On November 14, EXOR N.V. issued a press release whereby the company announced a €300 million share repurchase plan. Less than six months earlier, at the Exor annual meeting of shareholders, the board of directors had approved a share repurchase plan of €500 million, valid for the following 18 months. The additional repurchase plan comes in anticipation of a special dividend from Fiat Chrysler (FCA), of which Exor holds a 29% economic interest, as FCA will distribute the proceed from the sale of its auto part subsidiary, Magneti Marelli.
Magneti Marelli Sale Marks the End of an Era
The divestiture of Magneti Marelli by Fiat Chrysler was much anticipated. As early as 2015, reports started to emerge about FCA planning either to sell the parts business or alternatively, spin it off as an independent public entity.
In October 2018, Fiat Chrysler Automobiles agreed to sell Magneti Marelli to Calsonic Kansei, a Japanese auto-parts business owned by KKR & Co. The transaction was valued at 6.2 billion euros ($7.1 billion) in an all-cash deal, which was in the higher end of what analysts were estimating.
The sale of Magneti Marelli marks an end of an era for FCA. It’s the first M&A transaction since the untimely death of Sergio Marchionne, whose track record in turning around companies is second to none.
Marchionne was initially appointed to the Board of Directors at FIAT in 2003, shortly after John Elkann took the reigns at IFIL (the holding company of the Agnelli family that would later become Exor). Shortly thereafter he was appointed CEO.
When Marchionne arrived at FIAT, he had already made his mark as a turnaround specialist. At FIAT, however, his knack for opportunistic dealmaking became the stuff of legend. It all started with the cancellation of a production alliance with General Motors, whereby GM agreed to pay FIAT $2 billion as part of the settlement.
In 2009, FIAT assumed control of Chrysler Automobiles, which had been forced into receivership by the U.S. government. FIAT bought a controlling stake for $0, pledging to reopen factories and revive the company by sharing resources with FIAT. In 2014 the company completed a full merger under the Fiat Chrysler Automobile name.
Elkann the Captial Allocator
Nine days after the sale of Magneti Marelli was made public, FCA issued another announcement. The company made public its plans to pay a $2 billion extraordinary dividend to its shareholders. In addition to that, the company announced its intentions to start to pay regular dividends as of 2019.
The Elkann-Marchionne-era had been extremely rewarding to long-term shareholders. FCA focused its resources on higher margin brands, such as Jeep and Ram while cutting back on Dodge and Chrysler. Free cash flow was used to pay down debt and FCA staved away from investments into new electric vehicle technology and automated driving. At the same time, shareholders had received shares in CNH Industrial and Ferrari through tax-free spin-offs.
It was therefore with considerable curiosity that we awaited news on how Elkann would allocate the proceeds from his M&A transaction after the departure of Marchionne. We assume that the special dividend is something that Elkann pushed through at the board level as the Chairman of FCA.
The decision to pay out a special dividend, along with the subsequent repurchase plan announcement at Exor, indicates to us that Elkann sees Exor stock as particularly cheap at current valuation in the market.
Exor Share Repurchase Plans
On November 27, EXOR released yet another press release. This time around, the company reported on the status of the repurchase agreement. Since November 14, the company has purchased 299,413 shares at an average price of €49.91, or for an aggregate amount of little less than €15 million. This means that Exor bought back 0.12% of its outstanding shares in the space of 13 days.
Exor now holds 2.40% of the issued shares as treasury shares and seems to be intent on repurchasing shares aggressively.
Exor Discount to Net Asset Value
Four out of Exor’s six main investments are publicly traded. While PartnerRe is a wholly owned subsidiary and The Economist (42.4% interest) is a private company, Fiat Chrysler Automobiles (29.98%), CNH Industries (26.89%), Ferrari (22.91%) and Juventus FC (63.77%) are all publicly listed on stock exchanges.
As such, we can easily compare the current valuation of the economic interest that Exor has in those publicly traded entities. We can then update the values of those investments on the Exor balance sheet to come up with an updated current Net Asset Value. This is commonly referred to as a sum of parts analysis.
Since Exor shares are also publicly traded we can compare the NAV per share with current share price in order to estimate if the company is trading at a discount or surplus to its Net Asset Value per share.
Our estimate is that Exor is currently trading at 65% of the value of its Net Assets, or a 35% discount to NAV. As such, buying back stock at these levels should be significantly accretive to Exor shareholders. At current levels, Exor should be able to buy up about 5% of the outstanding shares through the two repurchase plans that the company has announced.
We have created a live sheet that automatically updates the market prices of the Exor entities that are currently traded:
Edit: Conglomerate Discount
We have received some questions with regards to the discount to NAV on Exor stock. It is worth noting that holding companies – family-controlled companies in particular – more often than not, trade with what is commonly called a Conglomerate Discount. There are several reasons for the discount, most notably tax implications and concentration of control.
Although there is a good reason to believe that Exor will continue to trade a meaningful discount to its NAV, we feel that a current discount of about 35% unreasonably high.
Further Reading
- Main Exor Security Analysis Page
- More Fundamental Security Analysis
- Predictive Attributes of Outperformance
The Fundamental Finance Playbook is a publication dedicated to the Fundamental Research of Stocks and Security Analysis. We publish thoughts and opinions on individual publicly traded stocks as well as our thinking on methodologies for finance and investing practices in general.
All publications on the Fundament Finance Playbook are provided for informational and entertainment purposes only and do not constitute a recommendation to any particular security, a portfolio of securities, or an investing strategy.
a UK investment trust that specialises in investing in closed end companies is https://www.british-empire.co.uk/ and the average holding is >30% discount to NAV. It seems like this is the semi permanent norm. Historically widens in bear market, and even after a 10 year bull market the spread is still in the 30s. I think the only way EXOR will trade differently is if people start to think of it first and foremost as an insurer like BRK , MKL or FFH in which case price to book of 1 will be starting point.
As far as we can tell, British Empire trades at a 10% discount to NAV. The discount at Exor, however, at 30% is at the higher end, historically. Nonetheless, we completely agree that one should not expect the discount to NAV to change in the near term.
What we find particularly interesting with regards to Exor are two things:
1. The company has been monetizing assets and using part of the proceeds to buy back stock. If Exor can monetize assets at NAV and use proceeds to buy back stock at a 30% discount, it will be accretive to the remaining shareholders.
2. Exor has creditworthiness. The company cost of debt is extreamly low and if the underlying assets perform, that should also be accretive for shareholders.
British Empire trades at a 10% discount and its holdings themselves trade at >30% discount. It is a discount on a discount. The observation is that these European holding companies are on semi permanent discounts. I think what may change that for Exor is if it changes is investor perception to be more like an insurance company that invests the float, like MKL, FFH or BRK and that is clearly what Agnelli is trying to do. He might need to get rid of Fiat first.