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Fiat / Fiat Industrial The Value of a Spinoff

Stefano Gatti Stefano Lenzotti

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e [email protected] e [email protected] case centre

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

Stefano Gatti, Stefano Lenzotti

Fiat / Fiat Industrial – The Value of a Spinoff1

“There is no longer any reason to keep together sectors that operate with such diverse financial and industrial logic. The concept is not only outdated, it no longer serves any useful purpose.” Sergio Marchionne, 16 September 2010

1. Background of the Deal

“Fiat Investor Day”, held in Torino, Italy on 21 April 2010, set the stage for CEO Sergio Marchionne and members of the Group Executive Council to present the first quarter 2010 results to the financial community, along with projections for the future of the Fiat Group and its constituent companies.

This much anticipated event coincided with the official resignation of President Luca Cordero di Montezemolo, and the subsequent appointment by the Board of Directors of John Elkann, grandson of Giovanni Agnelli and President of EXOR, parent company of the Fiat Group

During the presentation of the 2010-2014 Business Plan, a partial and proportional demerger was announced, slated to take place in the months to come. This move would lead to the listing of a new holding, completely independent of the Fiat parent company: Fiat Industrial.

All companies operating in the “Capital Goods” business would be transferred to the new group. Pertinent activities would encompass production of industrial vehicles, agricultural machinery and relative mechanical parts. Only companies with “Automobile” as their core business were to remain under Fiat.

The need for a spinoff in the Fiat Group had been apparent for some time, and for two main reasons. First, the market found it difficult to appreciate the full value of each individual company within the framework of an industrial conglomerate. Second, the general tendency was to show a preference for companies with a strong focus on a single business, rather than widely diversified organizations.

So on 20 April, when word got out that the following day a spinoff would be annouced, market reaction to the news was positive, driving up Fiat S.p.A shares by 9.26% (see Figures 1 and 2). This favorable response was reconfirmed the day of the announcement, when Fiat closed at +1.73%. This despite an initial dip due to quarterly results that were positive, but still penalized by the recent crisis.

In the months to follow, rumors spread of a 9-billion euro offer for Fiat Industrial by Daimler, a company that had had previous dealings with Fiat when the Chrysler partnership was set up. The reports of a deal, although well-received by the market, were immediately denied. Fiat did however express its willingness to discuss the possibility.

1 This case was written by Professor Stefano Gatti (SDA Bocconi School of Management) and Stefano Lenzotti to provide a framework for classroom discussion, and not as a tool for illustrating more or less accurate assessment methodologies. All evaluations in this document are intended exclusively to give students a clearer understanding of corporate restructuring processes and the value creation that these processes can generate. The authors are not responsible for inappropriate use of the data cited herein. The authors wish to thank Massimo Della Ragione and Giuseppe Pipitone (Goldman Sachs) for their assistance in accessing certain data presented in this case study.

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

On 21 July 2010 the Fiat Group’s Board of Directors approved the partial and proportional demerger, in accordance with Article 2506 of the Italian Civil Code. On 16 September 2010, during the Extraordinary Shareholders’ Assembly convened to vote on the deal, the spinoff was definitively approved by shareholders. This set in motion the procedures that would lead to listing Fiat Industrial on the Borsa Italiana on 3 January 2011. On that occasion, Sergio Marchionne himself presented the details of the operation, saying: “Separation of the Group into two distinct entities will finally enable the strategic issue that has been a thorn in Fiat’s side for a number of years to be resolved. It will allow our Group to launch a new chapter in its history.”2 Figure 1: Trend in share prices of Fiat S.p.A. (Data source: Datastream)

8.80

9.00

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2 Source: “Il Sole 24 Ore”, 16 September 2010.

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

Figure 2: Trend in daily returns on Fiat S.p.A. shares compared to returns on the FTSE Italia All-Share index (Data source: Datastream)

-.08

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2010M03 2010M04 2010M05 2010M06

R_ACTUAL_FIAT R_FTSE_ITALIA

21/04/2010

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

1.1 Structure of the Fiat Group before the Spinoff

Prior to the spin off, the Fiat Group was the largest private industrial concern in Italy. Fiat designed, built and sold cars, trucks, agricultural machinery, engines, spare parts and mechanical components. The Group focused on technological innovation and environmental compatibility as competitive success factors.

For some time, diverging prospects and needs had been emerging in the Group’s traditional sectors.

The Automobile business in particular operated in an extremely competitive market, where key competitive factors included: price, quality, product range and personalization options, safety, fuel efficiency and functionality. All this calls for huge investments in research and development, due to consumer expectations of constant innovations in terms of new products, emissions control, and driver/passenger safety.

For the Capital Goods business, instead, key competitive factors centered on a solid brand, an extensive distribution network, financial services to support purchases, and a wide product range. This business was highly impacted by general economic conditions, demand for food and climatic conditions; here competitors spent less on research and development because demand was less dependent on product models.

