € 16.03

    € 19.23

    Chrysler

    2x

    4x

    5x

    7x

    10x

    Value per share

    € 2.69

    € 5.37

    € 6.71

    € 9.40

    € 13.43

     

    € 10.70

    € 18.23

    € 23.59

    € 31.12

    € 40.80

     

    € 13.39

    € 23.60

    € 30.31

    € 40.52

    € 54.23

     

     

     

     

    We valued the automobile business at 4x -7x  EBITDA multiple and the industrial business at a 6-10x EBITDA multiple which we believe are substantially justified as upside multiples given comparable company multiples over long periods of time. However, this admittedly translates into a 5-6% free cash flow yield assuming capex scales down with EBITDA on a 1 to 3 basis.

     

     

    Average EV/EBITDA multiples

    Average EV/Sales multiples

     

    10 years

    20 years

    10 years

    20 years

    Ford

    11.0x

    10.4x

    1.04x

    1.04x

    GM

    10.3x

    8.1x

    0.79x

    0.82x

    Renault

    11.1x

    11.0x

    0.87x

    0.96x

     

    Low

    High

       

    Fiat auto valuation (grayed)

    4.0x

    7.0x

     

     

     

     

    Fiat industrial comps

    Average EV/EBITDA multiples

    Average EV/Sales multiples

    CNH comps

    10 years

    20 years

    10 years

    20 years

    Ceterpillar

    13.1x

    12.3x

    1.69x

    1.47x

    Deere

    12.9x

    12.8x

    1.57x

    1.41x

    Agco

    7.9x

    8.1x

    0.58x

    0.68x

    Iveco comps

         

     

    MAN

    5.7x

    5.7x

    0.52x

    0.40x

    Scania

    9.2x

    9.7x

    1.41x

    1.40x

     

    Low

    High

       

    Fiat industrial valuation (grayed)

    8.00x

    10.00x

       

     

     

    Operations and competition

    In the interest of brevity, we will touch on the critical Fiat automobile issues of low Italian capacity utilization and market share in Brazil and Italy, and will address the critical drivers of CNH. These are the principal issues which should drive performance. Fiat's ultimate operational goal is to drive up Italian plant utilization through the Company's growth plan. To the extent that this is not successful, Fiat will continue to clash with obstinate labor interests. We have been relieved by Fiat's recent tough stance with its' Italian base, threatening to not move Panda production without an agreement by labor unions and a public shaming that Italy is Fiat's only loss making operation. Brazil is now one of Fiat's largest markets where the Company has a leading passenger car market share at 24-25%. Fiat assumes deterioration in market share of close to 1%. Any surprising share losses or downturn in Brazil would dramatically affect financial performance. In Italy, Fiat Auto retains above a 30% market share in Italy. With a drop in subsidies, especially for CNG vehicles, we are hesitant to read much into a recent drop in overall sales and market share in Italy. North American and South American agricultural equipment are the critical divisions within CNH, given the size of their North American business and the expected growth in South America. It will be critical that CNH maintain its' top 2 presence in these markets.

     

     

     

    Risks

    Exor related

    Pernicious treatment of minority shareholders through unequal share class treatment or improper transactions.

     

    Destruction of value through ill-advised investment decisions

     

     

     

    Fiat related

    Increased investment in Italy without reaching appropriate terms with unions.

     

    Slowdown or increasing competition in Brazil.

     

    Severe Italian recession possibly precipitated by a debt crisis.


     

    Catalyst

    Continued repurchases of Exor preference shares.

    Separation of Fiat automobile and Fiat industrial.

     

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