Chrysler Group LLC filed for an IPO earlier today with an initial registration of $100 million. Our close scrutiny of the prospectus, preceding news and our expertise in the auto industry allows us to evaluate the IPO and the potential valuation of the group.
History of Fiat-Chrysler
At the height of the liquidity crisis as the auto industry was facing enormous challenges from low sales and large interest payments, the credit crunch forced it to seek help from the US government. After building some of the largest and most successful automobile companies in history, this was an unfortunate sea change for the Detroit Big-Three: General Motors (NYSE: GM), Ford Motor (NYSE: F) and Chrysler.
While Ford managed to tide the crisis with short-term financing that helped it avoid a government ownership or receivership, GM filed for bankruptcy and was taken over by the government with a 66% ownership stake. The US government has since then reduced its stake to below 8%, opting to sell off its shares in chunks.
Chrysler, the smallest of the Big-Three automobile companies, ,exited its quick fire government-aided bankruptcy with its sale to Fiat who bought a 58.5% majority stake. The rest of the company is owned by the United Auto Workers (UAW) union. The UAW was offered an equity stake in the firm in lieu of the company’s obligations to retirees and pensioners of the firm.
Four Years is a Long Time
All of this happened at the height of the credit crisis in 2009 under the Obama administration-appointed Car Czar, Ron Bloom. Four years is a long time – credit has started freeing up, car sales are on fire, even reaching its pre-crisis levels last month and Chrysler is an attractive buy again. While UAW is trying to sell its stake to raise money for its obligations, Fiat is also very interested in buying these stakes to integrate Chrysler fully in its global operations. Over the past many months, there have been intense negotiations between the parties, nevertheless they have not yet agreed upon a price. Fiat wants to wholly own Chrysler – especially to get access to its free cash flows. Fiat is facing significant headwinds in its primary markets in Europe and Latin America; and the Chrysler ownership will help significantly in generating the cash flow it needs. Fiat and its CEO, Sergio Marchionne, have no intention to push Chrysler to an IPO, yet it is optimal for UAW to do so in this corporate game of chicken. There is a likelihood that the IPO will not be accomplished; rumors are rife that the primary purpose of the filing is to come up with a market price for UAW’s stake.
Chrysler’s prospectus is low on information, though it is clear that all the shares that are up for sale belong to VEBA (the UAW entity that owns 41.5% of Chrysler). Fiat, of course, does not want this sale and will not gain anything from it. The prospectus describes in detail the advantages of its partnership with Fiat and also enumerates the multiple risk factors faced by it currently.
Automobile Fundamentals and Jeep
According to the prospectus, “… for the twelve months ended June 30, 2013, we shipped 2.4 million vehicles worldwide, generating approximately $66.0 billion in net revenue, $1.6 billion in net income and $5.2 billion in Modified EBITDA”. And additionally, “Demand for our vehicles increased during the three months ended June 30, 2013, as evidenced by a 10 percent period over period increase in our worldwide vehicle sales, which is largely driven by the 17 percent period over period increase in our U.S. retail sales. In addition, our U.S. market share increased 20 basis points to 11.4 percent for the three months ended June 30, 2013, as compared to 11.2 percent for the same period in 2012.” This follows WSA’s hypothesis laid out in our Automobile Sector Outlook that with higher sales and easier credit automakers are definitely on the move up.
It is expected that the IPO will value the company at $10 billion, which is on the lower side of our one-year valuation range. UAW can only sell 22% of its 41.5% stake – the rest is set aside for Fiat to buy using call options. However, the exact percentage that UAW intends to sell is uncertain. According to the prospectus, Fiat was on the verge of acquiring 10% of UAW’s stake. However, when the wrangling over the pricing was taken to the courts by UAW, the court declined to decide on a price. Since then, the ensuing negotiations have led to the current IPO filing. If UAW intends to sell the same 10% of the company with a $10 billion valuation and 1 million shares, we can expect an IPO price of $10 per share.
While the valuation seems optimal for current sales levels, we expect Chrysler to perform better than expected, primarily due its Jeep brand. Although nearly 70% of its earnings come from the US market, we believe the Jeep, which accounted for 31% of Chrysler’s global sales, is ideally suited for markets like China and India with its all-terrain drive and macho image. The company has already mentioned its intentions to increase its emerging markets offerings and we hope that once the current state of flux is concluded, the company will speed up this process.