Fiat Chrysler Investors Cheer As M&A Looms

Shares of Fiat Chrysler Automobiles (NYSE: FCAU) are soaring Friday, pushing above the $16-a-share level for the first time. That takes prices up nearly 40% from the low set August 11. And it appears further gains are on the way.

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Automaker stocks in general have been on the move on the idea thousands of flood-damaged vehicles are headed for the crushers following Hurricane Harvey. Insurance checks in hand, thousands of drivers will be looking for new wheels providing a boost to sales—totaling upward of $5 billion, according to Cox Automotive. But Fiat Chrysler has added the impetus of excitement with several reports of imminent M&A activity.

The roadmap ahead comes with few twists and turns:

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  • FCA could be acquired either in whole or in part by a Chinese auto maker, something the company is reportedly actively seeking.
  • Or it could spin off its luxury Maserati and Alfa Romeo brands—not unlike the highly successful divestiture of Ferrari in 2016.
  • Or it may tie up with General Motors as FCA CEO Sergio Marchionne hinted earlier in the year, maintaining his long-held focus on the need for automakers to consolidate to survive.
  • Or it might form a joint venture with German automaker Volkswagen.
  • Or it might spin off its in-house parts makers Magneti Marelli and Comau, as FCA management discussed in the company's 2Q earnings call.

FCA should look to Ferrari, which it spun out a few years ago. From a post-IPO low of $30.96 set in February 2016, the iconic sports car company's shares are up more than threefold. Until the recent excitement, FCA's shares weren't as lucky: The stock price had been mired in a three-year sideways crawl bounded by the $12-a-share level.

The situation remains fluid

It's becoming clear that some type of action that enhances shareholder value is coming, because, at the industry level, headwinds are building. Total US vehicle sales have been on the slide since late 2016, down to a seasonally adjusted annualized rate of 13.2 million, used-vehicle prices are falling quickly as a glut of off-lease vehicles hit the secondary market, and new car inventories are accumulating on dealer lots as factory output outpaces demand resulting in record promotional activity (average incentive of nearly $4,000 per vehicle, according to J.D. Power).

If supply/demand imbalance and pricing pressures weren't enough, the credit side of the situation is pretty horrible: Auto loan delinquencies in the US are rising to levels not seen since the financial crisis, encouraging loan managers to tighten lending standards, squeezing off the credit lifeblood of the auto market.

That's not all. Intense technology change and hard-driving competitors from Tesla to Alphabet's Waymo are changing the way we think of the driving experience. BMW's ReachNow service is helping take car-sharing mainstream. M&A activity is ramping in response, with the PitchBook Platform showing year-to-date deal value in the global automotive sector already outstripping 2016's total.

Global automotive M&A activity

Fiat Chrysler

Certainly, there is value at Fiat to be unlocked. Goldman Sachs analysts believe the company is worth twice as a much as merely the sum of its parts vs. its current enterprise value. Morgan Stanley analyst Adam Jonas believes Jeep alone is worth more than Fiat Chrysler in its entirety, at 120% of FCA's market capitalization. Even Marchionne himself admitted during the company's last earnings call that he had an obligation to "purify" FCA's portfolio of holdings as YoY revenue growth stalled.

Shareholders can hardly wait.

For more on the future of the automotive industry, be sure to check out our featured coverage of autonomous vehicles.

Article by Anthony Mirhaydari, PitchBook