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Agnelli heir gambles with the family fortune
The shift away from Exor’s Italian roots raises questions about whether John Elkann’s strategy for the Fiat owner is moving too fast
As John Elkann leaves an Italian restaurant in Munich, he is accosted by a young couple. “Can I have a picture with you?” asks the woman, giggling at her temerity. He responds with the ease of someone accustomed to such requests.
Mr Elkann, softly spoken and baby-faced, is as near to a superstar as you get in business. His grandfather, Gianni Agnelli, was the uncrowned king of Italy, and the pre-eminent European statesman-industrialist of the 1970s and 1980s. His 41-year-old grandson is best known to Italians as the owner of Juventus football club and the car companies Fiat and Ferrari.
But, behind the scenes, the New York-born Mr Elkann is transforming Exor, the €12bn family investment business he inherited in 2011, taking it far from its roots both in Italy and in industry. It is a metamorphosis involving big bets on sectors where he has little experience and, in the process, he has severed ties which have traditionally supported the company in times of trouble.
“He has had the vision to do a number of things from a corporate structure standpoint, he has simplified, he has focused on a few key assets,” says Rodolfo De Benedetti, chairman of the family-controlled industrial group CIR. He and Mr Elkann are merging their family newspaper assets in Italy. “I have a lot of respect for what he has done.”
For many analysts and investors, the direction in which Mr Elkann is taking Exor involves significant risks. For others, it is a long-overdue modernisation of the Agnelli family’s approach to managing its wealth.
Nothing symbolises the shift more than the decision last year to move its headquarters from Italy to the Netherlands. It marks the end of an era not just for the company which, at its peak in the 1980s, controlled directly or indirectly nearly a quarter of the Italian stock exchange, but also for the country.
Appointed to the Fiat board in 1997, at the age of 21, Mr Elkann became head of the family seven years later after the death of his cousin Giovanni, the dynasty’s original appointed heir, and after Gianni Agnelli and Mr Elkann’s uncle Umberto died within months of each other. Given the relatively unhealthy state in which Agnelli senior had left the business, teetering on the brink of bankruptcy, and his own inexperience, many expected him to buckle under the task.
“John took a very modern approach to the portfolio,” says David Herro, chief investment officer of Harris Associates, which owns 7.3 per cent of Exor. “What often happens in these things is that people get attached to certain assets [but] John did away with any kind of legacy loyalty.”
Spreading its wings
The relocation reflects the increasing diversification of Exor’s portfolio, both geographically and by sector. Throughout its history, its assets were dominated by Fiat, yet the carmaker’s holding company FCA now makes up just a quarter of the Exor portfolio. In Turin, which represents the “T” in Fiat’s name, there are 5,000 Fiat workers compared with the 100,000 employed at its peak.
It remains, however, highly geared to the cyclical and capital-intensive car industry, raising questions over whether it will reduce its exposure further. There has been a successful spin-off of Ferrari, whose $9.8bn initial public offering in 2015 reduced Exor’s stake to 23 per cent and offloaded some of FCA’s debt on to the luxury carmaker.
The planned 2019 departure of Sergio Marchionne, the chief executive widely credited with turning Fiat round after it came close to bankruptcy in 2004, and then steering it through the merger with Chrysler in 2009, is reviving speculation over FCA’s future.
Mr Marchionne hinted at the Geneva car show last month about a possible tie-up with VW. But analysts consider the better suited partner for FCA to be GM, although Mary Barra, its chief executive, has balked at even meeting Mr Marchionne. In early March Mr Elkann insisted to the Financial Times that there were no ongoing talks or a long-term plan to exit the car business, adding: “Sergio has been very clear about the merits of consolidation if well done, and I have [been] . . . very clear about it, and I haven’t changed my mind.”
The biggest gamble Mr Elkann has taken is the $6.1bn purchase last year of PartnerRe, the US reinsurer, after a bitterly fought takeover battle that resulted in Exor paying a 24 per cent premium for the company. The all-cash deal was Exor’s biggest, and bankers say Mr Elkann’s greatest challenge is to justify the price he paid, even though subsequent deals in the sector have been similarly richly valued.
The purchase has brought with it a number of heightened risks for Exor. PartnerRe is the only large investment in which it owns a 100 per cent stake, and the company makes up 34 per cent of the portfolio’s net asset value, where it is held at its acquisition price.
To finance it, Exor had to take on a significant amount of debt — €8.2bn by September 2016 — bringing its loan-to-value, a key metric at investment holding companies, to over 20 per cent.
