Business Breakdowns
· Krishna Mohanraj, Zack Fuss
There was also a second holding company called IFIL, which further complicates how the family fortune was structured and managed. With Exor, all this has become simple. You've got both the holding companies merged, everything born under the Exor umbrella. The legal headquarters was moved to the Netherlands. The listing was moved there as well later, so everything came under a single country regulatory authority. It all made sense because you get full exemption on capital gains and dividends, a very competitive tax rate, extensive tax treaties globally. So it made sense for a global company to be based in the Netherlands. All that was done under Elkann. There you have both a long history of the Fiat group, but also under Elkann, over the last maybe 20-odd years, we've seen a lot of change. [00:00:00] S0: It's interesting because if you look at some of these family-led holding companies which have listings, they're typically extremely complicated. I think about the Bolloré group in France, but this one actually, in the scheme of things, is somewhat straightforward. Obviously John Elkann, the architect of a lot of that. And today we have what's primarily listed companies inside of this tax-efficient holding company. I guess it's a good time to present, of the 40 billion plus assets that they own, what is inside of this holding company today that he's effectively cleaned up over the course of the last 15, 20 years?
· Krishna Mohanraj, Zack Fuss
[00:00:00] S1: Today, if you look at Exor, you've got stakes in listed global companies, and then you have the private investments. It's weighted very much towards the publics—70% of gross asset value. And gross asset value is roughly, let's say, 45 billion euros. 70% of that is in four companies: Ferrari, Stellantis, CNH Industrial, which is Case New Holland, and Philips. Then you've got maybe another 6 or 7% in smaller listed investments—IVECO, Juventus, which is a football club, Clarivate. The rest is in private investments, so a range of investments there: Louboutin and Shang Xia, which are in luxury; The Economist magazine; Welltec, which is a Danish tools company in the energy sector. You also have an asset management firm that they set up a couple of years ago called Lingotto. If you think about that evolution, it's probably worth talking a little bit about how much that's changed. In 2009, when Exor was born, it was predominantly a mass-market auto company with a few other assets thrown in. But with this transformation and the unlocking of value in Fiat, it looks very, very different today. Ferrari is their largest asset, and like they say, Ferrari is not a car company. And Stellantis, which is the auto company, is only about 10 to 12% of assets. [00:00:00] S0: So if you think about the composition of today's business, John is paramount in architecting that. So what is it that's influenced him to craft the company in this way? What else is there to learn about John, who seems to be one of the more underrated business builders of his generation?
· Krishna Mohanraj
[00:00:00] S1: The first thing to say is when Elkann comes into the thick of action at Fiat, things were really, really bad. He was nominated as heir in 1997 when he was only 21. And that itself was because of a family tragedy. Gianni's own son dies of cancer in '97, but really only in 2003, 2004 does Elkann take over. His grandfather dies in 2003, his great uncle in 2004. So at the ripe age of 27, he becomes the sole family representative at the firm. And at that time, both financially and operationally, the company was struggling. They've been through four CEOs in three years, and for a while it looked like the firm wouldn't survive. So that's really the context of the start of Elkann, if you will. The second thing to say is that he had almost the perfect background for what this group needed. Very global mindset. Born in New York City, schooled in the UK, Brazil, France, engineering school in Turin, multiple global internships. Works for a couple of years at GE. Another very global experience. He was fluent in four languages and since 1997 his grandfather had gone out of the way to include him as a silent participant in a lot of business phone calls, later reviewing what was said, etc., to give him a vicarious sense of the business. While it was definitely a trial by fire at the start, he also had a lot going for him when he started. One of the first things he does when he takes over was play a role in the selection of Sergio Marchionne as CEO of Fiat. This was very controversial at the time because Marchionne was an outsider, but it ended up being a brilliant decision. Marchionne was known to the family. He had turned around this testing company called SGS and made a lot of money for the family. So he was known to them, but still a long shot. And Marchionne really went to work at Fiat. First, he manages to get about $2 billion from General Motors to get rid of a put option that Fiat had with them on Fiat's auto business. At that time, the last thing that GM wanted to do was to take on a struggling auto business from Fiat. So they pay him $2 billion to cancel that. Sergio then goes about almost single-handedly taking control of the car business, cutting costs, driving the team to execute. The family also had to put in capital to renegotiate bank debt. And from the brink of disaster, they turn it around.
· Krishna Mohanraj, Zack Fuss
By the time the financial crisis hits, Fiat is in a position to not just survive, but actually merge with Chrysler. That move to hire Marchionne made a huge difference. Marchionne ends up not only transforming Fiat, but also becoming a legend in the auto industry. He also went a long way towards the education of John Elkann. Even today, Elkann, every opportunity he gets, he pays homage to Sergio as both a personal mentor and a transformative figure in his life. Exor is formally existed in 2009. Fiat itself was transformed from a struggling conglomerate into its pieces. You've got Stellantis, the auto business, after the merger with Chrysler and Peugeot, CNHI, IVECO and of course Ferrari. 15 years, the amount of change in Exor has been staggering. If you look at the listed investments, maybe the big four. In 2009, three of the big four are no longer in the portfolio. So that tells you the extent of change. [00:00:00] S0: So if we talk about today's big four, which all attribute to Ferrari as the largest, Stellantis, CNH and then Philips, which we'll discuss later, how do you think about those big four in the context of the portfolio today? What is important to think about as it relates to each of those independent of one another, and maybe starting with Ferrari.
· Krishna Mohanraj
[00:00:00] S1: What can you say about Ferrari? I think you have a whole episode on Ferrari in Business Breakdowns. For Exor, it's been the gift that keeps on giving. Over the last decade or so since listing, the value unlock in Ferrari has been incredible. It continues to be the big driver of NAV per share growth for Exor. With Ferrari, the big question has always been this: is it a car company or is it something more, and more is it an ultra-premium luxury company? And if you hear John Elkann talk about it, it's not a car company. It's a very special company, something beyond great. The ethos of Ferrari is motor racing and selling cars is almost an afterthought. That's what makes them unique. Exor, as we know, they are trying to build great companies, and what they have with Ferrari is something beyond great already. If you look at what the market is saying, the market agrees. It's clearly saying this is not a car company. But I think that's a question that will be asked over and over again. The EV transition is coming and that will raise that question again. And I think that will be a further reconfirmation that they're nothing like a car company. But that is still TBD. I think the main thing to mention from a portfolio standpoint is the size of the Ferrari stake as a percentage of NAV. Now I think it started at 15% and went as high as almost half the portfolio. In February, Exor sold about $3 billion worth of shares with the intent of using the proceeds towards both buybacks and additional investments. So in a sense they are signaling a few things, acknowledging that Ferrari has become a huge part of the portfolio. They like concentrated, but I think they're comfortable with a concentration level of 25 to 30% and Ferrari had grown much beyond that. Also, they are signaling that they find their stock with an NAV discount, which we'll talk about, to be hugely undervalued. And all things equal, they want to invest in something that they know best. And what do they know better than Exor itself? So an intent to buy back shares while reducing over-concentration in their Ferrari stake. When you talk about listed investments, Ferrari would be the number one investment for them.
· Zack Fuss
[00:00:00] S0: If you think about their listed investment portfolio and the big four, they kind of check the box on a handful of industries. Ferrari, an automobile company, but with a luxury overhang. Stellantis, then your next company in what's a cyclical industry in auto. Clearly the involvement of Sergio Marchionne in changing the trajectory of their auto business is paramount. But today it's a challenged sector. How do you think about the stake in Stellantis and what are they doing in order to help improve the outcome to drive NAV at Exor?