In light of the above, Fiat Group subsidiaries could be classified in the following macro product categories (without taking into consideration the spinoff):

 Automobiles (Fiat Group Automobiles, Ferrari and Maserati): Fiat Group Automobiles manufactured and sold automobiles with the Fiat, Alfa Romeo, Lancia and Abarth brands, and light-duty commercial vehicles with the Fiat Professional brand. Greatest sales volumes were generated by the lower product segments (Mini, Multi Purpose Vehicle (MPV) and Compact). Ferrari and Maserati produced cars in the high segments (Luxury, Coupé, and Sports Cars).3

 Agricultural and construction equipment (CNH): CNH manufactured agricultural machinery with the brands Case IH Agriculture, New Holland Agriculture, and Steyr, and construction equipment with the brands Case Construction, New Holland Construction, and Kobelco. With a distribution network covering Europe, North America, Latin America and Asia, CNH is a global leader in both agricultural and construction equipment.

 Industrial Vehicles (Iveco): Iveco designed, produced, and sold a complete range of industrial vehicles with the Iveco brand, buses with the Irisbus brand, vehicles for fire-fighting and for special purposes with the Magirus and Astra brands. Iveco’s distribution network was primarily concentrated in Europe, Latin America and Australia.

 Components and production systems (FPT Powertrain Technologies, Magneti Marelli, Teksid and Comau): These companies produced mechanical components and automated industrial systems primarily for the Group. FPT Powertrain Technologies operated specifically in three distinct business lines: Automotive Applications (engines and spare parts for cars; light-, medium- and heavy-duty commercial vehicles; buses); Industrial Applications (engines and spare parts for industrial and agricultural machinery); and Marine Applications (marine engines for professional and pleasure crafts).

3 To identify the positioning of Fiat Group Automobiles, Ferrari and Maserati, we refer to traditional segmentation of the automobile market: Mini (Segment A); MPV (Segment B); Compact (Segment C); Mid-size (Segment D); Executive (Segment E); Luxury (Segment G); Coupé (Segment H); Sports Car (Segment I) and Van (Segment L).

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

Fiat Group held a controlling interest (if not all equity) in the companies listed above, as illustrated in Figure 3.

Figure 3: Fiat Group organizational chart before the spinoff (Source: Fiat Group Consolidated Financial Statement 2009)

This structure was the final outcome of a series of acquisitions constituting a major diversification strategy initialized in the late ‘60s with the aim of shoring up the Group in all of its business sectors (see Table 1).

Table 1: Timeline of major deals resulting in the Fiat Group structure before the spinoff (Source: Consolidated Financial Statement Fiat Group 2009)

Although Group Headquarters has always been located in Torino, from the outset Fiat’s growth took an international path resulting in a strong global presence. In fact, industrial activities and financial services in the automotive sector were handled by companies in roughly 50 countries, and consolidated through commercial relationships with customers in around 190 countries.

Fiat’s growing ambition was to shore up international business, in particular outside of Europe. This ultimately led the Fiat Group to hold a market share of 31.8% in Italy, 8.6% in Europe, and a leadership position on the Brazilian market, immediately prior to activating demerger procedures.

Figure 4 shows the breakdown of revenues both by business area and geographic destination, highlighting which markets and business activities account for the largest share of turnover.

Fiat Group Automobiles

100%

MASERATI

100%

FERRARI

85%

IVECO

100%

FPT POWERTRAIN TECHNOLOGIES

100%

CNH

89.3%

FIAT

GROUP

COMAU 100%

MAGNETI MARELLI

100%

TEKSID

84.8%

Year Milestone 1899 Fiat founded 1967 Magneti Marelli acquired

1975 Iveco founded, Ferrari joined Group

1978 Comau and Teksid established, Lancia absorbed in Group

1984 Alfa Romeo acquired

1993 Maserati joined Group

1999 New Holland and Case Corporation merger

2005 FPT Powertrain Technologies founded

2009 Strategic Partnership with Chrysler

2011 Fiat Spinoff

Automobiles

Components and production systems

Agricultural &

Construction Equipment

Industrial Vehicles

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

Figure 4: Breakdown of revenues by business area and geographical destination (Source: Fiat Group Consolidated Financial Statement, 2009)

56%

20%

14%

1% Automobiles

Agricultural & Construction Equipment

Industrial Vehicles

Components & Production Systems

Other Activities

25%

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Italy

Rest of Europe

North America

Mercosur

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

2. Details of the Spinoff

The Fiat spinoff represented the last step in the process of decentralizing management. This process had actually begun in the ‘70s, initially transforming former divisions into separate subsidiaries of the same Holding, and ultimately into two distinct groups.

Specifically, this separation involved on one hand Iveco and CNH activities, plus the Industrial and Marine (I&M) branch of FPT Powertrain Technologies, and on the other automobile-related businesses, including Fiat Group Automobiles, Ferrari, Maserati, Magneti Marelli, Teksid, Comau and the Passenger & Commercial Vehicles (P&CV) line by FPT Powertrain Technologies (See Figure 5).

