Fiat CEO Marchionne says Fiat will spin off industrial vehicles, create global car firm

Fiat to split industrial and auto businesses

TURIN, Italy — Fiat CEO Sergio Marchionne announced Wednesday that Fiat will separate its industrial vehicle and auto businesses into two distinct companies in order to “give birth” to a global automotive company — including its alliance with Chrysler LCC — that aims to build 6 million cars annually by 2014.

The demerger will unbundle businesses that have different risk levels and cash investments, allowing each to make better industrial choices and alliances, Marchionne said.

“We believe right now is the time produce the spin off,” Marchionne told analysts after presenting Fiat’s five year business plan. “It’s the perfect time to do the spinoff. If we can do it now, we can weather anything.”

Marchionne says Fiat didn’t do it earlier because it needed the collective strength of all the business to turn the company around after he took over in 2004. During that period, the car side relied heavily on the industrial side, which Marchionne called “unfair.”

“Now, however, that process is complete and there is no longer any reason to keep together sectors that work with such diverse logic. The existing structure no longer serves any useful purpose,” Marchionne said.

The spinoff of the industrial side will create Fiat Industries SpA, comprising CNH agriculture and construction equipment, Iveco and FPT Industries and Marine activities. Fiat SpA will include Fiat Group Autos, which includes the Fiat, Alfa and Lancia brands, as well as Maserati and 85 percent of Ferrari, as well as components and other related assets.

Fiat forecasts that the “new” Fiat, or auto company, will have revenues of €64 billion ($86.31 billion) by 2014, while Fiat Industrial revenues will be €29 billion.

The demerged company will be quoted on the Milan Stock exchange, with each current Fiat shareholder receiving one share of each company, he said. The spinoff requires approval of the Fiat board — but had the clear support of the new chairman, Angelli family heir and Fiat’s largest shareholder John Elkann.

“Today is an historic day for Fiat,” the 34-year-old Elkann told reporters the same day the board also confirmed his role as chairman, taking the place of Luca di Cordero Montezemolo.

Elkann will remain chairman of the new Fiat SpA with Marchionne as CEO, while Marchionne will be chairman of Fiat Industries with brand CEOs. The five-year plan includes 34 new models, 13 of which will be produced in North America.

Plans for Chrysler, which emerged from bankruptcy last June and is not publicly traded, were not addressed. But Marchionne said Fiat could achieve its goals and integrate with Chrysler without an initial public offering — which is planned anyway.

“Our cooperation with Chrysler does not require us to exchange shares,” Marchionne said.

The demerger, paired with the rationale that it allows each to make easier alliances, gave rise to new speculation about whether Fiat is shopping for new partners. “We’re always looking,” Marchionne said, but added that Fiat could reach the 6-million-car threshold he considers critical to remain competitive with just Chrysler as a partner.

Fiat took an initial 20-percent share in Chrysler in exchange for technology and management know-how, and plans to increase its holdings to 35 percent in two years. Marchionne said the 35-percent share would be good enough for an IPO.

Marchionne’s goal of producing 6 million cars by 2014, however, takes into account Fiat targets presented Wednesday of 3.8 million, on top of Chrysler targets of 2.8 million presented last November.

Fiat shares closed up 1.73 percent, to €10.60 ($14.52), on the highly anticipated news, with 11 percent of capital equal to €121 million ($163.18 million) changing hands.

Marchionne said the demerger would give both businesses greater strategic flexibility, stressing the primary rationale is “growth, autonomy and efficiency.”

“These businesses are vastly different,” Marchionne said, citing business cycles, capital requirements, customer base and markets. “And the markets value them differently.”

“That the car side requires more capital and is a little riskier than FI is at the heart of this,” he said.

He said the new structure would allow all business to display the market value that might be “otherwise suffocated.”

The current structure, with all of the business under Fiat Group SpA, reflects Fiat’s growth from an automotive company founded by Giovanni Agnelli in 1899 to a business conglomerate 111 years later.

Marchionne said the group businesses had one thing in common: “The products were powered by engines.”

Also on Wednesday, both Fiat and Chrysler reported first quarter earnings.

Chrysler Group LLC slashed its net loss to $197 million on cost cuts, manufacturing efficiency and disciplined pricing. That was far less than the staggering $3.8 billion that Chrysler lost from the time it left bankruptcy protection June 10 through the end of last year, and the company says it is a sign that its turnaround plans are starting to work.

Fiat reported narrower first-quarter losses of €25 million ($34 million), compared with a loss of €410 million last year, and forecast its auto business will be hurt this year by the elimination of cash-for-clunker programs in Europe. The results were the result of a rise in revenues, with the auto business taking residual benefits of the slowing cash-for-clunkers programs.

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AP Auto Writer Tom Krisher contributed to this report from Detroit.