Two and a half cheers for Fiat chief Sergio Marchionne, whose efforts to bring order to the once-Byzantine Fiat group structure took another step forward yesterday. The plan is to merge Italy’s Fiat Industrial and US-traded CNH – in which FI has an 88 per cent interest – into a new holding company with a primary listing in New York.
That makes sense and investors should welcome the decision, although more for the longer-term advantages than for short-term gains. CNH was formed in 1999 when New Holland, Fiat’s majority-owned farm and construction equipment business, acquired US rival Case. Fiat Industrial was formed when the Italian group spun off its non-car operations in 2010. Together, FI and CNH comprise the third-largest maker of capital equipment by sales worldwide. But CNH’s separate identity and minority shareholders make intra-group business more complex. Valuations suffer, too: CNH shares trade at an enterprise value to 2012 earnings ratio of a little more than three times, while FI’s are on 4.3. That compares with five to six times for peers such as Volvo and Caterpillar. No instant cost-savings are expected from the full marriage. But there should be cheaper refinancing possibilities longer-term. Greater liquidity of the new entity’s shares could improve market ratings, making the equity more useful, too.
The half cheer is reserved because of an accompanying “loyalty” plan. Shareholders can “earn” double votes if they participate in FI or CNH shareholder meetings or remain on the register for three years. Such schemes have strong advocates in continental Europe, where short-termism is much derided. But differential voting plans can be a dangerous, double-edged tool for countering this. Here, one beneficiary could be the Agnelli family holding company, with 27 per cent of FI. Not so progressive.