Description

Fiat – FCA (Fiat Chrysler Automobiles)

Fiat currently offers investors an appealing asymmetric risk/reward ratio with a potential upside of 500% - 800% over the next 4 years, while at the same time providing a limited downside due to the resilient values of Ferrari and Maserati, which are almost worth the current market cap and could be spun off in a crisis.

The potential of the company seems to be misunderstood or grossly neglected by the majority of investors. Fiat trades at significant discounts to its peers and well below its breakup value. Fiat seems to be valued as just an Italian carmaker with a shitty brand, a high debt load and a home market in deep recession. There is certainly truth in it, but there is much more to the story.

With the completion of the takeover of Chrysler this January, Fiat (or Fiat Chrysler Automobiles (FCA) going forward) became the 6th biggest carmaker by revenues in the world and owns a variety of well-known brands. The company is still in kind of a turnaround/ transformational situation, but the most critical steps are already completed. In the future the milestones to generate strong shareholder returns are reaching the full benefits of the takeover, getting results in line with competition, performing a successful execution of the global premium segment strategy, and paying down debt. If FCA delivers on its current 5-year targets (2013 to 2018), shareholders could see impressive returns of up to 800% (based on an EV/EBIT multiple of 8-10 in 2018) over the next 4 years.

In general companies tend to promise a lot, but by studying FCA’s case, achieving their targets doesn’t seem to be just wishful thinking. In the light of industry trends and comparisons with competitors, the bar is set high but not astronomically high. More importantly, FCA’s management appears to be very good if not outstanding and capable to deliver on their strategy if the economic climate will allow it. At an EV/EBITDA multiple below 3, FCA is priced far away from a successful execution, and even a partial success should generate quite decent returns for shareholders going forward.

Ferrari, Maserati and the auto parts businesses (Magneti Marelli, Teksid and Comau) act as a downside protection, if the mass market car business runs into deep troubles. The unsecured debt at Fiat’s level would allow spin-offs of these divisions and the main shareholder (the Agnelli Family) and management would likely go that route if needed to preserve shareholder value. Fiat’s current market cap is €9b. Ferrari is worth around €4.5-6b, Maserati €3-4b and potentially more with a successfully execution of its present strategy. The components businesses together are worth around €2b. Magneti Marelli, the biggest one of the components businesses is a global leader in its segment with captive sales below 40% and consistent profits throughout the crisis. With a clear path of worldwide growth in car sales and a still depressed margin level, €2b for the three businesses can be seen as conservative. Taken together, these assets provide a solid downside protection - Ferrari and Maserati are especially resilient in value.

Fiat’s long and volatile history as an automobile maker dates back to 1899 - the year when Giovanni Agnelli and other investors founded the company. Fast forward around 100 years, Fiat has taken over some carmakers along the way (eg. Alfa Romeo, Ferrari, Maserati), became a relevant automobile maker in Europe and the Agnelli Family still owns around 30% of the company (via the family holding company Exor).

At the beginning of this century, the strategy and organisation of the company was flawed and Fiat ran into deep trouble. Two family members who had active roles in the company died between 2002 and 2004. The company was close to bankruptcy at that time and had 5 CEOs in just 3 years. Eventually, Sergio Marchionne -who is still CEO of Fiat today - was appointed by the Agnelli Family in mid-2004. The situation of Fiat’s car business was in such a bad shape that GM paid Fiat $2b in early 2005 in order not to have to buy the rest of Fiat! The companies had had a deal since 2000 - GM had a 20% stake in Fiat and Fiat had the right (put option) to sell its remaining car business to GM.

Sergio Marchionne fixed Fiat’s mess. He reduced bureaucracy, quickly refocused the business, turned it around and brought the company back to profitability in one and a half years after 4 years of losses. He launched successful new cars and formed alliances to share costs and gain scale. Scale matters a lot in this business. Fiat’s management knew early that a long-term survival in the car business would only be possible if Fiat were to become a big global player. Before the take-over of Chrysler, Fiat considered selling the mass market car business, but the crisis in 2008/09 with the subsequent bankruptcy of Chrysler opened a game changing opportunity for Fiat. A successful combination of the two companies would form a group of a scale large enough to stay in the business in the long term. Apart from that, the acquisition was a significant achievement in terms of value creation for Fiat - the numbers speak for themselves.

