Companies Overview
Fiat Chrysler (FCA)
Fiat Chrysler is an Italian-American multinational automobile manufacturer, created after the acquisition of Chrysler by Fiat in 2014. Fiat was founded in Turin in 1899, whereas Chrysler was founded in Detroit in 1925.
Fiat Chrysler is headquartered in Amsterdam for tax purposes, while its main R&D and manufacturing centers are located in the Detroit metropolitan area, Turin, and Campo Largo, Brazil. The company is cross-listed on the NYSE and Borsa Italiana, in which it is a component of FTSE MIB. Until recently, Fiat was led by Sergio Marchionne, who became the CEO of the struggling company in 2004 and brought it back to profitability in one year. In 2009, he became the CEO of Chrysler, after Fiat agreed to acquire 20% of the U.S. car manufacturer, which in turn allowed Fiat to re-enter the U.S. market. The move was announced the same year Chrysler filed for Chapter 11 bankruptcy in the middle of The Great Recession in general and the American car industry crisis of 2008–10 in particular. In 2011, Chrysler became profitable again after a 5-year break. With Sergio Marchionne behind the wheel, the company enjoyed years of car sales growth, thus cementing Marchionne’s name along other famous CEOs of once-struggling car manufacturers, such as Lee Iacocca and Alan Mulally. In 2016, the corporation was ranked 8th world’s largest motor vehicle manufacturer with 4.6 million sales worldwide. Best-selling brands of the company are Fiat, Ram, Jeep, Chrysler, and Dodge.
Kohlberg Kravis Roberts (KKR)
A household name in the financial world, KKR is a leading global private equity firm headquartered in New York City. The company history began when Bear Stearns (an investment bank, which is now part of J.P. Morgan) bankers Jerome Kohlberg, Jr., Henry Kravis, and George R. Roberts were working on a team focused on leveraged buyouts, known as bootstrap acquisitions at that time. The team was among the pioneers of LBOs in general, and made a number of highly successful investments; however, the management of Bearn Stearns considered the investments too lengthy. Dissatisfied with their management views, in 1976 the bankers formed one of the first private equity firms in the world, KKR. The company was at the forefront of the LBO boom of the 80s, exemplified by KKR’s $31.1 billion takeover of RJR Nabisco, which was completed in 1989 and which was the largest LBO until 2007. The takeover became the subject of one of the most well-known Wall Street stories of all time, Barbarians at the Gate.
The firm has experienced a steady growth, and it has been listed on the NYSE since 2010. Currently, the company is led by its founders, Kravis and Roberts. Latest deals of the firm include an acquisition of Envision Healthcare (a leading U.S. provider of physician-led services) for $9.9 billion in an all-cash deal, a Unilever spread business (which include Becel, Flora, Rama, and other brands) for €6.8 billion, and BMC Software Inc. for $8.3 billion. As of this year, the company has 98 companies in its private equity funds and $191 billion AUM overall, thus making it the third-largest private equity company in the world, behind The Carlyle Group and Blackstone. While it is mostly known for its private equity department, KKR also manages real estate, hedge funds, and venture capital, among others.
Magneti Marelli
Magneti Marelli is a company focused on design and production of hi-tech systems and components for the automotive sector. The firm was founded in 1919 in Sesto San Giovanni near Milan, and is currently headquartered in Corbetta, Lombardy, Italy. The company was founded in 1919 as a joint venture between Fiat and Società anonima Ercole Marelli, and in 1967 it became a wholly owned subsidiary of Fiat. Currently, the company has about 43 000 employees, 85 production units, and 15 R&D centers across the globe. The company’s products include headlights, suspension systems, exhaust systems, robotized gearboxes, and central information displays. With $9.2 billion in sales, Magneti Marelli is the world’s 28th largest auto parts supplier by revenues.
Calsonic Kansei
Calsonic Kansei Corporation was established through the merger of Calsonic Corporation and Kansei Corporation in 2000. The earliest predecessor of the firm, Nihon Radiator Manufacturing, which later became known as Calsonic, was founded in 1938. The second component of the merged company, Kanto Seiki Co., which later became known as Kansei, was established in 1956. Kansei became known as the first producer of CPUs for cars in Japan and world’s first manufacturer of head-up displays for automobiles. Currently, Calsonic Kansei has 23 000 employees, 79 production plants, 14 R&D bases, and is headquartered in Saitama, Japan. With $9 billion in sales, Calsonic Kansei is the world’s 29th largest auto parts supplier by revenues. The company supplies auto parts, such as exhaust systems, compressors, and thermal systems, to 18 car manufacturers across the globe.
Industry Overview
The automotive aftermarket is that portion of the automotive industry comprising the automotive service and parts production business. This market has reached a robust dimension in 2017 with a global market value of $ 824,82 billion and according to analysts’ expectations the Industry in question will grow at a CAGR (compound annual growth rate) of 4.4% from 2018 to 2023.
The aftermarket is split into the OEM (original equipment manufacturer) network and the independent aftermarket (IAM). There are five distinct stakeholders’ groups that make up the automotive aftermarket:
- Parts manufacturer: OEMs and automotive supplier.
- Parts distributors: OEMs with their affiliated distributor network.
- Automotive workshop: this category includes auto centers, system chains and OEM workshop networks.
- Intermediaries: particularly insurance, leasing companies, etc.
- End Customers: consists in private, business and fleet market
One of the main trends that we have seen through the years is that, as this market continues to mature, more consolidation can be expected, since parts producers and distributors need to increase their size and establish an international footprint.