Figure 5: Organizational Chart of Fiat S.p.A. and Fiat Industrial S.p.A. (Source: Demerger Information Document)

Summing up, the spinoff would result in the creation of a new group, Fiat Industrial S.p.A. This new organization was listed on the Borsa Italiana on 3 January 2011 with ordinary, preferred and non-voting shares, according to the pre-existing share structure of the Fiat Group.

To make it possible for Fiat Industrial S.p.A. to exist independently on the market, the following steps were necessary:

 Internal reorganization of Fiat Group to transfer the activities and shareholdings relating to the Capital Goods business;

 Provide Fiat Industrial Holding with initial equity to compensate for transferred activities;

 Divide Fiat Group’s debt between the two new groups, Fiat S.p.A. and Fiat Industrial S.p.A.

CNH Iveco

I&M P&CV

FPT Automobiles Components Other Activities

Fiat S.p.A.

Fiat Shareholders

CNH Iveco FPT I&M

Fiat Industrial S.p.A.

FPT P&CV Automobiles Components Other Activities

Fiat S.p.A.

Fiat Shareholders

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

2.1 Internal Reorganization of the Fiat Group

Prior to the Fiat Group spinoff, Iveco’s industrial activities were radically reorganized. The aim was to set up a group structure separating Italian businesses linked to Industrial Vehicles from Industrial and Marine. Foreign shareholdings pertinent to these sectors were to be concentrated in a single subsidiary of the Group.

This reorganization was executed by means of two transactions conducted in tandem; the effectiveness of these initiatives was clearly contingent on Fiat Industrial S.p.A. being admitted for listing on the MTA (Mercato Telematico Azionario) by the Borsa Italiana. The first called for Iveco to transfer groups of activities and shareholdings representing Italian operations to Nuove Iniziative Finanziarie Cinque and Nuova Immobiliare Nove, two companies wholly owned by Fiat S.p.A. and inactive prior to the spinoff.

Specifically, Nuove Iniziative Finanziarie Cinque acquired the group of activities associated with Industrial Vehicles, while Nuova Immobiliare Nove obtained from Iveco the group of activities relating to Italian operations and shareholdings in Industrial & Marine. Subsequently, Nuova Immobiliare Nove acquired interest in SAIC Fiat Powertrain Hongyan Co.Ltd. Chongqing held by FPT Powertrain Technologies (which remained within the consolidated Fiat S.p.A.)

To more clearly illustrate the above transactions, Tables 2 and 3 provide a list of shareholdings transferred from Iveco to Nuove Iniziative Finanziarie Cinque and Nuova Immobiliare Nove.

When these deals came into effect, Nuove Iniziative Finanziarie Cinque took over the corporate name Iveco, while the former Iveco (which at this point counted only a few non-core businesses, with relation to the group of transferred activities) was renamed Fiat Gestione Partecipazioni S.p.A.; lastly, the name Nuova Immobiliare Nove was changed to FPT Industrial S.p.A.

At the same time, the second transaction resulted in the transfer of foreign shareholdings in the Industrial Vehicles business and the I&M branch of Powertrain activities from Iveco to Fiat Netherlands Holding N.V. This beneficiary company already held approximately 90% of the share capital of CNH Global, and shareholdings in other foreign entities relating to the Industrial Vehicles business.

To complete the structure of the Fiat Industrial Group, Fiat Industrial Finance was incorporated on 7 June 2010 in order to establish a centralized treasury capable of operating in international financial markets.

Table 4 lists the value of shareholdings transferred to Fiat Industrial S.p.A. as of 30 June 2010, as stated in the half-year financial statement presented by Fiat S.p.A.

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

Table 2: List of shareholdings transferred to Nuove Iniziative Finanziarie Cinque S.p.A (Source: Demerger Information Document)

Table 3: List of shareholdings transferred to Nuova Immobiliare Nove S.p.A. (Source: Demerger Information Document)

Table 4: Shareholdings transferred to Fiat Industrial S.p.A. at 30 June 2010 (Source: Demerger Information Document)

Company Name Percentage of Ownership

OFFICINE BRENNERO S.p.A. 100%

IVECO ACENTRO S.p.A. 50%

ALTRA S.p.A. 100%

ASTRA VEICOLI INDUSTRIALI S.p.A. 100%

NAVECO Ltd 50%

SAIC IVECO Comm. Vehicles Investment Co. Ltd 50%

IVECO OTO MELARA S.c.r.l. 50%

SAVECO PARTECIPAZIONI S.r.l. 100%

CRF S.c.p.a. 9,99%

UNIONCAF S.r.l. 0.001%

FIAT SE.P.IN S.c.p.a. 5.99%

ELASIS S.c.p.a. 3.30%

ORIONE S.c.p.a. 0.22%

SIRIO Sicurezza industriale S.c.p.a. 4.64%

FIAT REVI S.c.r.l. 6%

V.IVE.RE GEIE 50%

GEIE V.IV.RE 50%

IVECO MAGIRUS AG 5.66%

EOS S.c.r.l. 3.04%

Company Name Percentage of Ownership

EUROPEAN ENGINE ALLIANCE S.c.r.l. 66.6%

IVECO MORENFORSHUNG 60%

FPT OF NORTH AMERICA 100%

Company Name Percentage

Of Ownership Number of Shares Held

Carrying Value for Fiat At 30 June 2010 (euro)

Fiat Netherlands Holding N.V. 100% 94,923,538 4,577,346,053

Nuove Iniziative Finanziarie Cinque S.p.A. (future Iveco S.p.A.)

