Business Breakdowns
· 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?
· Krishna Mohanraj
[00:00:00] S1: Perhaps it's worth talking about Stellantis, CNHI and IVECO together because they all came from the conglomerate. They're all in their own ways cyclical, capital intensive. They are all in some phase of a turnaround with challenged end markets. IVECO is a little bit different because of their defense exposure. With Stellantis, it is the product of a mega merger between Fiat Chrysler and Peugeot. Marchionne, in a very famous presentation a long time ago, talked about essentially the over-capitalization of the auto industry. And one of the biggest themes for Fiat was to reduce that by consolidation in the industry. So Stellantis is a product of that. It is definitely a car company, there's no question about that. And the market says that clearly. If you think about the multiples and the troubles that they've seen over the last few years, it is a difficult business. They've done their best to make the transition to EV. They have done their best to address the overcapacity, but essentially it is very clear that it's trouble. You can see that from the multiple. The valuation is undemanding. From a portfolio perspective, the exposure as a percentage of assets for Exor is about 10%. It's quite low compared to the historic exposures. Then you have CNHI, which again came from the old Fiat conglomerate. It is the more cyclical on-highway trucks business, was spun out as IVECO. And the Ag equipment business, which is a more higher quality, less cyclical business, became CNHI. They are the number two global player in that space after John Deere. A lot has happened at CNHI over the last three, four years to simplify the company, invest in technology. But again it is facing a cyclical low in its end markets, still a work in progress. We have a new CEO who's actually an insider from IVECO. For a very high quality business, the valuation is not demanding. It's another asset to look out for in the coming years. And then on IVECO, it's a global maker of commercial trucks, buses, defense vehicles spun off in 2022. The interesting thing is they're trying to separate out the defense business as a spinoff or a sale. And as you can imagine right now there is a lot of pent-up demand for anything in the defense sector. There is also chatter on M&A for the core business as well, including some potential conversations with the Indian company Tata Motors.
· Krishna Mohanraj, Zack Fuss
A lot more current news around IVECO, but it is a smaller stake for them in terms of share of NAV. If you look at the three businesses, I would say they're reasonable to cheaply valued businesses facing both idiosyncratic and weak end markets. From a portfolio standpoint, it feels like you're getting assets which are fairly undervalued. And we will talk about the NAV as a whole and what the stock trades as a discount to NAV, but in the underlying NAV, with the exception of Ferrari, I wouldn't call any of the other listed companies as overly valued. [00:00:00] S0: To round out the conversation on the listed companies and we'll dive deeper into some of them. I know we have left Juventus, Clarivate and then Philips, which I want to set aside just given the continued interest there. But Juventus probably takes more mindshare than it really does economic share, just given how high profile sports are today, but somewhat of an immaterial stake for them. And then Clarivate, which is an interesting one given that has very significantly underperformed as a listed company. But just curious how those assets came to be part of the portfolio and the varying degrees of importance and support for their broader capital allocation strategy.