Aftermarket industry is cyclical and sensitive to general economic conditions. There are a few key drivers for this industry such as:
- New car sales, the consumption of automotive parts and equipment is strongly correlated with the demand of new vehicles. More than 80 millions of cars were sold in 2018 and the sales of vehicle is projected to increase further at a CAGR of 3% by the forecast period of 2018 – 2024.
- Shift in the trend from light combustion vehicles to hybrid electric vehicles. It is evident that more and more companies are changing their production lines, focusing their attention on electric vehicles, and thus the aftermarket industry needs to adapt to the change, thus bigger dimension and economies of scales are required.
- The price of raw material is a driver of profit or loss for the sector. Hence, trade frictions such as those between USA and China can be a factor of uncertainty for this industry, since the risk of rising prices can heavily affect the financial performance of companies operating in this industry. We have already seen that in the past a great degree of uncertainty coming from trade war and the business cycle itself has induced Volvo to postpone its IPO.
At the end of 2017 deal value in the aftermarket industry marked an all-time high of $40,7 billion, although the deal volume decreased by 10,6% in fact 194 deals were transacted in 2017 and 217 in 2016.
Deal Drivers
The agreement from Fiat Chrysler Automobiles NV to sell Magneti Marelli is the first big transaction under the guide of new CEO. Moreover, it represents a steering from the path previously followed consisting in separating the business by distributing shares to investors. There have been several reasons for this change.
The option of listing the company on the Milan stock exchange was seen as not optimal due to political uncertainty in Italy and global tensions, resulting in a worse market condition. Furthermore, profit warnings from automakers and suppliers were seen as potential threat. In particular, financial concern have been raised from Daimler AG with a second profit warning and Continental AG with an outlook cut. A sign of the poor performance of the industry is also represented the by stock price of Aston Martin following the IPO.
The process of separating divisions is a continuation of the strategy started from Marchionne, with the aim of focusing on the cars’ business at its core.
The rationale takes also in consideration the distribution of dividends, which have never been given to shareholders since the formation of Fiat Chrysler. The sale could give the company more than $2 billion in dividends, according to a senior credit analyst at Bloomberg Intelligence. As far as valuation is concerned, the sale price was 1 billion euros higher than analyst’s average valuation, Mediobanca reported in a note.
On a strategic note it is important to highlight that the new company formed from the deal, Magneti Marelli CK Holdings, concluded an agreement to supply components to Fiat Chrysler. KKR managed to create a big automotive by any standard: the new Marelli Calsonic Kensei will have revenue of 15.2 billion euros, and R&D departments in Europa, Japan and America. With Calsonic Kensei being specialized in conditioning, (exhaust) pipes and electrical components and Magneti Marelli representing a giant in the battery sector the deal should provide synergies, both from expertise and economies of scale. Also the new entity would make Calsonic more independent from Nissan.
Sources have said that FCA preferred Calsonic offer compared to a pure private equity one since it lowers the chance of the unit being broken up.
Deal Structure
The last 26th of October FCA announced that had sold Magneti Marelli to CK Holdings Co., holding company of Clasonic Kansei Corporation that is controlled by the American private equity firm KKR. Before the former CEO of FCA, Sergio Marchionne, passed away, he declared that he could have been interested in the sale of Magneti Marelli just for the right check. Mike Manley, current CEO of FCA, considered € 6,2 billion the right value for the auto components business division.
The combined business of Calsonic Kansei and Magneti Marelli will be renamed as Magneti Marelli CK Holding and will create the 7th largest global independent automotive components supplier, with combined revenues of € 15,2 billion. The new entity will operate nearly 200 facilities and R&D centers across Europe, Japan, the Americas and Asia Pacific.
The Japanese auto parts maker has raised about EUR 5 billion to support the acquisition of Magneti Marelli. 5 banks (Mizuho Bank, MUFG, Sumitomo Mitsui Banking Corp and Sumitomo Mitsui Trust Bank) clubbed the financing of Calsonic Kansei, bringing the outstanding debt for the combined companies at around ¥1trn (7,7 billion EUR). Shares of Calsonic and Magneti will form the collateral for the loan, three quarter of which will be denominated in yen and the remainder in euro. The financing creates a record for the largest LBO loan from Asia.
According to a Thomson Reuters report, Calsonic is paying 17x Magneti’s estimated earnings for 2019, which means that the projected earnings are equal to € 364.705.882, six times higher than those of 2017 (€ 61.386.204). Although the EBITDA of the Italian Company has been negative since 2011, this is the case in which the valuation of Magneti Marelli has been based on the potential future cash flow of the company and the relevant synergies that would be created, both in terms of cost reduction and research and development.
Calsonic’s buyout of Magneti is expected to be completed in the first half of 2019 and is subject to regulatory approval.
Goldman Sachs and J.P. Morgan acted as Financial Advisors to FCA, while UBS and Morgan Stanley advised KKR-Calsonic.
Sources and References: Bloomberg, Companies’ websites, Financial Times, Reuters, Wall Street Journal, CNBC, Il Giornale, Oica, Pitchbook, Auto News, Medium, NY Times, McKinsey report, PwC report, MarketWatch
To contact the authors:
Davide Martintoni davide.martintoni@studbocconi.it
Giuseppe Tricarico giuseppe.tricarico@studbocconi.it
Karolis Korniaga karolis.korniaga@studbocconi.it
Bocconi Students M&A Circle 
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