Fiat paid no more than $4.4b for the complete acquisition of Chrysler. At the end of 2013, Chrysler had a net cash position of around $1b and achieved an EBIT of $4b in that year. Including unfunded pension obligations of roughly $4b, the price is currently below an EV/EBIT multiple of 2! Not to mention that Fiat and Chrysler are already 5 years into integration and the bulk of the $4.4b was paid this year plus more than half of it came from Chryslers cash balance. For the record, the average EV/EBIT multiple for car makers is currently at 12.5. At an EV/EBIT multiple of 8 Chrysler alone is worth around (~ €24b) FCAs TEV (~ €24b).

Sergio Marchionne deserves a lot of credit for this takeover. Certainly not all the credit, but he arranged the very beneficial deal for Fiat. He saw the benefits of the merger for the Italian car maker and was willing to put tremendous effort into completing the ambitious plan to merge the two companies. As part of the deal, he became CEO of Chrysler in 2009 and quickly organised a turnaround of the company. Since his arrival at Chrysler, the company’s culture changed considerably. Management became more decentralised, the group more focused on what really matters and quality, cost structure and market share of Chrysler’s cars have been improving decently since then.

At the end of 2010 the industrial business (trucks, tractors etc.) and the car business were separated. Today FCA only includes the car making business of Fiat. Both Chrysler and Fiat went through hell over the last decade. The majority of employees are still with the group regardless. They know how to deal with obstacles - they had to overcome a lot. I think the market is not pricing this and Marchionne properly.

The merger of Fiat and Chrysler into one holding compnay is likely approved (on 1st August) by Fiat’s shareholders and completed soon thereafter. The companies will merge into a Netherlands-based holding company, which will pay taxes in the UK and have its main listing on the NYSE and a secondary listing in Milan. Before the end of the year - probably in October - this chapter should be closed and the company should trade on the NYSE. There is a risk that the merger doesn't go through though (see risks).

The capital structure of the company will benefit from the merger into one holding company. The scale and geographical diversification of the combined entity should lower interest costs. Fiat is currently paying an average 6.7% on its debt. Two recent bond issuances since the completed takeover confirm the potential to lower the average interest burden going forward.

• €1b due in 7 years were priced at 4.75% this March
• €0.85b due in 8 years were priced at 4.75% this July

A year ago Fiat still had to offer 6.75%. Apart from lower interest costs in the future, cash will be able to be allocated between the “two companies” freely. Fiat (€20.5b debt v. €8.5b cash) is much more indebted than Chrysler (€9.5b debt v. €9.2b cash) but could only access Chrysler’s cash through dividend payments which are limited at 50% of Chrysler’s earnings.

At the end of H1 2014, the Group had debt of €31.9b (€17.3b in bonds and the rest in bank loans) and €18.7b cash. Cash to revenue ratio stands at 20%. Net debt is at €13.1b plus €3b in underfunded pension obligations. Over time, Fiat should be able to reduce its interest expense from its current level of close to €2b. In his plan, Marchionne aims at a net debt level of just €1b in 2018. With his revenue target and cash to revenue ratio of 20%, debt would slightly decrease from its current level. FCA should be able to reduce its average interest expense to around 5.5% - depending on where interest rates in general go.

The combined entity owns a variety of brands, which opens up tremendous flexibility and possibilities to target different segments without diluting a single brand. The position is quite similar to Volkswagen Group’s – just not as good.

Fiat has its strength in small cars, LCVs and engines. It has a good position in Europe and Latin America, but very week presence in North America. Apart from that, it also has the Luxury brands and the components business. Chrysler on the other hand, is strong in big cars, trucks and SUVs, but weak in engines. It has a strong position in North America but weak international presence. The combination of the two forms a strong alliance.

The benefits are already recognisable, but not jet fully reached. There is still potential to drive costs, quality and efficiency in the entity. For example a standardisation of many common parts could drive out costs and increase quality at the same time. Around 70% of the variable cost of a new model can be leveraged across other models. 20% can be seen as common architecture families for different cars. The costumer never sees 80% of the components of a car. So of course FCA is not alone in leveraging components across multiple platforms, but they seem to be able to still gain a lot in this field.

Ferrari:

Ferrai is one of the highest rated brands globally and certainly offers the most sought after high-end performance cars in the world. The volumes are intentionally kept at 7000 units/year and the waiting list to get a new Ferrari is at around 2 years at the moment. For example, the limited LaFerrari (499 units) that sells for €1m, received 700 requests before the car was even presented and had overall more requests than 2 times the limit. With a growing class of very rich people (HNWI & UHNWI) in the world, Ferrari’s pricing power should remain more than intact going forward.

