TheChek News Flow

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.