First thoughts on potential Fiat/VW deal (PDF ATTACHED)
* Little credibility to Manager Magazin’s report in our view
* There are clear and major obstacles to such a combo
* Long-term potential may be attractive, but others tried before
* Such deal would require another cap increase at VW
Low credibility to Manager Magazin’s report in our view
Manager Magazin reports that “the VW Group is exploring the possibilities of a takeover or partial takeover of the Italian-American competitor Fiat-Chrysler” with ongoing discussions between Mr. Piech and the Agnelli family. In our view, this report has a little credibility. Mr. Piech could potentially be looking to bypassing Mr. Marchionne by talking directly to the owners to try and get his way on Alfa. We would expect VW to deny the story. We confirm our Reduce on Fiat (TP EUR6) and Buy on VW (TP EUR226).
There are clear and major obstacles to such combo
Clear obstacles for a VW–Fiat combo include market share overlap in LatAm & Europe (> 40% in Brazil, > 30% in Europe, > 40% in Italy) that would make such deal challenging from an anti-trust standpoint, and the complexity both industrially and marketing-wise. While the combined entity would be a top-five player in the US, we feel VW would be better off on its own, given Chrysler’s industrial base (located in the unionised North) and its sustained underspending. So while it would resolve VW’s market share problem, we fear the efficiency of operations would decline.
Long-term potential may be attractive, but others tried before
Long-term potential from pooling architectures would be massive, but far off, complex and expensive to implement. While VW may be interested in the Alfa brand, and possibly Jeep, we struggle to see the attraction of Chrysler and Dodge, specifically if the Agnelli family would keep the Performance and Luxury brands, as reported by Manager Magazin.
Such deal would require another cap hike at VW
With Fiat’s EV at close to EUR29bn, given its elevated net debt and pension deficit, VW would, in our view, definitely require a capital increase of significant scope, with the combined group potentially ending up with a net industrial debt position vs. VW’s current net industrial cash. Overall, we think the move would not make much sense for VW, as the brand portfolio could be too complex here. The combined entity would have revenues in excess of EUR300bn in 2015 (!) and an operating profit of about EUR19bn, based on our current estimates for both companies.