Sergio Marchionne sees Ferrari’s net margins above 15% in 2018. Ferrari and Maserati can share more R&D costs and potentially benefit from other synergies as well. The well perceived customising programs are also increasing margins. From 2016 onwards Alfa Romeo will get Ferrari engines too. The unit volume is likely to be kept at around 7000 cars/year, but a strongly growing class of high-net-worth individuals in Asia might lead to higher production levels. A softening of the limit would immediately boost margins and the bottom line. According to Marchionne EBITDA would be well above €1b at 10k cars a year. In 2013 EBITDA was €660m and EBT was €364m.

An after tax multiple of 15 puts Ferraris value at €3.8b. Using an EBIT multiple of 12 yields €4.4b and an EBITDA multiple of 9 leads to €5.9b. For a business like Ferrari, this seems to be reasonable. If one takes the (well in excess of) €1b EBITDA guidance at 10k cars/year, Ferrari’s value would grow to around €9b. I should mention that FCA only owns 90% of Ferrari - so maybe this is the reason why the equity trades at at €9b ;-)...

Maserati:

Maserati’s organisation was reshaped under Marchionne already 10 years ago. In 2007 the brand showed profits for the first time after 17 years of losses since being part of Fiat. The brand really took off in 2014 (right at the 100 year anniversary). Car sales went from 6.2k in 2012 to 15.6k in 2013 and were already at 17.5k in H1 2014. For the full year, management believes they will get to 38k cars based on current orders. This recent success story is due to the newly launched (2013) Quattroporte and Ghibli, which are luxury full-size and large-size sedans that are meant to attract a broader audience to Maserati. Sales with the new strategy were initially targeted to get to 50k/y over the years, but will be close to 40k already in 2014.

The new cars aim at the high end of the premium segment which is currently dominated (almost overcrowded) by the Germans (Porsche, BMW, Audi and Mercedes). The cars are equipped with Ferrari engines, are powerful, sound amazing, have an appealing design (at least this is how I see it) and they should be able to attract enough costumers at their price levels. The Quattroporte starts at 102.500$ and the Ghibli begins at 66.900$. As far as I can judge, German cars offer a little more comfort (especially at the back seats) and are technically superior in some areas, but the driving experience of Maserati’s cars beats them. Judging from the current response, the cars seem to find a market - especially the lower priced Ghibli seems to attract a lot of people.

At the moment, the total luxury segment stands at about 1m cars/year and could grow to 1.25m cars/year in 2018 - mainly due to growth in Asia. In total, Maserati targets 75k in sales. Besides the new sedans a luxury SUV (Levante) will arrive in late 2015 and round off the product range for the full luxury segment.

Trying to go from 15.6 to 75k cars might seem to be quite dilutive for a brand, but the brand should be able to retain its exclusivity. With 75k cars sold per year, Maserati will still stay below Jaguar (80k/year in 2013) and be certainly well below Porsche’s sales (160k in 2013).

Maserati achieved revenues of €1.5b (avg. car selling price €96k) and an EBT of €171m in 2013. In H1 2014 sales increased to €1.4b and EBT €120m. For the full year, management believes they will reach 38k cars. At these levels, revenue should already be around €3b and EBT at around €250m for 2014. If the new cars don’t fall apart in a year or two, Maserati should have reasonable chances to reach the 2018 targets. It will also depend on the success of the Levante. I’d say Maserati is currently worth around €3-4b and could become worth around €6-7b (€6b in sales and margins slightly above 10%) with a successful execution of its strategy.

Jeep:

Jeep is currently very successful in North America. In the first 6 months of this year, Jeep is best in class in its segments (CUV/SUV) per model with average sales of roughly 73.200 per model (5 models) and very close to the market leader Ford on a total basis. Ford achieved 396k units with 6 models v. 366k for Jeep with 5 models. Jeep’s market share in North America stands above 10% in the UV segment.

Going forward management plans to replicate part of Jeep’s North American success globally. The total volume target is ambitious, but probably doable - the goal is to reach 1.9m units in 2018. This year the sales are likely to reach 1m units. Key drivers to achieve the future growth are a stronger globalisation of the brand, especially an introduction to Brazil and China where Jeep is almost unrepresented, and a stronger presence in Europe where Italy will partly serve as a new production base.

