Please ensure Javascript is enabled for purposes of website accessibility

Why Fiat Chrysler Automobiles Is Spinning Off Its Parts Business

By John Rosevear – Apr 5, 2018 at 4:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

FCA said it will spin off its parts subsidiary, Magneti Marelli. Here's why.

Fiat Chrysler Automobiles (FCAU) said on Thursday that it will move ahead with a plan to spin off its Magneti Marelli parts subsidiary by early next year.

The move isn't a surprise. FCA has been looking to sell or spin off Magneti Marelli for at least a couple of years now. Here's what we know, and what it might mean for FCA's shareholders.

FCA will spin off Magneti Marelli to shareholders

FCA said in a statement that its board of directors approved a plan to create a new holding company for Magneti Marelli, and to distribute shares of that holding company to existing FCA shareholders "by the end of 2018 or early 2019."

Sergio Marchionne is shown on the floor of the New York Stock Exchange.

FCA CEO Sergio Marchionne. Image source: Fiat Chrysler Automobiles.

CEO Sergio Marchionne said the move will deliver some value to FCA's shareholders while giving Magneti Marelli more strategic flexibility. It's part of a larger plan to be revealed later this year, he said:

The spin-off will also allow FCA to further focus on its core portfolio while at the same time improving its capital position. A separation of FCA and Magneti Marelli is a key ingredient of the 2018-2022 Business Plan which will be communicated in June. The FCA Board of Directors are confident that this separation is the proper next step, and will be beneficial for Magneti Marelli, FCA and our shareholders.

FCA expects Magneti Marelli's shares to be listed on the Milan stock exchange once the transaction is completed.

The spinoff follows at least one known attempt at a sale

Magneti Marelli is a major, long-established auto-industry supplier. It focuses largely on electronic systems, including in-car entertainment systems, lighting, instrument clusters for dashboards, and -- recently -- components for connected-vehicle systems.

A dashboard instrument cluster, with a tachometer, speedometer, and other indicators visible

Magneti Marelli's products include dashboard instrument clusters and other automotive components. Image source: Magneti Marelli/FCA.

If you think that's a combination that might be appealing to a large electronics company looking for a quick entry into autos, you might be right. FCA apparently explored the possibility of a sale to at least one potential buyer: Bloomberg and other media outlets reported in 2016 that FCA was close to a deal to sell Magneti Marelli to Korean giant Samsung Electronics.

But for whatever reason, the deal never happened. Samsung bought another connected-car supplier, Harman International, a few months later.

This is probably why FCA is spinning off Magneti Marelli now

So why spin it off now? Marchionne's mention of the 2018-2022 business plan is a clue. He's nearing retirement, and that plan is expected to be a road map for the company's future after his departure. And Marchionne wants to hand off FCA with as low a level of debt as he can manage.

FCA had 17.97 billion euros ($21.97 billion) of debt as of the end of 2017, but the critical number is what the company calls "net industrial debt," its automotive-related debt minus the total of its cash and available credit lines. That number stood at 2.39 billion euros ($2.92 billion) as of the end of the year. Marchionne would very much like to erase it entirely before he leaves.

That seems likely to happen in any event. FCA's profit margins have been strong recently. It's very possible that the company could reduce its net industrial debt to zero (or put another way, reduce debt below the level of its total cash and credit lines) without raising funds via a transaction.

The spinoff of Magneti Marelli, which is probably worth something in the neighborhood of 3 billion euros, will add some insurance.

Is FCA setting itself up to be acquired?

The spinoff of Magneti Marelli might also make FCA more appealing to a potential buyer. It's widely believed that FCA's spinoff of Ferrari in 2015 was a move intended to keep Ferrari under Italian control in the event of an FCA sale.

A red 2018 Jeep Wrangler on a rocky trail

FCA's powerhouse Jeep SUV brand could be the prize that draws an acquirer. Image source: Fiat Chrysler Automobiles.

Marchionne has argued for several years that the auto industry needs further consolidation to be healthy over the long term, going so far as to openly pitch General Motors on the idea of a merger. (GM has made it clear that it has zero interest.)

Spinning off Marelli moves FCA closer to being a "pure play" global automaker centered on high-profit SUVs and pickups, with an established small-car brand (Fiat) and luxury brands (Alfa Romeo and Maserati) for balance.

Might a streamlined FCA be of interest to an acquirer, possibly a Chinese automaker looking to go global? It might. That's one possibility for FCA shareholders to ponder as we wait to see the 2018-2022 plan in June.

John Rosevear owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Fiat Chrysler Automobiles N.V. Stock Quote
Fiat Chrysler Automobiles N.V.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.