100% 200,000,000 200,000,000

Nuova Immobiliare Nove S.p.A. (future FPT Industrial S.p.A.)

100% 100,000,000 100,000,000

Fiat Industrial Finance S.p.A. 100% 100,000,000 100,000,000

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2.2 Impact on Consolidated Equity of Fiat Group

To move forward with the partial and proportional spinoff, the first step was to create Fiat Industrial S.p.A., which took place on 15 July 2010. To do so, Fiat S.p.A. subscribed and paid in the entire sum of 120,000 euro in share capital, consisting of 80,000 shares with a par value of 1.50 euro each.

Fiat Industrial S.p.A. was given an additional capital increase by means of a reduction in Fiat S.p.A share capital. This was done by reducing the par value of all shares, rather than buying back and then cancelling outstanding Fiat S.p.A. shares.

When the spinoff plan went into effect, Fiat S.p.A.’s equity amounted to 6,377,262,975 euro, of which 1,092,247,485 ordinary shares, 103,292,310 preferred shares, and 79,912,800 non-voting shares, with a par value of 5 euro each. Pursuant to the spinoff, share capital was reduced from 6,377,262,975 euro to 4,464,084,082,50 euro, by decreasing the par value of all share classes from 5 euro to 3.5 euro.

Consequently, the total amount of share capital transferred to Fiat Industrial S.p.A. was 1,913,178,892.50 euro, consisting of the same number of Fiat S.p.A. shares with a par value of 1.5 euro each.

These shares were allocated to Fiat S.p.A. shareholders, without consideration, when Fiat Industrial S.p.A. was listed on the Borsa Italiana.

The breakdown of shareholders’ equity as of 30 June 2010 is provided in Table 5.

Table 5: Breakdown of consolidated equity of Fiat S.p.A. and Fiat Industrial S.p.A. at 30 June 2010 (Source: Demerger Information Document)

2.3 Impact on Net Debt of Fiat Group

To ensure the material separation of Fiat Industrial S.p.A. and Fiat S.p.A., two conditions had to be in place when the spinoff actually took effect: the complete financial autonomy of both groups, and a level of liquidity and solidity that would allow them each to fulfill their respective short and medium-long term obligations.

The first move taken to secure these conditions was to establish Fiat Industrial Finance, which played the same role as Fiat Finance for the Fiat Group. This new financial institution carried out centralized treasury activities and handled all financial transactions for the Fiat Industrial Group.

In addition, financing was set up for Fiat Industrial S.p.A. in order to minimize any form of subsidization from Fiat S.p.A from the outset. In June 2010 a CNH bond was issued for 1.5 billion dollars, with no

(in euro) Fiat S.p.A.

Pre-demerger Fiat S.p.A.

Post-demerger Fiat Industrial S.p.A.

Post-demerger

Share Capital 6,377,262,975.00 4,464,084,082.50 1,913,178,892.50*

Legal Reserve 716,458,326.00 501,520,828.00 214,937,498.00

Share Premium Reserve 1,540,884,892.00 1,078,619,424.00 462,265,468.00

Reserve for Purchase of Own Shares 543,446,846.00 543,446,846.00

Reserve for Own Shares held 656,553,154.00 656,553,154.00

Own shares held in Portfolio (656,553,154.00) (656,553,154.00)

Retained Profit/ (Loss) 2,884,133,602.00 1,724,169,407.50 1,159,964,194.50

Stock Option Reserve 103,789,900.00 103,789,900.00

Other reserves 86,887,735.00 86,887,735.00

Net profit (loss) at 30 June 2010 47,319,921.00 47,319,921.00

Total 12,300,184,197.00 8,549,838,144.00 3,750,346,053.00

* Additional to the 120,000 euro in capital existing pre-demerger

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guarantees given by Fiat S.p.A.; the expiration on a one-billion euro credit line was also extended. In July 2010 an agreement was finalized with eight banks for 4.2 billion euro in financing,4 earmarked to cover working capital needs and to pay off outstanding infra-group loans when the spinoff took effect amounting to 4,948 million euro as of 31 December 2009. Lastly, before finalizing the transaction, bilateral credit lines were transferred to Fiat Industrial S.p.A. totaling one billion euro.

Table 6 shows the breakdown of Fiat Holding’s debt. Therefore the data shown below do not represent the Group’s consolidated debt; they refer to Fiat S.p.A.’s balance sheet at 30 June 2010.

