August 22, 2017 / 7:21 PM / a year ago

Breakingviews-Jeep sale would leave Marchionne nowhere to hide

NEW YORK (Reuters Breakingviews) - Selling Jeep would leave Sergio Marchionne nowhere to hide. The Fiat Chrysler Automobiles chief executive advocates using M&A to stop carmakers wasting precious capital. Offloading the company’s top brand to China’s Great Wall Motor, whose president has indicated interest, could raise billions. But it would leave an emaciated rump.

A Jeep vehicle is seen at a GM dealership in Miami, Florida August 12, 2010. General Motors Co posted its biggest quarterly profit in six years on Thursday and CEO Ed Whitacre stepped aside on the cusp of an IPO expected to allow the U.S. government to relinquish its majority stake. REUTERS/Carlos Barria (UNITED STATES - Tags: BUSINESS) - RTR2HABG

Great Wall’s interest may stall in any event. With a market value of some $15 billion, it may struggle to secure financing or Beijing’s approval for a deal larger than itself. Even if it succeeded, the Trump administration and the U.S. Congress are likely to balk at allowing such a large and iconic U.S. brand to end up in Chinese hands.

Fiat Chrysler, though, does need to do something. It is already the earnings straggler among the major automakers. Its pre-tax margin last year, at 2.8 percent, was the lowest of the group; Ford Motor and General Motors both cranked out just over 7 percent.

Things are improving as Marchionne shrugs off more of the debt that resulted in part from taking over Chrysler after the U.S. government-backed bankruptcy exit in 2009. But Fiat Chrysler is the only one of the top 12 that sell-side analysts reckon will fail to earn more than a 6 percent pre-tax margin in each of the next three years, according to Thomson Reuters data.

The $23 billion a Jeep sale might bring, according to Morgan Stanley, could be tempting, whether Great Wall or another carmaker ends up the buyer. It would clean up the balance sheet. Deep-pocketed players like Google, Apple and Intel are new rivals in the race towards autonomous driving. Lacking investment firepower, Marchionne has stayed largely on the technological sidelines, though last week he took his company into the Intel-Mobileye-BMW alliance.

Yet handing the keys to Jeep to a new owner would combust even the modest earnings that are currently anticipated. The brand may account for almost three-quarters of EBITDA next year, reckons Morgan Stanley. Ram trucks, Maserati and three captive parts makers are still profitable, but Alfa Romeo, Dodge and Chrysler are in the red. On top of that, the company still has more than $5 billion of both net debt and unfunded pensions.

Marchionne is due to step down next year to concentrate on running Ferrari. A radical move like selling Jeep would certainly leave a mark. But it would set up his last lap at what remained of Fiat Chrysler to be a dismal one.


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