Ferrari IPO: Supercar or Superstock?

Ferrari owner Fiat Chrysler Automobiles NV is planning to sell a 9 percent stake in the Italian supercar manufacturer, according to an SEC filing.  The sale will consist of 17.2 million shares of Dutch holding company Ferrari NV at $48 to $52 each, according to a filing on Friday with the U.S. Securities and Exchange Commission. The shares will trade on the New York Stock Exchange under the symbol RACE.

The IPO and eventual full spinoff of Ferrari are part of Fiat Chrysler Chief Executive Officer Sergio Marchionne’s effort to raise funding to cut the parent company’s debt and help finance a 48 billion-euro ($54.5 billion) investment program that focuses on expanding the Jeep, Alfa Romeo and Maserati nameplates globally.

As part of its separation from Fiat, Ferrari will take on 2.8 billion euros in debt from the company, the filing shows, and subsequently issue a projected 2.128 billion euros in debt to third parties. Including that debt, Ferrari will have an enterprise value of about $12 billion. That would be in line with the minimum $11.4 billion that Marchionne, who’s also the division’s chairman, has estimated is appropriate for a brand he contends should be treated more like a luxury-goods maker than an auto manufacturer.

“A luxury multiple is justified due to Ferrari’s capital intensity, profit margins at scaled unit production, operating leverage and price inelasticity,” said Adam Wyden, founder of ADW Capital Partners, who owns Fiat Chrysler shares.

At $9.8 billion, Ferrari would be valued at nearly 35 times its annualized profits for the first six months of the year. That may sound like a high multiple for a car company. In today’s startup bubble, that valuation makes Ferrari—which will trade under the ticker symbol RACE—a “decacorn,” along with the likes of Airbnb, Dropbox, Pinterest, and Snapchat.  Here’s the thing: Ferrari does not see itself as a car company. It sees itself as a luxury company. The word “luxury” is the reason Ferrari thinks it can command such a price. About half of Ferrari’s current assets consist of its brand value. “Goodwill” and “intangible assets” are literally that: assets that don’t exist, except as concepts (although they’re backed with powerful intellectual property and copyright claims).

Ferrari, which has made a point of restricting the number of cars it makes to just below demand to preserve its models’ high-end reputation, is set to push the boundaries of its exclusivity with plans to increase production of cars such as the €235,000 488 Spider convertible to 9000 cars in 2019 from about 7200 vehicles last year, according to a September 22 filing. The carmaker had previously set its limit at about 7000 cars a year.

Founded in 1947, the company has been making some amazing cars in recent years and its Formula One team (the original reason for Ferrari’s existence) is very close to challenging dominant Mercedes. It’s unclear how an independent Ferrari would operate, but meeting federal fuel efficiency standards could prove tricky, without lots of Fiat 500s to pull the average MPGs up. There’s also chatter that Ferrari will face increased pressure from shareholders to generate more profits. That could mean not only increasing sales but also adding more profitable but less racetrack-friendly vehicles, like SUVs to its manufacturing setup. Porsche has done just that, with lots of success, in the past decade. But that won’t ease the sting of seeing a Prancing Horse seven-seater for the Ferrari purists.