Table 6: Breakdown of Net Debt of Fiat Holding and Fiat Industrial Holding at 30 June 2010 (Source: Presentation of Demerger Plan at the Extraordinary Shareholders’ Assembly)

Table 7, instead, shows the consolidated net indebtedness structure associated with the industrial activities of Fiat S.p.A. and Fiat Industrial S.p.A.,5 presented to shareholders during the Extraordinary Assembly convened on 16 September 2010. As no consolidated financial statements were available for 30 June 2010, the data in the table are estimates of the values that would presumably have been observed at year’s end 2010, corresponding to the date on which the spinoff took effect. Table 7: Projected net debt of industrial activities at 31 December 2010 (Source: Presentation of Demerger plan at Extraordinary Shareholders’ Assembly)

The net debt of consolidated industrial activities, estimated in excess of 5 billion euro as of year-end 2010, was divided equally between Fiat S.p.A and Fiat Industrial S.p.A. Liquidity allocation was contingent on respective financial requirements of the two groups; as a result, approximately 10 billion euro went to Fiat S.p.A and approximately 3 billion euro to Fiat Industrial S.p.A.

As regards the bond issues, these were not transferred as part of the spinoff, but remained with the issuing entities. Consequently Fiat S.p.A. still held a bond worth approximately 9 billion euro, while Fiat Industrial S.p.A. had bonds issued by CNH in 2010 and 2009 worth a total of 2 billion euro.

4 Of this financing, 2 billion euro was provided through a syndicated loan which took the form of a Revolving Credit

Facility, and 2.2 billion was disbursed directly by the eight bookrunners of the syndicate as a Bridge Loan to Bond with a one-year maturity, renewable for one additional year. The Bridge Loan to Bond was subsequently reimbursed by Fiat Industrial S.p.A. in March 2011 via two bond issues: the first for 1 billion euro with a four-year maturity, and the second for 1.2 billion euro with a seven-year maturity. 5 This figure does not include assets and liabilities associated with the provision of financial services, which include lending to third parties, and rental and leasing activities of CNH, Iveco, Fiat Group Automobiles and Ferrari.

(in thousands of euro) Fiat S.p.A.

Pre-demerger Fiat S.p.A.

post -demerger Fiat Industrial S.p.A.

Post-demerger

Cash and cash equivalents 356 356 -

Current financial receivables 478,925 265,925 213,000

Debt (4,369,119) (2,929,119) (1,440,000)

Net Debt (3,889,838) (2,662,838) (1,227,000)

(in thousands of euro) Fiat S.p.A.

Pre-demerger Fiat S.p.A.

Post-demerger Fiat Industrial S.p.A.

Post-demerger Industrial Activities Net Debt

~ 5 ~ 2.5 ~ 2.5

Liquidity ~ 13 ~ 10 ~ 3

Bonds ~ 11 ~ 9 ~ 2

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2.4 Pro-forma Consolidated Financial Statements: Fiat S.p.A. and Fiat Industrial S.p.A.

Tables 8 and 9 show income statements and balance sheets respectively for Fiat Group, Fiat S.p.A. and Fiat Industrial S.p.A., based on the spinoff as if it had taken place on 31 December 2009.

From an accounting-based perspective, certain Fiat S.p.A. assets were allocated to Fiat Industrial S.p.A. according to book value. Consequently, to compile these reports there was no need to recalculate fair value of all the balance sheet items in question. 6

6 To clarify, the sum of the single balance sheet items ascribable to Fiat S.p.A. and Fiat Industrial S.p.A. post-demerger does not necessarily coincide with the total value reported in the Group’s pre-demerger consolidated financial statement at 31 December 2009. Any discrepancies are due to the reinstatement of intercompany items, which was necessary to compile the reports in question. Reinstating intercompany items entails reinstating assets and liabilities, as well as profit and loss and cash flow items which can be attributed to transactions carried out between subsidiaries of the Fiat S.p.A Group, and subsidiaries of Fiat Industrial S.p.A. Subsequent to the spinoff, these transactions could no longer be considered infra-group and consequently would not be eliminated.

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Table 8: Pro-forma consolidated income statement for Fiat Group, Fiat S.p.A. and Fiat Industrial S.p.A. at 31 December 2009. (Source: authors’ elaboration of Demerger Information Document)

(in millions of euro) Consolidated Income Statement Fiat Group 2009

Pro-forma Consolidated Income Statement Fiat S.p.A. 2009

Pro-forma Consolidated Income Statement Fiat Industrial S.p.A. 2009

Net Revenues 50,102.00 32,684.00 17,968.00 Cost of Goods Sold (40,588.00) (26,216.00) (14,912.00) Selling, general, and administrative costs

(4,296.00) (2,673.00) (1,636.00)

