CNH+Fiat Industrial: 1+1= 2 at best

Finally, Sergio Marchionne has pulled the trigger on fully merging CNH and Fiat Industrial, and pretty much in line with expectations. The proposal made to the BOD at CNH (which Marchionne is Chairman of) from FI (which Marchionne is chairman of) is for a merger of the two companies at “undisturbed” pricing” answer the only real question for investors: Is there any downside for CNH shareholders?  It turns out not really.

The inverse question was more important: Is there any upside?  Not really here either, and that may be a disappointment for some investors who speculated that CNH holders would get a premium in return for fully turning over the company’s $3 billion plus in cash on the balance sheet to a company hungry for liquidity.

The new listing on the NYSE will bring more transparency to FI, which has been a bit of a black box when looking at Fiat Powertrain (FPT) and Iveco.  It will also bring one consistent reporting method assuming the newco. uses US GAAP, eliminating the cumbersome need to normalize financial metrics.

Most importantly, is the fact that the newco. will finally present a clear picture to the ratings agencies, alleviating the nagging question, “What is the real balance sheet?”

CNH has maintained a great relationship with US fixed income investors, fetching pricing above its rating, however, the prospect of an investment grade rating could allow all the operating units to access much cheaper and more consistent funding, especially CNH capital which has perennially relied on cash from CNH industrial operations to growth sales, and has clashed with dealers as it cannot compete with the likes of DE and local lenders on funding costs.

For those that follow news, the new US listing is likely the impetus for CNH and FI halting any business with Iran.  As for retaining an Italian listing, CNH execs have mentioned a potential for a London listing (2010) however, expect Marchionne to hold this one over Monti’s head as he bargains over capacity issues in Italy on both the Industrial and Auto sides of his business interests.

Comment: What’s the upside:

1) transparency if management so chooses

2) access to US fixed income investors

3) ultimately could lead to the more aggressive US-based valuations for the NYSE listing.

FI will remain under control of Exor with Marchionne and his bankers calling the shots and John Elkann overseeing Agnelli family interests.  While we can look for some consolidation in top FI management, don’t expect any new faces.  It makes you wonder why we wasted the 24 months post demerger from Fiat Group.  Upside for management, it does provide a pleasant diversion from the disaster of Fiat (non Chrysler) Auto.


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