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  • Chris Mayer

Another Conglomerate Breakup?

One of the interesting side-benefits of owning holding companies is that you wind up following the holding companies’ own investments. And every once awhile this pays off in giving you an idea you might not have looked at otherwise.


For example, we own Exor – which I’ve written about on the blog before. Exor owns a number of things. But the big horses in the stable are Fiat Chrysler, Ferrari, Partner Re and CNH Industrial.


The last name on that list that has become intriguing… and it’s probably not a name I would’ve looked at if I didn’t own Exor. It’s 40% off its 52-week high. I think we’re close to seeing some strategic moves here. Before I get to why, a quick briefing on the company.


CNH Industrial N.V. (CNHI) has five operating segments:


Agriculture is the largest at ~40% of sales:



It also contributes the most in profits:



CNH is cyclical, no surprise. But last year was a record year. Here’s John Elkann (Chairman and CEO of Exor) talking about CNH in Exor’s annual letter:


“CNH Industrial has also had a record year, delivering revenues of ̴$30 billion, adjusted EBIT of $2.1 billion and adjusted net income of $1.1 billion, while generating free cash flow, which allowed it to reduce its debt and improve its rating.


Hubertus Mühlhäuser is off to a very strong start in his role as CEO and his professional background in the capital goods industry will serve the company well.


Importantly, Hubertus has set about simplifying the organizational structure of a company of 65,000 employees, 66 plants and 54 R&D centers, which launched 50 new products in 2018. This new structure is leaner and will reinforce CNH Industrial’s customer centricity and its entrepreneurial culture.”


You’d never guess it looking at the stock chart:



CNH is, basically, a conglomerate. And it seems to me paring off a less profitable division or two would make for a more valuable company.


The last line from Elkann about CNH is this:


“Hubertus and his leadership team are excited about CNH Industrial’s future and are preparing to present their strategic plan at a Capital Markets Day later this year.”


My guess is that CNH Industrial is going to break up. And I think the unveiling for that grand plan could be September 3rd, which is when CNH will hold its Capital Markets Day.


There are at least four reasons I think this will happen (someday, even if not announced on the 3rd).


#1 It seems the obvious move


First, it’s obviously compelling. And with the stock languishing, there may be some impetus to do it.


What could CNH be worth on a sum of the parts basis? My friends at Horizon Kinetics put out a note in April where they estimated “a sum-of-the-parts value of $22 billion, or roughly $16 per share (based on a diluted share count of 1.36 billion).” They used estimated 2019 EBITDA for each segment. Their multiples ranged from 9x for the agriculture group to just 6.5x for the commercial vehicles group.


Keep in mind, CNH doesn’t screen well because the financing division blows up the enterprise value. Net debt at year-end 2018 was $18.6 billion, but $18 billion of that relates to financing activities. CNH issues asset-backed securities (ABS). Accounting rules require it recognized the securities as an asset, with a corresponding liability.


Net "industrial debt" - as the company calls it - was only $600 million at year-end. (It swells a bit seasonally). Given CNH's free cash flow, it could have zero net industrial debt by the end of 2019. Even without going through the sum of the parts exercise, CNH seems cheap at 10x earnings for a company that could have no net debt by year-end.


Granted, CNH is cyclical and earnings can evaporate on these things when times get tough. For this reason, I find it hard to value them – CNH included. But however you value the pieces, it seems a good bet that agricultural equipment and commercial vehicles would be better off controlling their own destinies. It’s the usual rationale for many winning spinoffs.


#2 It’s in the air


Daimler and Volkswagen have both talked about spinning off their commercial vehicle businesses. And there are plenty of other recent examples of conglomerates that have decided to break apart. So, it’s in the air.


CNH could spinoff its own commercial vehicle division (called IVECO). The profit margins here are the lowest among CNH’s segments (excluding the small construction group).


#3 John Elkann has seen this movie before


It’s not like John Elkann hasn’t seen this before. Look at Fiat Chrysler. It spun out Ferrari. And it recently sold Magneti Marelli. The wealth creation out of Fiat has been mind-blowing.


Here’s how Mohnish Pabrai put it in his letter:


“In 2012, when we first invested around $60 million in FCA, the entire market cap of the company was around $5 billion. One of the largest businesses on the planet with over $130 billion in topline revenue had its equity valued at less than 4% of revenue. The $5 billion market cap included 90% ownership of Ferrari, which was spun out in 2016 and is currently valued at $21 billion. FCA recently sold Magneti Marelli, a wholly-owned auto parts company, for $7 billion.”


You would’ve laughed in 2012 if I told you all that value would come out in Fiat Chrysler a mere eight years later. Might CNH Industrial offer some mini-version of that? I admit the set-up is not as attractive (CNH sells for 44% of sales, not 4%!) – but still, I think CNH could create a lot of value by breaking up.


Elkann already has the playbook. And since Exor controls nearly 30% of CNHI’s stock, he can get it done if he wants to.


#4 It’s about time


Finally, I’m not the first to bring this up. I found the following exchange in the first quarter 2018 conference call:


“Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst

The first question is on some of the comments that you made over the past few months concerning a spin-off of some assets that -- is it just your opinion or it's something that they share inside the company knowing there is an experience in this sense. Just to understand. I can understand it's not a question to ask you right now, you're leaving, but do you believe that your successor will push it or it's something that was just your idea?


Richard Joseph Tobin, CNH Global N.V. - Director


Yes, I think I'm going to leave that up to the Board of Directors and my successor.”


So, they’ve talked about it before. I’m sure there are earlier references. Other investors are thinking about it, too. Here’s an excerpt Longleaf Q4 letter:



I don’t own CNHI directly… yet. I struggle to value the thing with any confidence. That keeps me away, frankly. Plus, I’m not too keen on owning deeply cyclical companies after they’ve have record years. (Of course, I missed Fiat Chrysler largely because I had a mental block about owning an auto manufacturer.) But the market discounts a lot of bad news already with tariffs, etc., taking the stock from $14.70 to $8.82.


I may yet buy it, as I work to understand it better. Even so, I’m happy to own it through Exor, where the negatives are blunted somewhat by the larger NAV at Exor. And I eagerly await CNH’s Capital Markets Day in September.


Thanks for reading. You can write me at info [at] woodlockhousefamilycapital.com


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Published May 22, 2019

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