The global UV industry is predicted to grow from roughly 14m units in 2013 to 18m units in 2018, with the strongest CAGR of 9% in APAC. Jeep’s global dealership network is planned to grow from roughly 4700 to over 6000 dealers. And the production base will spread from the US to Italy, China, Brazil and India over the next 4 years.

In Brazil, Jeep can expand on Fiat’s shoulders. Fiat has a strong presence in Brazil (23% market share) with the largest dealer network in the country (600 dealerships). So far, Fiat was primarily present in the mass market. Going forward, the country’s economy is believed to be mature enough for more premium cars. According to IHS the UV market should get a boost and more than double from 2013 levels to over 800k units in 2018.

Fiat’s facilities in Brazil are basically running at full capacity. In 2013 FCA only sold around 23k of imported Jeeps (from the US) in Brazil. The company secured a deal with the Brazilian government to build a new facility to produce Jeeps (capacity: 200k units) directly in Brazil in the future. The government donated the land, provided infrastructure support, gave tax incentives (50% reduction) and 80% of the financing is subsidised via development banks. The plant will be ready in 2015. Even though the current environment is challenging the favourable long-term trend should be intact.

In Italy one of Fiat’s facilities will be remodelled to produce Jeeps with a capacity of up to 200k. FCA invested around €1b in its Melfi plant where the new Jeep Renegade (besides other Fiat vehicles) will be produced for worldwide distribution. This will be the first Jeep car produced outside the United States. This is part of the strategy to increase utilisation rates in Fiat’s existing mass market plants in Europe, while at the same time reducing excess capacity in this overcrowded segment without plant shut-downs.

The overall UV market size in Europe is slightly below 5m and should provide room for growth for Jeep. The brand sold less than 60k cars in 2013 – a market share of only 1%. In June, 2 months after the launch of the Cherokee, the share stood already at close to 3%

China is currently the largest market (60k units sold in 2013) for Jeep outside the US. FCA recently formed a joint venture with Guangzhou Automobile Group to begin a localised production of Jeep vehicles in the country. The production is expected to begin in late 2015. The UV industry in APAC stands at 5.3m units and is expected to grow to over 8m in 2018. Jeep plans to reach a production capacity of 500k over time and an increase in dealership locations from below 400 to above 1200 in 2018.

The volume targets for Jeep are ambitious, but the anticipated market shares in the “new” markets (<5%) are well below Jeep’s current market share in the UV Segment in the US (>10%). The strategy largely depends on the success of Jeep in its new markets.

Alfa Romeo:

Alfa Romeo is kind of a joker in FCA’s overall strategy. It is designated to fill the gap between the mass market brands and the pure luxury brands Ferrari and Maserati and to increase utilisation in the European plants with products that could achieve way better margins that the mass market offers in Europe. The brand is probably the single best chance for FCA to be successful with this plan. A dilution of Maserati to a lower price segment would be very harmful - trying to climb up the price and quality ladder with another brand of their portfolio while still offering cheaper/lower quality cars is almost a sure adventure to burn shareholder money.

Nonetheless, Alfa Romeo’s part in FCA’s strategy for the next 4 years is definitely the most critical one and one that must be observed with quite a healthy dose of scepticism. I’d say Sergio Marchionne knows this very well and the group will put tremendous effort into it, but I think it will still be very difficult to succeed. Engineers from Ferrari, Maserati and other divisions got together with an R&D budget of €5b. I guess the group has the capability to fulfil the plans, but this can’t be assessed before cars will be launched in 2016. The Alfa Romeo 4c currently acts as a teaser in the US.

Chrysler:

Since Fiat took over Chrysler, not just Jeep, Ram and Dodge are improving sales and market share points - also Chrysler itself has been seeing better days again. Coming from 800k sales in 2005, sales and market share plummeted to levels not seen since the 1990s just before bankruptcy in 2009 (225k sales). Since then, Chrysler has become more focused and improved a lot. Some car models were thrown out, others refreshed. A core of basically just 3 cars remained - a minivan, a full-size sedan (300c) and a mid-size sedan (200c). The 3 are doing okay. The minivan has a dominant position with a market share of 24% in 2013 (20% in 2009) with sales of 122k (85k in 2009). The full-size Chrysler 300 also saw sales and market share improvements over the last years (sales from 39k to 58k; market share from 8% to 10%). The smaller version, Chrysler 200 (previously Sebring) went from 24k to 117k in sales and 1% to 5% in market share.

