Insight Into Chrysler's New Partner - Fiat Releases 2008 Results

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January 23, 2009

Statement from Fiat Chairman, Luca Cordero di Montezemolo

We greatly appreciate the Prime Minister’s decision to hold a meeting next week to discuss the crisis in the automotive sector in Italy.

The Prime Minister and the Government are well aware of the difficulties the automotive industry is facing globally, the importance of the industry and its entire value chain to the Italian economy and the fact that some European countries have, in absence of action at the Community level – which we had hoped for on several occasions – implemented significant measures to support the sector.

In light of this, we view the Government’s initiative as a signal of the importance it gives to a sector which is very important in terms of both its contribution to Italian GDP and employment.

Turin, 22 January 2009

Fiat Group also announced its 4th Quarter and year-end financial results (Press Release).  It reported revenues for 2008 were up 1.5% from 58.5 billion to 59.4 billion in part to a strong performance in the first three quarters.  However, for the year profits were down 16.2% from 2.05 billion to 1.72 billion (Figure 1).

Figure 1: Fiat Group 2008 Full Year Results

The company had €3.9 billion in cash at the end of year compared to €6.9 billion at the end of 2007.  As a result of its cash position the company will suspend its dividend and share buyback program.

Fiat also reported a 70% drop in 4th quarter profit as demand for its vehicles declined in its key western European and south American markets.  Net profit for the 4th quarter of 2008 was €180 million, down from €597 million in 2007.

The automotive group sold 2.15 million cars and light commercial vehicles in the year, down 3.6% from 2007.  The company said:

In 2008, the Western European passenger vehicle market was down 8.4% from 2007 with sharp declines in registrations in Italy (-13.4%), Spain (-28.1%) and Great Britain (-11.3%) and more modest declines in Germany (-1.8%) and France (-0.7%). In Brazil, demand increased 10.6% over 2007 with significant growth in the first half (+26.6%) being partly offset by a decline in the closing months of 2008.

Even though automotive revenue was flat for the year at €26.9 billion, the sales decline in the last quarter accounted for a €1.5 billion decline in revenue.  Full year trading profit was flat however in the 4th quarter, profit dropped by €158 million with the Fiat brand making €65 million (Figure 2).  For the year the automotive group made €1.102 billion, down from €1.093 billion in 2007 (Figure 3). Fiat's industrial debt now stands at almost €6 billion (Figure 4).  

Figure 2: Automotive Group 4th Quarter Profits

 Figure 3: Automotive Group Full Year Profits

Figure 4: Fiat Group Debt

Analysis:

For the year the company showed impressive results in light of the deterioration in the global economy in the last quarter of the year (See Fiat and Chrysler Ink Partnership Agreement).  However, I believe the economic climate will look more like the 4th quarter than the proceeding period.  The 4th Quarter results at Fiat Group automotive are a concern especially in light of the agreement signed earlier in the week to partner with Chrysler LLC.  The general direction of the industry in Europe is weak.

According to the Wall Street Journal, the agreement between Fiat and Chrysler appears to be contingent on Chrysler obtaining an additional $3 billion loan from the US government on top of the $4 billion the company received late last year.  An official from Fiat denied that claim.  After reviewing Fiat’s 2008 financial results, the agreement would have to be contingent on Chrysler obtaining more money.  Fiat just does not have the cash on hand to invest in Chrysler.  Given the further deterioration in Fiat’s primary markets of South America and Europe, they might experience profitability pressure.  The €65 million 4th quarter results do not inspire confidence.

There was also recent talk Fiat and PSA Peugeot Citroën are in discussion of a possible alliance or merger.   Fiat CEO Sergio Marchionne has stated Fiat was open to further deals beyond its proposed alliance with Chrysler (See Red Ink Warning – The Auto Slump is Global Including the Imminent Fallout).

PSA Peugeot Citroën also has indicated recently that it would consider alliances, and it has a long relationship with Fiat, its partner in three joint production ventures.

For the first half of 2008 (Chart Set) PSA Peugeot Citroën showed positive results and was generating good cash flow.  Net profit for the first half was €733 million. As of the end of June, the company had €6 billion (Statement) in cash.  However, sales in 2008 were down 4.9% globally to 3,260,000 units sold (Press Release).  Its sales in Europe declined 8.8% to 2,130,900 units (1,125,700 Peugeot and 1,005,200 Citroën).  PSA Peugeot Citroën has yet to post its complete 2008 financial results.

With the information available I would not be comfortable with a full merger between Fiat and PSA Peugeot Citroën.  The uncertainty in the markets makes Fiat and Chrysler’s situation very unstable.  Factoring in the balance sheet of each company, any full-out merger could be considered reckless.  Fiat's increase in debt over the last year, taken in context of its negative cash flow and poor cash position should raise a couple red flags.

The credit situation continues to be a going concern and financing that is needed to support a merger given the limited cash reserves is not available.  That is unless it comes from the French and Italian governments.

Given the government-industry meeting next week in Italy that seems likely.

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