Fiat Finally Convinces CNH To Seal The Deal

By Stephen D. Simpson, CFA | November 26, 2012 AAA

The laws and regulations that govern mergers and acquisitions (M&A) in Europe are a fair bit different than those in the United States, particularly as they relate to minority shareholders. Similar to how Alcon ultimately secured a better offer for shareholders, despite the fact that Novartis (NYSE:NVS) already owned more than three-quarters of the company, CNH Global (NYSE:CNH) has succeeded in obtaining better terms from Fiat Industrial (OTC:FNDSF) - a company that incorporates most of the non-auto businesses of Fiat (OTC:FIATY) for the 12% stake that Fiat did not already own.

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The Terms of the Deal
While the deal is not complete (investors have an offer from Fiat Industrial and a recommendation from CNH's Board of Directors to accept it), the odds are reasonable that it will go through. In this transaction, a new company will be established into which both CNH and Fiat Industrial will merge. Fiat Industrial shareholders will get one share of the new company for each share they own, while CNH shareholders will get 3.83 shares and a $10 special dividend (per share).

As structured, and assuming a 15% tax on that special dividend, CNH Global shareholders are getting an offer worth approximately 21% more than Fiat Industrial's last offer.

A Worthwhile Move for FI
This transaction should be a solid strategic move for Fiat Industrial. By reorganizing the new company in the Netherlands, the company should be able to take advantage of favorable corporate tax rates (about 6% lower, at least on a statutory basis). In addition, the combined company will look to list on the New York Stock Exchange, giving shareholders good liquidity and ostensibly giving the company access to capital on reasonable terms.

Because the combined entity will have to abide by U.S. GAAP, R&D expenses are likely to be higher (IFRS allows for the capitalization of R&D under certain conditions). On the other hand, the combined company will have a centralized funding structure and should be in line for an improved credit rating. With Fiat Industrial having a sizable amount of debt, the savings here could be worth more than $100 million per year.

SEE: Analyzing An Acquisition Announcement

A Fair Price for CNH Shareholders, but with Some Risks
CNH Global shareholders should be reasonably pleased with their Board for holding out for better terms. Now the question is whether it makes sense for CNH Global shareholders to hang on to their shares and become shareholders in the new Fiat Industrial.

Close to 60% of Fiat Industrial's revenue comes from CNH, with about one-third coming from Iveco and the remainder from FPT (Fiat Powertrain Technologies). Iveco is a commercial truck manufacturer that builds medium and special-duty trucks like Oshkosh (NYSE:OSK), as well as heavy trucks like those manufactured by Navistar (Nasdaq:NAV) and Volvo (OTC:VOLVY). Iveco is on the smallish side among truck builders, and gets almost two-thirds of its revenue from Europe (and more than half from Western Europe), with roughly one-third of its sales coming from Latin America.

FPT is a parts and components manufacturer, specializing in powertrains and transmissions for industrial, commercial and marine vehicles.

Likely the biggest risk for CNH Global shareholders is in the makeup of this new company. Although agricultural equipment can indeed be a cyclical business, it has generally been less volatile than commercial trucks. Likewise, CNH is a more formidable competitor to Deere (NYSE:DE) and AGCO (NYSE:AGCO) than Iveco is to other commercial truck manufacturers. So while CNH Global shareholders may be able to look at the new company as an opportunity to play the eventual recovery in European and Latin American truck demand, they should realize that opportunity comes with some risks.

SEE: Biggest Merger and Acquisition Disasters

The Bottom Line
Seeing as how Fiat Industrial intends to list the new company on the NYSE, shareholders are not really seeing CNH go away. What's more, it's not as though Deere is a pure-play on ag equipment either. Given that a higher bid is not very likely, CNH shareholders should ask themselves whether they want to hold shares in a company engaged in both ag equipment and commercial trucks, or whether it is time to sell out and move on to the next idea.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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