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CEO could address key issues facing Fiat Chrysler

Michael Wayland
The Detroit News

Second-quarter earnings for Fiat Chrysler Automobiles NV likely will be overshadowed on Thursday by myriad outside issues and reports involving the automaker.

Aside from fines, vehicle buybacks and unprecedented sanctions announced by federal regulators against the automaker earlier this week, several topics are on the minds of employees, analysts and news media: Ferrari’s upcoming IPO; reports of its Magneti Marelli components company being for sale; and CEO Sergio Marchionne’s continuing hunt for a merger partner.

A Thursday call to discuss what analysts expect to be healthy second-quarter results is the first opportunity Marchionne will have to address a number of the topics publicly, including new merger discussions.

The Detroit News on Tuesday reported directors of the automaker are expected to meet in London on Thursday to review a more detailed analysis of potential tie-ups with several automakers. The companies include General Motors Co., Volkswagen AG and Renault-Nissan, among others.

For months, Marchionne has been touting the need for the industry to consolidate to save billions on research and development of new vehicles and powertrain technologies. Most infamously, he spent a majority of a three-hour first-quarter earnings call discussing his consolidation manifesto, “Confessions of a Capital Junkie.”

There has even been talk of Marchionne vying for a hostile takeover of GM, following CEO Mary Barra rejecting a proposed merger by Marchionne earlier this year.

Bernstein Research analyst Max Warburton in a recent note to investors argued Fiat Chrysler, which has massive debt and little to no cash to offer, could even make an all-equity offer to GM holders, offering a premium and promising a dramatic improvement in future profitability. Not to mention, himself.

“Were Marchionne to make an offer for GM, he can’t offer anything immediate and valuable like cash,” according to Warburton. “But he can offer big promises — and credibility as someone who has made a big automotive deal work.”

Standard & Poor's Senior Equity Analyst Efraim Levy in a Monday note to investors said while FCA should be able to manage the up to $105 million fine from the National Highway Traffic Safety Administration, it could be hazardous for a tie-up.

“While the amount should be manageable, we think it will be a hindrance for a company seeking a merger partner due to expected rising costs for operational investments,” he wrote, adding the fines and other expenses would equal between 7 percent to 8 percent of Fiat Chrysler’s 2015 net income.

As part of the $105 million settlement in the government’s investigation of nearly two dozen recalls covering 11 million vehicles, the automaker also faces at least three years of oversight by an independent monitor into its auto safety efforts and must offer to buy back about 193,000 recalled trucks and SUVs.

Regarding Magneti Marelli, some analysts believe if Fiat Chrysler isn’t considering selling it, the company should be. As well as selling its two other components businesses — Comau (production systems) and Teksid (iron and castings), of which it owns 84.8 percent.

“We think this would enable management to focus time and scarce resources on the business of automobile manufacturing, unlock value for shareholders, and partially reduce the hefty debt burden on FCA's balance sheet,” wrote Morningstar analyst Richard Hilgert in a July 20 investors note.

For the second-quarter, analysts expect operating profit of 1 billion euros ($1.1 billion), a 4.1 percent increase compared with a year ago, according to financial data and software company FactSet. Revenue is forecast to rise 18 percent to 27.49 billion euro (about $30 billion).

mwayland@detroitnews.com

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