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Undervalued or Unaffordable?

The New York Times’ Dealbook recently highlighted Fiat’s offer of $198 million for 3.3% of Chrysler’s stock. Fiat, which currently owns 58.5% of Chrysler, is looking to consolidate ownership and further integrate its American subsidiary.

The offer implies an enterprise valuation of $6.7 billion for the entire firm. However, many, including the article’s author, believe that Chrysler is worth much more (see Valuing Chrysler Too Cheaply).

Mr. Marchionne’s offer values Chrysler at just four times his own expectation of the company’s 2012 net income. General Motors, meanwhile trades above nine times expected earnings for last year, and Ford Motor’s multiple is just over 10 times.

The Fiat proposal also pegs the enterprise value of Chrysler at $6.7 billion, scarcely more than the company’s $5.5 billion of…Ebidta…Ford’s enterprise value-to-Ebidta multiple is over five times; G.M.’s is just 2.6 times, partly thanks to $20 billion of net cash. That makes Mr. Marchionne look mighty cheap.

Sergio Marchionne, Fiat’s chief executive, admits that the offer might not be in line with Chrysler’s current performance. However, I am more interested in understanding why Fiat would undervalue Chrysler. Given Fiat’s current struggles, I can’t help but wonder if the real issue is that Fiat can’t afford to buy it anymore…

More on this topic (What's this?) Read more on Chrysler at Wikinvest
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Revisiting Cross-Border Deals

As we approach the end of another year, and in the interest of intellectual honesty, I thought now would be a good time to revisit some of the predictions I’ve made regarding cross-border deals over the years.

Hits

Tesco’s entry into the U.S. Market – Several years ago I suggested that Tesco would face some serious headwinds in the U.S. market (see Tesco’s Venture into the U.S.). Consistent with my expectations, it now seems Tesco is considering ending its presence in the U.S. because the “journey to scale and acceptable returns will take too long relative to other opportunities” (see Supermarket Tesco says ready to exit U.S.).

Misses

Tata JLR – I was skeptical of Tata’s acquisition of JLR (see Foreign Takeover Troubles?, Tata and Jaguar/Rover RevisitedUpdate: Tata and Jaguar/Rover, Progress Report: Tata Motors and JLRBuyers Remorse: Will Tata Rue the Purchase of Jaguar and Land Rover?). Although Indian firms have had a pretty bad track record acquiring companies overseas, the JLR acquisition has bucked the trend. JLR sales have, so far, exceeded expectations (see Tata Profit Up on JLR Sales). So as of today, I’ve gotten this one wrong. Of course, these things take years to play out, and I still think we need a few more JLR product cycles to reach a definitive conclusion. But as the Magic 8-Ball used to caution, I think it’s only fair to say, “Outlook not so good” for my prediction thus far.

On the Fence

Fiat Chrysler - Again, I was very skeptical about this deal (see Fiat-Chrysler Darts ForwardFiat/Chrysler RevisitedCan Fiat Really Pull It Off, and Is Fiat Nuts?). Fiat is certainly struggling; however, Chrysler has experienced something of a revival (see Fiat Europe Struggling). I cannot say for sure whether Fiat will ultimately succeed in the U.S., and/or with its ownership interest in Chrysler, but so far, my predictions for Chrysler’s demise have been postponed, …perhaps indefinitely??

Anyhow, business predictions aside, here’s to wishing you all a happy and healthy New Year!

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Coca-Cola Acquires Aujan Stake

Coca-Cola announced in October that it was looking to further expand into the Middle East. Towards that end, Coca-Cola and Aujan Industries signed an agreement that marks one of the largest multinational investments in the consumer-goods industry in the region (see Aujan Industries and The Coca-Cola Company Announce Signing of $980 Million Agreement).

Under the terms of the agreement, The Coca-Cola Company will acquire 50 percent of the Aujan entity that holds the rights to Aujan-owned brands, and 49 percent of Aujan’s bottling and distribution company…

As many of you know, I am generally skeptical of acquisitions (see Great Shareholder Ripoff and Why M&A Deals Go Bad). I am even more skeptical of international deals, especially those in developing markets (see So You Want to Do Business In a Developing Country?). But this one might just be different…

“As one of the region’s leading beverage companies, this partnership will allow us to unlock new and substantial opportunities,” said Sheikh Adel Aujan, Chairman of Aujan Industries. “Drawing upon Aujan’s deep regional insights and the international capabilities of The Coca-Cola Company, Aujan will continue to leverage the strength of its leadership team and is now positioned for even greater success in the region and internationally.

I think that analysis is pretty spot on. This agreement allows a combination of Aujan’s local expertise with Coca Cola’s branding and distributional capabilities. If they are able to successfully avoid the kind of partner conflict that often scuttles alliances of this sort, Coca-Cola and Aujan will be able to work together to enhance the sales of Aujan’s products by leveraging Coca-Cola’s 80+ years of international experience and existing distribution network throughout the Middle East. In fact, it is similar to the Pepsi Wimm-Bill-Dann deal – another deal that I liked (see Pepsistroika).

So taking stock, I believe that the Coca Cola deal might just have a shot at increasing shareholder value.

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