CNH CEO to Mull Spinoff Options After Credit Rating Boosted
(Bloomberg) -- CNH Industrial NV, once part of carmaker Fiat, will work to strengthen its balance sheet this year before considering whether to separate its Iveco truck business from the company’s more profitable tractor division, Chief Executive Officer Richard Tobin said.
CNH, which makes farm equipment sold under the Case and New Holland brands, has been cutting debt, which brought its credit rating up to investment grade with two of the three major ratings agencies.
Moving firmly into the higher tier would give CNH “flexibility to consider a variety of different options for the portfolio, and what creates the most value,” Tobin said in an interview at the company’s headquarters in central London. “You could spin out individual businesses with very efficient balance sheets.” But he added, “I am not saying we will do this.”
CNH rose as much as 6 percent in Milan to a record, giving it a market value of about 16 billion euros ($20 billion), after being temporarily halted.
Tobin, 54, has worked with Fiat Chrysler Automobiles NV CEO Sergio Marchionne since the 1990s. Now he’s in a position to replicate the formula that Marchionne, who is also chairman of CNH, has used to drive a 10-fold increase in Fiat’s market capitalization: separate businesses and let them float freely to squeeze out the most value for shareholders.
“At the end of the day, one doesn’t have to be a genius” to see that the agricultural equipment business would have higher multiples, Tobin said. “If you want to get full value, you would delink" the two businesses, he said. Currently “we pay a semi-conglomerate discount on the pieces," Tobin said. CNH trades at lower multiples than its main tractor peers such as Deere & Co. and Kubota Corp.
The agriculture equipment unit generated about half of CNH’s profit last year on just 39 percent of its $27 billion in revenue, according to the company’s presentation on Jan. 30. Commercial vehicles accounted for 37 percent of sales and just less than 20 percent of profit. Analysts, aware of Marchionne’s record, have been asking when Tobin will follow suit.
"It’s time to separate the wheat from the chaff," Berenberg analysts led by Sebastian Kuenne said in a note Jan. 16. They say CNH should consider disposing its construction-equipment division and seek a partner for Iveco.
Tobin first wants to revamp Iveco before considering options. He acknowledges that the commercial vehicle unit so far has failed to execute its strategy. The plan is reduce fleet sales of larger trucks to focus on retail activity and increase prices to boost profit.
With a more robust balance sheet, CNH will have a "variety of different things to do other than a straight sale because for shareholders, unless someone wants to come and pay a huge premium, it’s probably more valuable to spin-off the business and let the market value it," Tobin said. "We are not religious about either option.”
CNH, whose operations are based in Turin, Italy, and Chicago, isn’t alone in evaluating whether to split off its truck businesses as the broader auto industry realigns around electric and self-driving cars.
Daimler AG has started preparations for its biggest corporate overhaul in a decade. The manufacturer plans a holding company with three legally separate units, Mercedes-Benz Cars & Vans, Daimler Trucks & Buses and financial services. Volkswagen AG’s influential labor leaders are open to granting the company’s heavy-trucks division more independence, potentially leading to a spin-off of the unit, people familiar with the matter said in November.
Tobin says CNH has been “very transparent” about evaluating options for its assets. “There is not a sacred cow, returns are highest in agriculture."
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