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Marchionne's dilemma: To sell or not to sell Alfa?


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Marchionne's dilemma: To sell or not to sell Alfa?

Luca Ciferri

Automotive News Europe -- December 1, 2010 09:42 CET

TURIN – Fiat CEO Sergio Marchionne's self-confidence has helped him tackle problems that lesser executives would duck, but he finally may have met his match.

In a very public test of Marchionne's faith in his own turnaround strategy, in September Volkswagen Chairman Ferdinand Piech bluntly announced that he wants to buy Alfa Romeo.

Piech was suggesting that VW – and only VW — could transform Fiat's perennial money-losing brand into a real moneymaker.

Marchionne subsequently declared that he'd prefer to keep Alfa Romeo. But several sources with direct knowledge of the matter say that Fiat and VW have been discussing the sale of Alfa for the past four months.

Marchionne has not yet decided whether to sell the brand. And it's not just a matter of price. He has asked his staff to prepare a battle plan to evaluate how Fiat would fare without Alfa.

His staff's deliberations boil down to this: By selling Alfa Romeo, Fiat would be better positioned to survive the next two years, which promise to be the most difficult stretch of its turnaround.

But if Fiat can survive without selling Alfa Romeo – and if it can successfully restructure that premium brand – then Alfa Romeo would play a key role in Fiat's resurgence.

A chronic headache

So far, Alfa Romeo has been Marchionne's biggest failure. The brand has not turned a profit in any of the past six years, and possibly for the past decade.

Sales this year will barely surpass 120,000 units, nowhere near its goal of 300,000 units.

In April, Marchionne announced a plan to boost Alfa sales to 500,000 units by 2014. But analysts are skeptical.

”Maybe Alfa could get to half a million units a year, but only after the brand is sold to VW,” said Credit Suisse analyst Arndt Ellinghorst in a prophetic remark last June during the Automotive News European Congress in Bilbao.

Here are four good reasons why Fiat should sell Alfa Romeo, followed by six good reasons why it shouldn't.

By selling Alfa, Fiat could:

• Cash in between 1.5 billion to 2 billion euros. Then the post spin off Fiat Auto would be virtually debt-free.

• Slash product development expenditures of at least 1.5 billion euros, since Fiat no longer would have to launch five new Alfas from 2012 through 2014.

• Boost profits in 2011 and 2012, since the company would be rid of Alfa's annual losses projected at about 200 million euros.

• Reintroduce Dodge as a sporty brand in Europe, positioned above the mainstream Fiat brand. A sporty Dodge would not overlap Lancia-Chrysler, which will focus on comfort.

And here are six good reasons why Marchionne should keep Alfa Romeo:

• If Fiat can muddle through the next three years, it will emerge in 2014 with fatter profit margins and a nearly debt-free balance sheet, according to Mediobanca Securities.

• Fiat can raise as much as 2 billion euros by selling Magneti Marelli, Comau and Teksid, which produce auto parts, production tooling and engine blocks. Then Fiat wouldn't have to sell Alfa, and it could focus more tightly on the auto industry. Investors would like that.

• A relaunched Alfa eventually could command profit margins of 10 percent or so. That would help Fiat to generate the 3.5 billion euro annual operating profit that Marchionne has promised by 2014.

• Fiat will save money by letting Alfa Romeo and Chrysler share platforms. Moreover, Alfa could generate sales of 500,000 units a year, helping Fiat and Chrysler to achieve economies of scale. Roughly 300,000 of the 500,000 units of Alfa planned by 2014 will be based on architectures shared with Chrysler.

• Since Alfa Romeo will share its compact wide global architecture with Jeep, Fiat could produce those vehicles together in crucial growth markets like China and Russia.

• Without Alfa Romeo, Fiat would be hard-pressed to make reasonable volumes and decent profits with mid-sized and large cars. Aside from Ferrari's handful of supercars, Fiat would be forced to eke out a profit from low-margin segments like minicars and compact cars.

Selling or not selling Alfa is a challenging dilemma even for a no-nonsense decision maker like Marchionne.