The better numbers are primarily based on performance and quality improvements introduced since 2009 and quick market adjustments. For example, the Chrysler 200 was not fully up against the completion in its tough mass market segment and sales are not doing well right now, but the recently remodelled 200c seems to be very competitive in terms of design, features, quality and pricing. It should have a chance to do better and is having a good start according to Marchionne.

Going forward, Chrysler’s portfolio of cars will broaden up again. In 2016 a compact car (Chrysler 100) and a mid-size UV will arrive. A year later, a full-size UV will join forces and the 200c will be refreshed. The addressed market segment by the brand should grow from currently 3.5m cars to around 11m cars in 2018. Since a lot of these new cars will share features and platforms with other FCA brands, the incremental volume should provide margin improvements. If the new cars are as successful as the other recent offerings of FCA, Chrysler could really be able to grow sales back to its best days in 2005 (800k). This is the target for the brand on its way to 2018.

Ram & Ram Commercial & Fiat Professional:

Ram is another brand of the FCA portfolio that has been doing very well since 2009. The new light and heavy trucks are currently taking market share at a good pace and seem to be best in class at the moment. Compared to its key competitors (Ford and GM), the brand showed the most improvements and innovations in the recent years – it became especially good in engines. The brand more than doubled market share from the absolute lows in 2009 and showed good upticks in market share while GM and Ford were losing. Especially GM is losing market share to Ram, while Ford remains more robust. In Canada, Ram already overtook GM (29.5% v. 26.4%) and something similar could happen in the US if the trend continues. After a strong Q1 (+22% yoy) for Ram, Q2 seems to come in quite strong as well.

Coming from very low levels (almost as little as 1m units) after the financial crisis, truck sales in 2013 (roughly 1.8m units) were still below the average of the last 10 years prior to the financial crisis (roughly 2.2m/y). Therefore Ram could have a couple of good years ahead.

But Ram is not just about trucks. Since the separation of Ram and Dodge in 2009, the strategy for the brand was recently taken to the next step with the launch of Fiat’s vans under the Ram Commercial brand in 2013. Ram Commercial now offers the Fiat Ducato as Ram Promaster and the Fiat Doblo as Ram Promaster City in the US. Fiat is powerful in commercial vans and can leverage this now in North America (an area where they were underrepresented). Ram on the other hand, with a full commercial portfolio, becomes a more appealing option for fleet managers who prefer to stick with one brand.

Ram’s total market (trucks + vans) in North America was around 2.6m units in 2013 and is predicted to remain fairly flat until 2018 (based on the past, this seems reasonable as a base case). Ram sold 463k units in 2013 (mostly trucks). With its full line-up going forward plus the tail winds in the pick-up truck segment, they aim at around 620k in sales (roughly 35% increase) in 2018. Again, ambitious targets - but in Q1 2014 sales were already up 22% and sales in Q2 look equally promising (similar increase).

Fiat Professional is targeting a 40% revenue increase until 2018, based on a European recovery with stable market shares and some growth in EM. Most of the increase in sales should stem from a normalisation of the current low levels in Europe.

Fiat:

Fiat was hit hard by the crisis in Europe and has been having a tough time recently. In Italy, an important market for Fiat (market share 28%), sales almost halved over the last 6 years from 2.7m in 2007 to 1.4m in 2013. The current capacity utilisation is very low and the situation in Europe is very competitive. Asian Competitors like Kia, Nissan and Hyundai have gained a lot of market share in Europe over time. Additionally, the middle costumer segment where Fiat was situated lost ground, while the premium segment and the value segment gained ground. All this made Fiat focus primarily on its successful cars like the Panda and the Fiat 500 family in Europe and tackle the utilisation problem differently with an internationalisation of Jeep, Alfa Romeo, Maserati and the Fiat 500 Family.

Latin America, despite not having very good times right now, looks more promising generally and Asia and North America are targeted for growth with the Fiat 500 Family. The strategy and the targets appear reasonable. The Fiat 500 is not to be underestimated - it is currently outselling BMW’s Mini and the Panda traditionally has been a leader in its segment. Assuming a recovery in Europe until 2018 is probably not overly bullish and more is not really targeted

I covered the main parts of the strategy in this write up but there are many moving parts in FCA. A lot of valuable information can be found in the company’s presentation concerning the strategy. Management provided quite a detailed plan and I encourage everybody who finds the general risk/reward situation interesting to look at it to get a better judgement for the likelihood of the bull case.