Mr Elkann says this has dropped to 18 per cent, and that figure will be further reduced by more asset sales including Exor’s stake in the Milan-based private client bank Banca Leonardo, and further redemption of financial investments managed by Black Ant, which he plans to divest in May.
But, as a private company, PartnerRe has increased the proportion of unlisted assets in Exor’s portfolio. The consequent drop of its exposure to listed assets from four-fifths to just over a half has been marked down by the rating agencies as a negative. “[PartnerRe] is a significant transaction and it means a different dynamic in the way of managing the portfolio,” says Carole Missoudan, an S&P analyst, who says unlisted companies are trickier to sell as well as to value. “[Exor] has eroded its flexibility for the current rating level.”
Mr Elkann dismisses such concerns, saying that, if he needed cash, the group has access to other liquid investments, and that the average maturity of Exor’s debt is over five years. Ironically, while the deal has on the surface diversified Exor, it has also left the portfolio concentrated in two big bets, cars and reinsurance, with most of the remainder in CNH Industrial and media assets. And while insurance may be a less volatile business than cars, Exor has little experience of the sector.
Reinsurance, which assumes risks from other insurers, is also not the business it once was when returns in the mid-teens were commonplace. Mr Elkann says that “what was a very good business is now a less good business”, but insists it “remains a pretty good business”, particularly when compared with returns in the car or media industries. The latter two sectors, though, face huge margin squeezes and therefore provide flattering comparisons.
Keeping it in the family
His big bet on a US reinsurer is the clearest signal yet of the changes he has wrought. Others are less financially significant, but also indicative of a new approach, with a deal to fold La Stampa, the newspaper owned by the Agnellis for nearly a century, into the company controlling rival La Repubblica, and the purchase of a 43 per cent stake in the Economist group in 2015.
Mr Elkann says he has paired his investments with more disciplined benchmarking than has previously been the case, and that investors support the direction in which he is taking Exor. But, however sanguine he sounds, Mr Elkann must balance the needs of very different investors in a complicated ownership structure. In Italy, he is commended for having kept the Agnelli family united, a feat many other Italian dynasties have struggled to achieve.
“I think having the family is actually a plus because it’s not an easy shareholder base . . . Most of [the family shareholders’] wealth and reputation is linked to our family business. So the commitment that it gives you as an organisation is a very important one. Institutional investors . . . are challenging on a shorter time horizon.”
How ever much he downplays it, managing the family investors is a challenge. The decision-making process the family follows is baffling in its complexity — as well as apparently inflexible in its desire to keep their hands on the reins.
The family controls Exor via its holding company Gianni Agnelli e Cie, which has a 53 per cent stake in the investment arm and a board made up of two members each from the three family branches, as well as two independent directors. The board has the power, for instance, to replace Mr Elkann as head of the family and Exor chairman.
Succession, though, is not an imminent concern. Mr Elkann, both chairman and chief executive of Exor, has the potential to run the company for many years. He argues that he is held to account by a strong board — with seven executive directors and eight non-executive directors, including Mike Volpi, the former Cisco executive-turned-venture capitalist, and that there is no need for any concern over governance.
“If you have too many people — a non-executive chairman and the executive director then . . . you end up complicating too far and sometimes governance has gone to extremes,” he says. “Quite lean organisation and power structures are more effective.”
Mr Herro says he has no issue with Exor’s corporate governance since, as a shareholder, Mr Elkann’s interests are aligned with those of other investors. And that, unlike his grandfather, who was snapped by paparazzi partying on the Italian Riviera with Jacqueline Kennedy, Mr Elkann appears the antithesis of many of his peers in the global business elite.
“John’s greatest skill is listening and asking questions,” says Mr Herro. “When I sit down with him, he almost asks more questions than [I do].”
Yet while he has built up clout in boardrooms across the world, Mr Elkann and the Agnelli family remain controversial in Italy. The family’s diversification away from the country has annoyed those who remember Fiat’s reliance on state incentives for carmakers during its 1980s boom years, which helped to make the family rich.
Mr Elkann has also attracted controversy via ill-advised remarks, showing a different side to the urbane figure presented internationally. In 2014, he was quoted as saying Italy’s youth were unable to find jobs because they were comfortable at home and lacked ambition. Diego Della Valle, the self-made luxury tycoon who is a vocal opponent of the Agnellis, called him “an imbecile”.
US dependence
On the financial front, Exor’s room for manoeuvre is limited by its current leverage of 23 per cent, which means it will struggle to fund further acquisitions or boost dividends. It is increasingly focused on the US at a time when the policy environment for manufacturers there is uncertain and when growth prospects are more exciting in Asia.