If he believes Fiat can muddle through the next two years, he should probably keep Alfa Romeo. But if he harbors any doubts, perhaps it's time to sell.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20101201/ANE/101209987/1317#ixzz16rySmdSF

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Alfa Romeo Sale to VW Rumors Surface Again

WEDNESDAY, DECEMBER 01, 2010

Back in April, the Fiat Group announced yet another round of plans to revive its money-losing Alfa Romeo brand, which included the development of new models and a re-launch in the U.S market. At that time, this seemed possible as the Italian maker intended to make good use of Chrysler and its RWD platforms to expand the model range.

However, at the end of August, Alfa Romeo was rumored to be hemorrhaging about €200 million (US $261 million) annually. The brand-hungry Germans over at Volkswagen felt Fiat's need and offered to take over the historic Milanese company. After much unrest, in October, Fiat CEO Sergio Marchionne put an end to the rumors and reiterated his turnaround strategy, while Alfa estimated losses climbed to €306 million or about $400 million.

Now, Automotive News [AN] claims that in the past months the two companies have been discussing the sale of Alfa Romeo, but Marchionne is still undecided. So, what will happen next?

Inside sources told AN that the decision is not only about money, even though Fiat could use the cash and Volkswagen has plenty of it (http://carscoop.blogspot.com/2010/11/vw-group-to-invest-516-billion-in-its.html). But this is a classic case of the door swinging both ways. If Fiat can survive the next couple of years, which will be the most difficult period of the turnaround plan and keep Alfa Romeo, then it could count on the premium brand to spearhead its next move.

The other scenario sees Fiat earning some quick cash, but still struggling in two year’s time, so, yes, the pressure is really on Mr. Marchionne’s shoulders.

My take on the matter is that Alfa should not be sold. Fiat has the opportunity to use platforms sourced from Chrysler, so rear-wheel drive Alfa’s could make a much anticipated come-back. Not taking this step doesn’t make sense.

Furthermore, if the Volkswagen Group acquires Alfa, it will have a tough time fitting the Italian company in a portfolio that includes brands like VW, Audi and Seat. In any case, only time will tell. In the meantime, take a look at the list below, in which Automotive News reasons the benefits of keeping or selling Alfa Romeo.

By selling Alfa, Fiat could:

• Cash in between 1.5 billion to 2 billion euros. Then the post-spinoff Fiat Auto would be virtually debt-free;

• Slash product development expenditures of at least 1.5 billion euros, since Fiat no longer would have to launch five new Alfas from 2012 through 2014;

• Boost profits in 2011 and 2012, since the company would be rid of Alfa's annual losses projected at about 200 million euros;

• Reintroduce Dodge as a sporty brand in Europe, positioned above the mainstream Fiat brand. A sporty Dodge would not overlap Lancia-Chrysler, which will focus on comfort.

And here are six good reasons why Marchionne should keep Alfa Romeo:

• If Fiat can fight through the next three years, it will emerge in 2014 with fatter profit margins and a nearly debt-free balance sheet, according to Mediobanca Securities;

• Fiat can raise as much as 2 billion euros by selling Magneti Marelli, Comau and Teksid, which produce auto parts, production tooling and engine blocks. Then Fiat wouldn't have to sell Alfa, and it could focus more closely on the auto industry. Investors would like that;

• A relaunched Alfa eventually could command profit margins of 10 percent or so. That would help Fiat to generate the 3.5 billion euro annual operating profit that Marchionne has promised by 2014;

• Fiat will save money by letting Alfa Romeo and Chrysler share platforms. Moreover, Alfa could generate sales of 500,000 units a year, helping Fiat and Chrysler to achieve economies of scale. Roughly 300,000 of the 500,000 units of Alfa planned by 2014 will be based on architectures shared with Chrysler;

• Since Alfa Romeo will share its compact wide global architecture with Jeep, Fiat could produce those vehicles together in crucial growth markets such as China and Russia;

• Without Alfa Romeo, Fiat would be hard-pressed to make reasonable volumes and decent profits with mid-sized and large cars. Aside from Ferrari's handful of supercars, Fiat would be forced to eke out a profit from low-margin segments such as minicars and compact cars.

link:

http://carscoop.blogspot.com/2010/12/alfa-romeo-sale-to-vw-rumors-surface.html

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