Fiat Chrysler (FCAU) is in the midst of a major spinoff to make Ferrari its own entity, but despite this major move, CEO Sergio Marchionne seems focused on the possibilities of a merger with General Motors (GM).
These merger talks have been ongoing for quite some time, but over the weekend, Marchionne added more fuel to the fire, calling it a “high priority” and that a merger would “be the best possible strategic alternative for (Fiat) and (General Motors).”
In looking at this combined entity, it would be best for FCAU and GM stockholders, too.
Fiat’s market capitalization currently sits at $17.5 billion — a valuation that will be noticeably less following the spinoff of Ferrari. General Motors has a market capitalization of $45.5 billion. For the sake of argument, let’s value the combined entity at $60 billion minus Ferrari.
According to Sergio, the combined company could generate annual EBITDA of $30 billion — a number Evercore recently confirmed as being realistic. That would be a big increase from the near $13 billion and $9.5 billion that General Motors and Fiat each create alone, respectively.
Obviously, to achieve that $30 billion mark, it would require some major synergies to manufacturing, delivery of vehicles, sales, marketing, and just about every division across the board. Fiat and its brands would seemingly be managed like new divisions to the GM family, adding to Cadillac, GMC and Chevrolet. That would mean major cost cutting at Fiat.
Nonetheless, at a $60 billion valuation, the combined entity would be trading at just 2 times EBITDA. That’s unprecedentedly cheap, and would thereby create additional free cash flow that GM could use on R&D and to give back to shareholders in the form of dividends and buybacks. Hence, the tie-up would be in the best interest of FCAU and GM stockholders … if $30 billion in EBITDA is realistic.
With that said, the big question is whether it will happen.
Why a GM-FCAU Tie-Up Is Inevitable
GM executives have said that they won’t pursue Fiat, but given its valuation, the synergies and changes within the auto industry, I tend to believe that GM must.
First and foremost, Tesla (TSLA) has really disrupted the space, and with new vehicles to come, it is possible that Tesla could become a bigger long-term threat with its emphasis on technology and performance.
Furthermore, Apple (AAPL) and Google (GOOG, GOOGL) are largely considered wildcards in the auto space, from self-driving cars to the aggressive hire of top Tesla engineers. No one really knows what Google or Apple are up to, and because of their deep pockets, that wildcard becomes a major threat to the traditional auto companies.
Therefore, consolidation seems like a natural fit to lessen the blow of new competition and gain competitive and operating efficiencies. FCAU and GM stock both trade at attractive stock multiples in an auto industry that has remained a consistent strength of the U.S. economy, on pace to well surpass 17 million new car sales this year.
However, traditional power players have taken a hit to their reputation with massive recalls, and a good way to counter these problems would be better rebates and lower prices while still creating higher EBITDA and margins from the synergies of better manufacturing, employee production and a streamlined delivery process of two major brands.
At the end of the day, a merger bodes well for these two companies, and if it happens, or if talks intensify, that would be a good indication to get on board and invest in GM stock for the long haul.
As of this writing, Brian Nichols held a position in AAPL.