And it is more, rather than less concentrated, after recent transactions. Despite the PartnerRe acquisition, Fiat Chrysler still accounts for a quarter of Exor’s net asset value. And four-fifths of the group’s earnings before interest, tax, depreciation and amortisation are dependent on the US.
While Mr Elkann has sought to evolve a new model for the dynasty, he is inevitably drawn back into the past. People close to the Agnelli family say the defining characteristic that unites its heyday of the 1980s and today is that the scion of the dynasty was matched by a “strongman” chief executive.
In Gianni Agnelli’s time it was Cesare Romiti. Today it is Mr Marchionne. History suggests that finding a successor for Mr Marchionne, and defining the future of the cars business, is likely to determine Mr Elkann’s success in growing the family wealth for the next generation.
Exxon Eyes Brazil Expansion
Oil company in talks to partner with Petrobras on offshore oil projects
Exxon Mobil Corp. XOM -0.69% , the only big oil company without a major foothold in Brazil, is in talks to gain access to the country’s prized deep-water resources, according to people familiar with the matter.
The talks have included discussions about a joint venture partnership through which Exxon would invest in projects with state-oil firm Petróleo Brasileiro SA, PBR -0.26% or Petrobras, as well as potentially buying stakes in offshore tracts the Brazilian government plans to lease out this year, the people said.
The specific terms of any agreement have yet to be completed. One person cautioned that talks between Exxon and Petrobras remained at a preliminary stage. But Exxon, which has eyed deep-water resources in Brazil for at least a decade, is working with Hess Corp.HES -0.28% in seeking to expand in the country after Brazil revised its regulations last year to attract greater foreign investment, the people said.
Representatives for Exxon, Hess and Petrobras declined to comment.
Exxon would join French giant Total SA and Norwegian state-controlled Statoil AS A, both of which have formed partnerships with Petrobras and expanded in Brazil in the past year. Royal Dutch ShellPLC has said it plans to invest $10 billion in the country over the next five years as part of a push to double its global deep-water production.
The race to expand in Brazil comes as Petrobras is selling tens of billions of dollars in assets in a bid to work off the largest debt burden in the global oil industry. Brazil’s conservative government, in power since the impeachment of President Dilma Rousseff last year, sees foreign investment in the oil sector as key to an economic recovery after Brazil’s worst recession on record.
James Dolan’s MSG Networks is sounding out suitors, several sources told The Post.
The regional sports network, which has the TV rights for the Knicks, Rangers, Devils, Islanders and other sports teams, collects roughly $5 per subscriber per month — among the highest in the country, SNL Kagan said.
ESPN, a national network, charges $7.86.
The sales process is believed to be rather young and there is no guarantee a deal will be made.
“Dolan’s gone to his friends” to gauge interest, a source said, referring in part to Guggenheim Partners Executive Chairman Alan Schwartz, who is on the board of Madison Square Garden, a company that shares ownership with MSGN.
Investment bank Guggenheim has experience selling media assets.
MSG Networks reaches roughly 7 million homes in New York and adjoining states. Its enterprise value is $3 billion, including a market cap of $1.7 billion and debt.
Its shares have risen 7.2 percent since Feb. 17, to $22.95 at Monday’s close.
In October 2015, The Garden spun off its media assets.
“I think the point of the spin-off was to sell the cable business a year or two later,” said one analyst who requested anonymity.
MSGN is the only stand-alone, publicly traded RSN.
Verizon is one possible buyer for MSGN, two sources said, noting that the wireless giant needs content.
AT&T is seeking to buy RSNs to add to the five it already owns — including Root Sports in Pittsburgh — but might be reluctant to make a purchase now, as it is trying to win regulatory approval to buy Time Warner, one RSN expert said.
An MSGN sale will not be easy, several sources said, as RSNs are considered mature and perhaps even a melting ice cube as viewers opt for skinny bundles and cord-cutting.
Plus, there are some MSGN contracts with local cable companies expiring soon and hammering out deals for more money could be tough.
Fox Sports Networks wants more sports content, but is likely not interested because it already owns New York’s YES Network, which televises Yankees games, sources said.
Comcast, which owns a piece of Mets’ rights-owner SNY, another Big Apple RSN, is said to be looking to exit the sector — not grow it, according to the RSN expert.
Last year, James Dolan, MSGN’s executive chairman, and his family received $2 billion from selling Cablevision and should have little trouble funding a bid for The Garden if they choose to make such a move, the analyst said.
On a positive note, if the board of MSG, which some think is undervalued, were interested in a quick MSGN sale, it might agree to reasonable rights fee increases, the RSN expert said.
MSG Networks and Verizon declined comment.