The macro environment could distort FCA’s targets tremendously. A dramatic cool down in the US and the bull case is over. However, this is not an unusual risk; it basically applies to any other US car company out there and more broadly to any cyclical company in the US. 

FCA carries a greater than average execution risk, but with a CEO like Sergio Marchionne, I see the risk of losing a lot of money at this levels significantly reduced. He has demonstrated a strong owner mentality and has a long history of working together with the Agnelli Family. He is correctly incentivised with options and recently bought some additional shares as well. His deal making quality paired with the assets that could be spun off should protect the downside. It’s something that can’t be measured in numbers, but it certainly enters the picture and makes the high leverage tolerable.

One slightly concerning short term risk is related to the merger. Under Italian law, there is a certain closing condition that could stop the merger even after approval from going through. Shareholders who didn’t vote in favour for the merger will get a cash exit right equal to 7.72€ per share (based on the 6m trailing price prior to the meeting), but limited to a total amount of €500m. If more than €500m (slightly above 5% of the shareholders) say first no to the merger and then after the approval want to exercise their right in the next 15 days, the merger won’t take place. With the current price now down to 7.25€, some guys could want to exit for a 6% gain and eventually block the merger. A dropping shareprice between now and the 16. wouldn't be benefitical. Since the share price would probably react very negatively in case of a failure and one needed to buy before the 23.July to vote against a merger where the share price was higher most of the time, I think the risk/reward was not appealing enough to attract a lot of people betting on it...

If this happens, Fiat would have to start the process for the merger all over again. Unless more than 95% of shareholders directly vote for the merger, it will take an additional 15 days after the Meeting on 1. August until there is full certainty regarding this risk. With a 95% approval rate at 1. August the uncertainty is already gone.

The family ownership in combination with a close tie to Marchionne is not only benefit. The family could enrich themselves on the back of minority shareholders. Based on a long history of being shareholder friendly or at least neutral, I see this is a very low probability event.

By looking at the table, Fiat’s discounts can’t be overlooked. However, one could certainly argue it is warranted due to the debt service ability. I see strong reasons to disagree - The potential spin offs, the possible improvements in the capital structure in the not too distant future, a breakup value way above FCA’s present TEV and all the pieces that are currently moving in the companies favour should lead to a higher valuation. 

I think FCA's equity would be more accurately valued at €18-20b, which is around twice the current market cap. First, the risk/reward situation would make more sense to me and second, based on the metrics it would better fit to the peers and third the break-up value would be a better fit as well.

Chrysler: €24b at EV/EBIT of 8 (multiple below GM and Ford)

Ferrari: €4b at EV/EBIT of 12.5 (just the 90% stake)

Maserati: €3b at EV/EBIT of 12.5

Components: €2b at EV/EBIT of 10 (current margins are low and growth is quite likely based on trends in global car sales)

Fiat with the car and LCVs businesses in Brazil and Europe. Both businesses are facing a difficult environment at the moment, but they have some dominant positions in certain segments and markets. Market share in Italy stands at 28% and the car sales are still 50% off pre crisis levels. The market share in Brazil is slightly above 20%. Fiat’s business has a highly profitable production base in the country that historically generated high margins in the past which are likely to get back to more normalised level over time.

2) A look at the risk/reward situation

At an equity value of €19b, the most likely scenario in a bear case would probably yield a permanent impairment of capital of around 50%, assuming one would still be left with Ferrari, Maserati and the Components business (Ferrari €4.5b + €3b Maserati + €2b components business = €9.5b). A bankruptcy without spin-offs appears to me as a very low probability event. FCA has around €20b in cash - which is a lot for the company’s size. They won’t go bust overnight.

The bull case, reaching their targets (net debt free and an EBIT of €9b in 2018) would still bring an upside of 280% based on an EV/EBIT multiple of 8.

Let’s say the company reaches half their current target EBIT of €9b and the debt issue is not resolved leading to similar net debt level like today in 2018. The equity should be worth €23b based on the same EV/EBIT of 8 - offering just a small upside of slightly over 20% until 2018.

3) Comparison with peers:

Using a EV/EBITDA multiple of 4 (which I believe would be better fit to peers) on gets slightly more than €20b for the equity

Using a EV/EBIT multiple of 8.5 (The lowest multiple in the list), paired with the low end of the 2014 guidance the value for the equity would be €15b

Catalyst

Ongoing successful execusion

Improvement in capitcal structure

Listing on the NYSE after the merger this fall