Cost of Research and Development (1,398.00) (1,010.00) (388.00) Other Income (expenses) (89.00) (13.00) (73.00) EBITDA 3,731.00 2,772.00 959.00 Amortization and depreciation (2,673.00) (2,036.00) (637.00) EBIT 1,058.00 736.00 322.00 Restructuring costs (312.00) (168.00) (144.00) Result from investments: 27.00 77.00 (50.00) Share of profit/loss of investees accounted for using equity method 18.00 65.00 (47.00) Other income (loss) from investments

9.00 12.00 (3.00) Company operating income 773.00 645.00 128.00 Financial income (loss) (753.00) (210.00) (543.00) Gross Income 20.00 435.00 (415.00) Gains (losses) from disposal of investments

4.00 3.00 1.00

Other unusual income (loss) (391.00) (193.00) (198.00) Profit (loss) before taxes (367.00) 245.00 (612.00) Taxes (481.00) (487.00) 6.00 Net Profit (loss) (848.00) (242.00) (606.00) Attributable to: Owners of parent (838.00) (277.00) (564.00)

Non-controlling interest (10.00) 35.00 (42.00)

Gains/(losses) on cash flow hedge

408.00 394.00 14.00 Gains/(losses) on fair value of available-for-sale financial assets

3.00 3.00 0.00

Gains/(losses) on exchange differences from translating foreign operations

509.00 315.00 194.00 Share of other comprehensive income of entities using the equity method

(47.00) (27.00) (20.00)

Income tax relating to components of other comprehensive income/(loss) (51.00) (32.00) (19.00) Total other comprehensive Income/(loss) net of tax

822.00 653.00 169.00

Total Net Profit /(Loss) (26.00) 411.00 (437.00)

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Table 9: Pro-forma consolidated statement of financial position for Fiat Group, Fiat S.p.A. and Fiat Industrial S.p.A. at 31 December 2009. (Source: Authors’ elaboration of Demerger Information Document)

(in millions of euro)

Fiat Group Consolidate d Statem ent of

Financial Position - 2009

Total % on assets and liabilities

Fiat S.p.A. Pro-form a Consolidated

Statem ent of Financial Position - 2009

Total % on ass ets and liabilities

Fiat Indus trial S.p.A. Pro-form a

Consolidated Statem ent of Financial

Position - 2009

Total % on as sets and liabilities

ASSETS Inventories 8,748.00 13.01% 4,606.00 10.47% 4,144.00 13.40% Trade receivables 3,649.00 5.43% 2,074.00 4.72% 1,729.00 5.59% Current tax credits 674.00 1.00% 407.00 0.93% 315.00 1.02% Other current assets 2,778.00 4.13% 1,879.00 4.27% 946.00 3.06% Cash and Cash equivalent 12,226.00 18.18% 10,665.00 24.25% 1,561.00 5.05%

Operating current asse ts 28,075.00 41.76% 19,631.00 44.63% 8,695.00 28.12% Intangible assets 7,199.00 10.71% 3,999.00 9.09% 3,200.00 10.35% Property, plant and equipment 12,945.00 19.25% 9,099.00 20.69% 3,846.00 12.44% Operating leased assets 457.00 0.68% - 0.00% 457.00 1.48% Def ined benefit plans assets 144.00 0.21% 18.00 0.04% 126.00 0.41% Def erred tax credit 2,580.00 3.84% 1,663.00 3.78% 917.00 2.97%

Operating fixed assets 23,325.00 34.69% 14,779.00 33.60% 8,546.00 27.64% Real estate investments - 0.00% - 0.00% - 0.00% Equity investments and other financial assets 2,159.00 3.21% 1,583.00 3.60% 671.00 2.17% Other equity investments 46.00 0.07% 46.00 0.10% - 0.00%

Operating e quity investm ents and real estate 2,205.00 3.28% 1,629.00 3.70% 671.00 2.17% Lending activity 12,695.00 18.88% 2,090.00 4.75% 10,605.00 34.30% Credits tow ard Fiat S.p.A. / Fiat Industrial S.p.A.

- 0.00% 4,948.00 11.25% 2,201.00 7.12%

Current financial assets: 853.00 1.27% 838.00 1.91% 190.00 0.61%

Securities 217.00 0.32% 180.00 0.41% 37.00 0.12% Other financial assets 636.00 0.95% 658.00 1.50% 153.00 0.49%

Financial assets 13,548.00 20.15% 7,876.00 17.91% 12,996.00 42.03% Available for sale assets 82.00 0.12% 71.00 0.16% 11.00 0.04%

TOTAL ASSETS 67,235.00 100.00% 43,986.00 100.00% 30,919.00 100.00% LIABILITIES Accounts payables 12,295.00 18.29% 9,232.00 20.99% 3,220.00 10.41% Debt for corporate taxes 377.00 0.56% 163.00 0.37% 262.00 0.85% Def erred tax liabilities 152.00 0.23% 90.00 0.20% 62.00 0.20% Other current liabilities 5,865.00 8.72% 3,520.00 8.00% 2,391.00 7.73% Provisions: 8,432.00 12.54% 4,474.00 10.17% 3,958.00 12.80% Employees' benefits 3,447.00 5.13% 1,542.00 3.51% 1,905.00 6.16% Others 4,985.00 7.41% 2,932.00 6.67% 2,053.00 6.64%

Operating liabilities 27,121.00 40.34% 17,479.00 39.74% 9,893.00 32.00% Financial debt 28,527.00 42.43% 18,306.00 41.62% 17,370.00 56.18% Asset-backed financing 7,086.00 10.54% 568.00 1.29% 6,518.00 21.08% Others 21,441.00 31.89% 15,537.00 35.32% 5,904.00 19.10% Financial debt toward Fiat S.p.A. / Fiat Industrial S.p.A.

