Fiat Sale Gives New CEO Room to Fulfill Marchionne Dividend Vow

(Bloomberg) -- Fiat Chrysler Automobiles NV hasn’t paid any dividend since it was formed in 2014. The times are a changin’.

The Italian-American carmaker, which already hinted at rewarding shareholders next year after having eliminated its net industrial debt, now has a 6.2 billion-euro ($7.14 billion) reason to speed up its decision. That’s the equity value of its Magneti Marelli unit, which was sold -- minus its plastics division -- to KKR & Co.’s Calsonic Kansei on Monday.

The deal “opens up the possibility” of a special dividend to shareholders of as much as 2 billion euros, Philippe Houchois, an analyst at Jefferies, wrote in a note to clients following the announcement. The sale could provide Fiat Chrysler with more than $2 billion in dividends, according to Joel Levington, a senior credit analyst at Bloomberg Intelligence who used market multiples for the auto supplier peer group in his analysis.

“The transaction recognizes the full strategic value of Magneti Marelli and is another important step in our relentless focus on value creation,” Fiat Chrysler Chief Executive Officer Mike Manley said in a statement.

Fiat Sale Gives New CEO Room to Fulfill Marchionne Dividend Vow

With the sale, Manley and Chairman John Elkann are continuing the late Sergio Marchionne’s strategy of extracting value for shareholders by separating businesses from the auto division. Under Marchionne, Fiat Chrysler’s value rose more than 10-fold, helped by the spinoffs of supercar maker Ferrari NV and truck and tractor division CNH Industrial NV.

Fiat Sale Gives New CEO Room to Fulfill Marchionne Dividend Vow

Marchionne, who hinted in April that Fiat could start paying a dividend once 2018 results were wrapped, said that Fiat investors should benefit from Marelli’s separation. In his last television interview in April, Marchionne said Fiat was looking to earn bigger North American profit margins than Ford Motor Co. and General Motors Co. as soon as this year, paving the way for payouts to shareholders. “It’s time for a change,” he said at the time, signaling his plan to step down next year. He died in July following complications from surgery.

The carmaker plans to use about 20 percent of industrial free cash flow to fund dividends throughout its five-year plan to 2022, it said in a presentation in June. The strategy targets doubling adjusted earnings before interest and taxes to as much as 16 billion euros in 2022, and envisions paying about 6 billion euros in dividends over the next five years.

Shares of Fiat Chrysler advanced as much as 7.2 percent in Milan after a delayed opening. The stock was up 3.7 percent to 13.93 euros at 4:06 p.m. local time. The price for the unit is more than 1 billion euros higher than analysts’ average valuation for the business, Mediobanca said in a note.

The sale is a major milestone for Manley, who took over Fiat Chrysler days before Marchionne’s death. It’s also the first deal he has overseen since the company’s so-called deal “maestro” passed away.

Marchionne, who had initially favored separating the business by distributing shares to investors, had said Fiat was open to changing its mind for a “big check.” Fiat Chrysler opted for a sale of Magneti Marelli instead of listing on the Milan stock exchange after market conditions deteriorated amid global trade tensions and political uncertainty in Italy, as well as profit warnings from automakers and suppliers.

Elkann, the head of the Agnelli family company that controls Fiat Chrysler, has been directly involved in the discussions since Marchionne, who had started talks earlier this year, suddenly passed away, according to people familiar with the matter. Through Sunday, shares of the carmaker had lost about 20 percent since Marchionne’s death as Italian stocks entered a bear market after the country’s new populist government failed to win investors’ confidence.

Simplifying the company allows Manley to focus on building and selling cars, and make Fiat Chrysler less complex in the case of any eventual merger talks.

©2018 Bloomberg L.P.