Ferrari, Ferrari, Ferrari! Next to Porsche, it's the brand that most excites auto enthusiasts worldwide. Owned by Fiat, Ferrari is a bright red high-horsepower moneymaking machine. Many people would like in on that action -- and that's why resurfaced rumors of a Ferrari IPO are, frankly, exciting.
And strategically timed. Fiat CEO Sergio Marchionne just said that Ferrari could be worth more than $7 billion. Time for some quick math: Fiat took a stake in Chrysler in 2009, post-bankruptcy. It's been upping its share ever since and wants to own 51 percent of the Detroit carmaker prior to an anticipated IPO. But Chrysler still owes the U.S. (and Canadian) government $7 billion. And Fiat will need cash to increase its equity.
A financial juggling act
Marchionne has been keeping numerous financial balls in the air since 2009. He brought no money to the table when Fiat effectively took over Chrysler -- in fact, the U.S. lent Fiat $6 billion to take Chrysler off its hands.
Upping its Chrysler stake hasn't cost anything, either. However, that $7 billion in outstanding debt has to be repaid before Fiat can acquire its magical Chrysler majority stake.
But the billions won't come from Ferrari
That Marchionne says Ferrari is worth $7 billion -- the amount of the U.S.-Canadian liability -- is a coincidence. No one else thinks it is. However, he needs to make Fiat's assets look more profound than they actually are to convince banker he's talking with to refinance Chrysler's U.S. government debt.
He's got a sequence in mind: Make good with the government, get Fiat's piece of Chrysler up to 35 percent, then buy the remaining 51 percent pre-Chrysler IPO.
The frothy Ferrari chatter thus serves two purposes: to overcome the perception that Fiat lacks the resources to execute the full Chrysler merger; and to bulk up Ferrari's worth in the event that Fiat floats an IPO designed to generate cash to fill out its Chrysler stake.
Whetting the market's appetite
This is all classic Marchionne. He's pled poverty ever since he got involved in this elaborate dance with Chrysler, the finance sector, and the federal government. So why change a working formula? Refinancing Chrysler's remaining debt to the U.S. taxpayer will help him preserve capital, and a Ferrari IPO will create capital where there was only speculative value before. And if Ferrari does go public, Marchionne wants to obtain the max value for Fiat's crown jewel.
Bankers are pitching Marchionne, who says he's ordered a white FF*, to list the unit to reduce debt and improve Fiat's credit rating. Standard & Poor's lowered its rating on the Italian carmaker to BB from the already junk ranking of BB+ in February, after Fiat spun off the industrial operations from the car business.Don't spend it if you don't need to
Standard & Poor's said at the time it may downgrade Fiat again if it buys a majority stake in Chrysler in 2011. Marchionne, who also runs the American carmaker, said he has no immediate plan to list Ferrari because Fiat has enough cash to increase its Chrysler holding.
"It's difficult to give a valuation of sacred brands like Ferrari," Marchionne said [on] April 4...where he chain-smoked Muratti cigarettes and sipped diet raspberry iced tea. "There are days when I think more than 5 billion euros."
I was a bit surprised when Fiat's plan to raise the Chrysler stake was reported to involve Fiat spending its actual money. But I'm not surprised that a Ferrari IPO has come back into the picture. Marchionne is the reigning auto world king of putting other people's money to work. And from what I can tell, he intends to remain on the throne.
*Just an FYI: Marchionne has made history for being rough on his Ferraris in the past.