Looking ahead

Agnellis brace for Fiat-Chrysler merger endgame

Industrial groups go through a time of strength, a time of privilege and a time of vanity, the late Italian entrepreneur and Fiat Chairman Giovanni Agnelli once remarked. "For me the first is the only one that counts", he added. His grandson John Elkann, the chairman and chief executive of Exor, the Agnelli family's investment group through which it controls Fiat, seems to concur.

His decision to sell a 15 per cent stake in Swiss inspection group SGS is a case in point. The proceeds of the deal - some 2 billion euros - will significantly boost Exor's financial firepower and strengthen its hand in the endgame of the upcoming Fiat-Chrysler merger.

Elkann said last week that he wanted Exor to keep a 30 per cent stake in the merged Italian-American carmaker. Fiat already owns 58.5 per cent of Chrysler and wants to buy out the other remaining shareholder, VEBA, a union's pension fund. So far there is no agreement on price, and the two parties are embroiled in a lawsuit about Chrysler's true value. Analysts estimate that Fiat will have to pay up to $3.5 billion for VEBA's stake. According to media reports, the Italians are in talks with banks to secure financing of $10 billion to both buy out VEBA and refinance the new company's debt. In the process, Fiat-Chrysler, which could be listed in New York, may also need a capital increase.

Exor stresses that it doesn't need the proceeds of the SGS sale to avoid dilution, and points to its existing 1.6 billion euro cash pile. This, however, would have required the group to take up 813 million euros of additional debt, the maximum compatible with an investment grade rating.

Exor may not have to use much of the SGS proceeds to remain a 30 per cent shareholder in Fiat-Chrysler. It insists that the SGS money is earmarked for new investment projects in Europe and the United States. Nonetheless, the sale provides a safety cushion against the combining of Fiat and Chrysler.

Wherever Exor invests its new 2 billion euros, it may struggle in the future to match the returns of the SGS deal. The stake in the Swiss company earned capital gains of 1.53 billion euros over 13 years. This translates into a 17 per cent annual internal rate of return, the likes of which aren't easy to come by these days.