0.00% 2,201.00 5.00% 4,948.00 16.00%

Other financial liabilities 464.00 0.69% 412.00 0.94% 227.00 0.73%

Financial liabilities 28,991.00 43.12% 18,718.00 42.55% 17,597.00 56.91% Paid up capital and reserves attributable to parent's shareholders

10,301.00 15.32% 7,581.00 17.24% 2,711.00 8.77%

Non-controlling interest 814.00 1.21% 200.00 0.45% 718.00 2.32%

Equity capital 11,115.00 16.53% 7,781.00 17.69% 3,429.00 11.09% Other liabilities 8.00 0.01% 8.00 0.02% - 0.00%

TOTAL LIABILITIES 67,235.00 100.00% 43,986.00 100.00% 30,919.00 100.00%

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2.5 Financial Targets for Fiat S.p.A. and Fiat Industrial S.p.A.

Figure 6 shows the key financial targets for Fiat S.p.A. and Fiat Industrial S.p.A. presented to shareholders during the Extraordinary Assembly convened to approve the spinoff.

For both Fiat S.p.A. and Fiat Industrial S.p.A. strong growth was projected for the period from 2010 to 2014, to be considered a sign of recovery from the global economic crisis which began in 2008.

With regard to Fiat S.p.A. the projected CAGR for revenues was 19%, with turnover reaching around 64 billion euro in 2014, double that of 2010. Therefore, the net improvement of EBITDA and EBIT is to be interpreted in light of an increase in business volume and anticipated optimization of operational efficiency.

As far as Fiat Industrial S.p.A., the business plan predicted a rise in revenues, in line with an 11% CAGR, to reach nearly 29 billion euro in 2014. In this case, too, the factors underpinning the higher EBITDA and EBIT are an expected increase in business volume and significant levels of operational efficiency to be achieved.

In comparing the investment plans for Fiat S.p.A. and Fiat Industrial S.p.A., we can see that investments for the latter group are lower than for the former. This reflects the fact that the Capital Goods business requires fewer resources, in particular in research and development.

Figure 6: Comparison of Financial Targets of Fiat S.p.A. and Fiat Industrial S.p.A. in billions of euro (Source: Business Plan 2010-2014)

>32

>19 22

24 27

2010E 2011E 2012E 2013E 2014E

Fiat Revenues Fiat Industrial Revenues

2.9

3.6

4.7

6.0

6.9

1.4

1.9

2.6

3.3

4.1

2010E 2011E 2012E 2013E 2014E

EBITDA Fiat EBITDA Fiat Industrial

3.7

4.5

4.2

3.6 3.7

1.0

1.4 1.4 1.4 1.3

2010E 2011E 2012E 2013E 2014E

CAPEX Fiat CAPEX Fiat Industrial

~0.6

1.1

1.8

2.7

3.5

~0.6

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2010E 2011E 2012E 2013E 2014E

EBIT Fiat EBIT Fiat Industrial

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

3. The Problem

Considering the diversity of the Automobile and Capital Goods businesses in terms of performance levels, projected growth rates and investment strategies, CEO Sergio Marchionne was convinced that the market was not able to fully understand the real, intrinsic value of the Fiat Group in its pre-demerger conglomerate structure. The thinking was that the market valuation of the Group factored in a conglomerate discount. Therefore, the spinoff would make the Fiat Group’s hidden value emerge because sector analysts would evaluate the Automobile and Capital Goods businesses separately, and the Group’s shareholders would reap the benefits.

Table 10 shows the as-is, pro-forma income statement of Fiat S.p.A., Fiat Industrial S.p.A. and Fiat Group for the four-year period from 2009 to 2012E.7

Table 11 provides key financial data for the Fiat Group before the spinoff, in addition to a sample of comparables in the Automobile Sector. Figure 7 shows the expected positioning of Fiat S.p.A. with respect to these companies.

Table 12 and Figure 8 respectively illustrate the key financial data for a sample of comparables in the Capital Goods sector, and the expected positioning of Fiat Industrial S.p.A. with respect to these companies.

