Fiat urged to buy all of Chrysler, but that means selling prized Ferrari

Fiat 500L, an SUV version of the retro-styled minicar

Fiat should grit its teeth, sell its Ferrari supercar subsidiary, and use the estimated $3.9 billion proceeds to buy the rest of Chrysler and pay down some of its burgeoning debt, say some investors.

But others believe that Fiat-Chrysler’s new strategy and targets will account for so much capital spending that the purchase of the rest of Chrysler would be unaffordable. This belief assumes Fiat would be unwilling to sell the family silver and dispose of a storied brand like its Ferrari subsidiary.

Bernstein Research analyst Max Warburton proposes the Ferrari strategy, after Fiat published its latest financial figures showing debt was rising to unacceptable levels.

But Morgan Stanley’s Stuart Pearson said Fiat’s plan to move upmarket and eschew the stack ‘em high, sell ‘um cheap market, means any plan to buy the rest of Chrysler, and capture all its cash-flows, will have to be delayed.

Yesterday the Italian automaker, which owns 58.3 per cent of Chrysler, announced net profit of $51 million for the third quarter compared with a loss of $60 million for the same period of 2011. Including Chrysler’s contribution, Fiat’s net profit more than doubled to $372 million from $146 million. Investors were worried though by Fiat’s estimate that net debt would probably zoom about $650 million to $8.5 billion by the end of the year.

Fiat-Chrysler CEO Sergio Marchionne also announced a change of strategy and targets. Fiat will concentrate on its premium priced and highly successful 500 small car and its cheaper more utilitarian Panda sister, Alfa Romeos, Jeeps, and upmarket Maseratis, while eliminating slightly bigger but slow selling small sedans like the Fiat Punto and Brava. Details were scarce but Marchionne said he wants to introduce five new Fiats, nine new Alfa Romeos, six Maseratis, and three new Fiat light trucks between 2013 and 2016. There would be a Jeep made in Europe.

Instead of closing factories like other ailing Europeans, Fiat would use excess capacity to make more premium products and export cars for Chrysler and other overseas markets.

Bernstein’s Warburton said the most important strategy for Fiat was to buy the rest of Chrysler and that would require asset sales.

“We believe the logical way forward is to proceed with the much-discussed IPO (initial public offering) of Ferrari and use the proceeds to buy the rest of Chrysler. We believe a full Fiat-Chrysler combination is necessary, but also investable,” Warburton said.

Warburton said it take about $2 billion to buy the rest of Chrysler, while selling all of Ferrari would raise about $3.9 billion.

Morgan Stanley’s Pearson said Marchionne’s plan to move upmarket would be expensive, with capital expenditure over two years reaching just over $23 billion, and would mean a full buy-out of Chrysler would be off the table for some time.

“(with these actions) CEO Marchionne confirmed our view that Fiat lacks sufficient capital to fully buy-out Chrysler without asset disposals,” Pearson said.

Fiat’s decision not to close European plants which are currently averaging about 45 per cent use rate is probably related to pressure from the Italian government, which has leverage because it pays a big proportion of the company’s labour costs.