16 Sep Jeep’s Missed Connection
Bloomberg Gadfly, August 20, 2017
Striking a good deal comes down to timing. A potential takeover of Fiat Chrysler Automobiles NV’s Jeep division by China’s largest maker of sport-utility vehicles is about a decade too late.
Great Wall Motor Co. wants to buy the maker of off-roaders originally created for the American military during World War II and has reached out to Fiat Chrysler to start negotiations, Bloomberg News reported Monday.
Buying Jeep, with its strong heritage and a good safety reputation, could aid Great Wall’s efforts to move upmarket, while Jeep’s China sales would benefit from Great Wall’s extensive dealer network. A purchase would also instantly give the Chinese company 5 percent of America’s car market, turbocharging its ambitions to become the world’s largest SUV maker.
But as my colleague David Fickling recently noted, size is no longer the best gauge of a carmaker’s success.
Acquiring the U.S. brand would have made a lot more sense a decade ago, when Great Wall first started talking to Jeep and a bankrupt Chrysler might have offloaded the marque on the cheap, according to Bill Russo, who led Chrysler’s Asia operations in the 2000s and now runs the auto practice at Gao Feng Advisory, a consultancy.
What used to be a slow-moving industry is now evolving faster than most traditional players can handle, and rather than size, things like advanced safety technology, electric vehicles and autonomous driving are powering the future.
While Jeep might help Great Wall get bigger, the Ohio-based maker of rugged SUVs lacks the technical expertise to help make the Chinese company smarter.
Plus, buying Jeep would be costly.
The landscape now isn’t like the aftermath of the financial crisis, when carmakers desperately agreed to deals like Geely Automobile Holdings Ltd.’s $1.5 billion takeover of Sweden’s Volvo Cars in 2010 and Tata Motors Ltd.‘s $2.5 billion acquisition of Britain’s Jaguar Land Rover in 2008.
Geely’s purchase of Volvo shows how it can take five to seven years for a car company to fully integrate an acquisition
Jeep is worth about 14.7 euros ($17.30) per share, or roughly the same price as all of Fiat Chrysler, according to a recent sum-of-the-parts analysis by Morgan Stanley auto analyst Adam Jonas.
Adding a 20 percent premium to Fiat Chrysler’s current $12.60 share price means Great Wall would have to come up with at least $23 billion to buy Jeep in the open marketplace, marking the largest auto acquisition since Daimler AG bought Chrysler in 1998.
Great Wall’s market cap is only $15 billion, but because its net debt represents less than 3 percent of its equity, and since auto deals aren’t blocked by Beijing’s crackdown on outbound M&A, the carmaker could probably borrow the funds it would need.
Still, it seems unwise for Great Wall to stake its near-term future on Jeep, spending all its cash and then some just to win overseas market share. Especially when the company, like Geely and its other Chinese competitors, are enjoying so much success at home.
The six or seven years Great Wall would need to fully integrate the Jeep business would be better spent elsewhere. Put the missed connection down to bad timing, and remember that no deal is better than a bad one.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
- It’s unclear what would happen to Fiat Chrysler’s $7.8 billion in net debt.
- Because of Jeep’s large U.S. presence, it’s likely that CFIUS, the government panel that reviews foreign takeovers of American companies, would intervene and perhaps stop the deal.
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