For Fiat, No Quick Fixes -- WSJ

Selling Jeep is only one of several ideas for lifting car maker out of also-ran status

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 25, 2017).

A Chinese auto maker's expressed interest in Fiat Chrysler Automobiles NV's Jeep division has given a boost to the Italian-U.S. car company's stock price, but has yet to materialize on the desk of Sergio Marchionne.

Fiat Chrysler's boss, the longest-tenured of Detroit's chief executives, doesn't have much time to wait around.

Mr. Marchionne, 65 years old, is planning to step down in early 2019. He is scrambling to craft a survival plan -- to be disclosed early next year -- for an auto maker that is at its most profitable point since Chrysler emerged from a 2009 bankruptcy but doesn't have the resources to develop electric cars or keep up in the autonomous-vehicle race.

Mr. Marchionne has been pessimistic about traditional car makers' ability to survive the transition to fully electric and autonomously driven vehicles. He has been looking for a larger rival to acquire Fiat Chrysler, and in recent months has taken steps to adapt to the rapid pace of change facing the industry, including joining a BMW AG-led consortium on self-driving cars.

If Mr. Marchionne's survival plan fails, analysts say the company and its biggest shareholder -- a Netherlands-based holding company for Italy's wealthy Agnelli family called Exor NV -- might be forced to break FCA into pieces. In a note on Wednesday, Jefferies Group said exiting the mass-market auto segment should be "a strategic priority for Exor," which holds 42.6% of Fiat Chrysler's voting rights.

Through a spokesman, Exor said it isn't pushing for an exit. "FCA has the means and is investing in developing its future," a strategy that Exor supports, he said.

Goldman Sachs Group Inc. estimates the "equity value" of Fiat Chrysler's sprawling business units, which include Maserati and an auto-parts division, is almost three times higher than its current market capitalization, which is valued at $22 billion by shareholders holding publicly available stock. Mr. Marchionne spun off Ferrari NV last year, and said last month that other units -- including Maserati or Alfa Romeo -- could conceivably be lopped off.

Great Wall Motor Co., a Chinese maker of sport-utility vehicles, said Monday that it is considering an offer for Jeep. Fiat Chrysler's stock is up sharply since, but the disclosure retrained the spotlight on the challenges facing the company. Selling Jeep, however, would mean shedding Fiat Chrysler's most-lucrative division, which along with the Ram truck unit delivers the bulk of the company's EUR6.1 billion ($7.2 billion) in annual operating profit.

Great Wall is one of several Chinese auto makers that analysts say may ultimately bid for some or all of Fiat Chrysler. "The Chinese are hungry for global brands," said Michael Dunne, president of Dunne Automotive, an advisory firm.

Mr. Marchionne has long preferred a marriage for the bulk of Fiat Chrysler rather than a breakup. The company declined to make him available for an interview.

An outspoken executive, Mr. Marchionne outlined in recent years a plan to be absorbed by a bigger partner with deeper pockets. He publicly courted General Motors Co. to form a company with enough scale and capital to outrun industry rivals and Silicon Valley tech giants, but was spurned by the larger rival. For the smallest of the Detroit Big Three auto makers, the appeal was enormous: A combined GM and FCA would sell far more vehicles than Toyota Motor Co. or Volkswagen AG, and have more than 50% share of the U.S. pickup-truck market.

Volkswagen also has been considered a potential suitor by analysts, and the German company's CEO didn't rule out an eventual merger when asked about it in March.

Fiat and Volkswagen have held talks over joint production of some light-utility vehicles, according to people familiar with the situation. Volkswagen isn't considering a takeover bid for Fiat, the people said. They said Volkswagen believes a takeover of Fiat would be complicated and difficult to complete while the German auto maker is still embroiled in a diesel emissions-cheating scandal that has cost it nearly $25 billion.

Having come up empty-handed, Mr. Marchionne has begun retooling the product portfolio to boost profit, moved toward offering more electric-engine options, and forged partnerships with companies to accelerate self-driving car efforts. He is now working on a new five-year business plan for release early next year, and he aims to eliminate Fiat Chrysler's hulking debt load before leaving the company to an as-yet unnamed successor.

Even with a healthier balance sheet and revised targets, analysts doubt Fiat Chrysler has a big-enough war chest to pay the tens of billions needed to update its lineup to meet the technological and regulatory changes expected within the next decade. Asset sales, including a deal with Great Wall, could help, but also won't bridge the gap.

"The incoming cash would help, but we still believe the group has to step up investments to meet forthcoming [emissions] targets," Citigroup said Wednesday. It said Fiat Chrysler and Great Wall rank among the worst in fuel-economy ratings, creating the potential for substantial financial penalties on top of the investment needed to catch up to the industry.

Fiat Chrysler is likely to first boost cash on hand by selling noncore business, such as components divisions Magneti Marelli or Comau, which Mr. Marchionne recently told analysts were more valuable as stand-alone units than as part of Fiat Chrysler. As for spinning off Maserati, a niche maker of luxury vehicles, or Alfa Romeo, he left the door open.

"There are no structural, industrial or engineering restrictions for the separation of Alfa and Maserati," he said last month. But, he said, "we do need to worry about the stump that's left behind."

For instance, Ferrari's spinoff helped raise money but it resulted in the loss of cash flow from a division that represented 11% of Fiat Chrysler's 2015 operating earnings.

--William Boston contributed to this article.

Write to Chester Dawson at chester.dawson@wsj.com

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August 25, 2017 02:47 ET (06:47 GMT)