Was Sergio Marchionne justified in believing the market was incapable of comprehending the true value of the Group? Would the planned spinoff actually emerge the Group’s hidden value? Other options included undertaking a carve out, by listing 49% of Fiat Industrial’s share capital at 9 euro per share, 8 or issuing tracking stocks on the industrial vehicles branch, diluting Fiat Group’s control down to 51%. Wouldn’t these options have generated even greater benefits for Fiat Group shareholders?

7 To correctly interpret Table 10, keep in mind that to calculate EPS, we did not use the exact number of shares as of the initiation of the spinoff process (reported by share class in Section 2.2). Instead, we applied a weighted average of outstanding shares, respectively of Fiat S.p.A., Fiat Industrial S.p.A. and Fiat Group (Source: Goldman Sachs Reports). 8 Market price of one share of Fiat Industrial S.p.A. on the MTA of the Borsa Italiana at 3 January 2011. We implicitly assume the same market price as of 1 January 2009 with reference to a hypothetical carve out. Despite the different market conditions in 2009 and in 2011, we believe that our assumption is an acceptable one for the sole purpose of calculating capital gains on the sale of 49% of shareholding in Fiat Industrial S.p.A. by Fiat Group.

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SDA Bocconi School of Management Fiat / Fiat Industrial 2011_002

Table 10: Pro-forma Income Statement and key financial data for Fiat S.p.A., Fiat Industrial S.p.A. and Fiat Group respectively, for the four-year period from 2009 to 2012E (Source: Authors’ elaboration based on Goldman Sachs reports)*

Fiat S.p.A. (in millions of euro) Net Revenues 32,684 31,617 36,191 41.199 Cost of sales (26,216) (25,248) (28,672) (32.017) General, administrative and sales costs (2,673) (2,586) (2,960) (3.369) Research and Development costs (1,010) (977) (1,118) (1.273) Income (loss) from ordinary operations (13) (13) (14) (16) EBITDA 2,772 2.793 3,426 4.523 Amortization and depreciation (2,036) (1,950) (2,030) (2.203) EBIT 736 843 1,396 2.320 Result from investments 77 110 146 196 Financial income (loss) (210) (133) (121) (103) Other income (loss) (358) (261) (224) (213) Profit before taxes 245 560 1,197 2.200 Taxes (487) (419) (384) (605) Tax rate % N.M. (75%) (32%) (28%) Minorities (35) (13) (15) (35) Net Profit (277) 128 798 1.560

Weighted average of outstanding Fiat S.p.A. shares (mln)

1,237 1,238 1,238 1.238

Fiat Industrial S.p.A. (in millions of euro) Net Revenues 17,968 20,331 22,862 25.889 Cost of sales (14,912) (16,077) (17,834) (19.858) General, administrative and sales costs (1,636) (1,851) (2,082) (2.357) Research and Development costs (388) (439) (494) (559) Income (loss) from ordinary operations (73) (83) (93) (105) EBITDA 959 1,881 2,360 3.010 Amortization and depreciation (637) (823) (857) (930) EBIT 322 1,058 1,503 2.080

Result from investments (50) 64 100 175 Financial income (loss) (543) (133) (114) (87) Other income (loss) (341) (496) (486) (518) Profit before taxes (612) 493 1.003 1.650 taxes (6) (167) (226) (373) Tax rate % N.M. (34%) (23%) (23%) Minorities 42 (37) (60) (65) Net Profit (576) 289 717 1.212

Weighted average of outstanding Fiat Industrial S.p.A.shares (mln)

1,237 1,238 1,238 1.238

Fiat Group (in millions of euro) Net Revenues 50.102 51.384 58,412 66.360 Cost of sales (40.588) (40.772) (45,877) (51.159) General, administrative and sales costs (4.296) (4.424) (5,026) (5.709) Research and Development costs (1.398) (1.416) (1,612) (1.832) Income (loss) from ordinary operations (89) (98) (111) (126) EBITDA 3.731 4.674 5,786 7.533 Amortization and depreciation (2.673) (2.773) (2,887) (3.133) EBIT 1.058 1.901 2,899 4.400 Result from investments 27 174 246 371 Financial income (loss) (753) (265) (235) (189) Other income (loss) (699) (757) (710) (731) Profit before taxes (367) 1.053 2,200 3.851 Taxes (481) (586) (610) (978) Tax rate %** N.M. (56%) (28%) (25%) Minorities 10 (50) (75) (100) Net Profit attributable to Fiat Group shareholders (838) 417 1,515 2.772

Weighted average of outstanding Fiat Group shares (mln)

1,237 1,238 1,238 1.238

** If profit before taxes 2009 was positive, we assume a Tax Rate of 36.5%.

2009 2010E 2011E 2012E

* Note that the sum of single items in the income statements of Fiat S.p.A. and Fiat Industrial S.p.A. is not necessarily equal to the corresponding item in the income statement of Fiat Group. Differences are due to intercompany items, which, if the two businesses are separated, are no longer calculated as the result of Infra-group transactions, and therefore must be computed in the income statements of Fiat S.p.A. and Fiat Industrial S.p.A.

2009 2010E 2011E 2012E

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