Automobiles NV (FCAU) John C. Culhane | Senior Analyst [email protected]

Fiat Chrysler Automobiles NV

Automobile Industry October 28th, 2015

John C. Culhane | Senior Analyst [email protected] Buy FCAU Equity (€) Jon A. Peatfield | Junior Analyst [email protected] Share Price as of 10/20/15 14.22 Ahmad Hasan | Junior Analyst [email protected] 52 week range 7.16 - 16.29 Market Capitalization 18.3 B Revenue 106.3 B Exchange: NYSE Security Ticker: FCAU EBITDA 8.5 B Business Description Net Income 980.0 M FCAU is an international automotive group engaged in designing, EV 29.3 B engineering, manufacturing, distributing and selling vehicles, components EV/EBITDA 3.4x and production systems. It is the seventh largest automaker in the world based on total vehicle sales in 2014. The company has operations in approximately 40 countries and sells vehicles directly or through distributors and dealers in more than 150 countries. FCAU designs, engineers, manufactures, distributes and sells vehicles under the , , Chrysler, , Fiat, , , and Ram brands and the SRT performance vehicle designation. Vehicle sales are supported with after-sales services and parts worldwide using the brand for mass market vehicles. The company makes available retail and dealer financing, leasing and rental services through our subsidiaries, joint ventures and commercial arrangements. In addition, we design, engineer, manufacture, distribute and sell luxury vehicles under the and brands.

Safe and Cheap

Safe We feel as though FCAU is a safe investment. Aside from high interest expenses following debt taken on from the Chrysler merger in 2011, FCAU is well capitalized. It’s trading lower than the industry average and median on both Total Debt to EBITDA (3.8x) and Net Debt to EBITDA (1.32x). The company also has a significant amount of surplus cash (€21.12 B) which can be used to pay down debt and interest expenses as needed.

Cheap According to our simplified discounted cash flow valuation, this company is trading at a 35.0% discount (at a share price of €14.22) to its combined going concern and resource conversion value. The value of FCAU however is heavily skewed toward resource conversion. FCAU currently has €21.12 B in cash and only 1.288 B shares outstanding. This provides €17.11 of resource conversion value while the going concern aspect of the company only provides €4.78.

1 Fiat Chrysler Automobiles NV (FCAU)

Table of Contents

Valuations ...... 3

Investment Catalysts ...... …….5

Foreign Exchange Risks… ...... 5

Investment Risks… ...... 5

Industry Overview ...... 6

Business Overview ...... 7

Profit Margins and Revenue………………………………………………… ...... ……………………………8

Market Share and Revenue by Segment……………………………………… ...... 10

Capital Structure and Credit Rating……………………………………… ...... ………………………….11

Management ...... 13

Major Shareholders ...... 13

Trends in Capital Structure ...... 14

Fiat-Chrysler Merger ...... 15

Ferrari Spinoff ...... 16

Balance Sheet with Separated Financials…… ...... …………….18

Valuation Comparables ...... 19

Debt Maturity Schedule ...... 20

Ownership of FCAU ...... 21

2 Fiat Chrysler Automobiles NV (FCAU)

Valuation

FCAU Pre Ferrari Spinoff

Ferrari Stand Alone

3 Fiat Chrysler Automobiles NV (FCAU)

FCAU Post Spinoff

FCAU Post Spinoff (Conservative Estimate)

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Investment Catalysts 1) FCAU plans to spin off their extremely profitable Ferrari business. 2) The 2014-2018 business plan includes expanding the rapidly growing Jeep brand globally through localized production in Asia and Latin America, reintroducing the Alfa Romeo brand in North America and expanding the Maserati brand to cover all segments in the luxury vehicle market. 3) Strong growth and a concentrated business plan in Europe has caused FCAU to drastically increase sales (20%) and market share in this region year to date. This increase in sales has mainly been driven by growth of the Fiat and Jeep segments. Their earnings report this quarter resulted in an increase in 2015 revenue guidance from 108 billion to 110 billion Euros. 4) Poor sales performance of FCAU’s minivan and large utility vehicles (FCAU’s most profitable product) was supressed over 10% in 2014 because of high oil prices, this segment should see greater sales in 2015 with oil prices dropping over 50%. 5) has been buying back shares of FCAU and now owns over 2.1% of the company. 6) FCAU’s possession of large brand-names that are very profitable and could extract even more value if spun off. 7) Fiat has very large amounts of cash compared to its competitors which shows that it is able to acquire other automobile manufacturers in order to have stronger market share.

Foreign Exchange Risks 1) Due to FCAU’s global operations, it faces the risk of many different macroeconomic factors such as fluctuations in currency. 2) In order to manage this risk, Fiat uses hedging instruments such as forward contracts, currency swaps, etc. 3) Sales in Latin America have been particularly hit with the weakening of the Venezuelan Bolivar and the Brazilian Real against the Euro. 4) In the 2015, it is projected that the declining value of the Euro will have adverse effects on sales but will also lead to larger exports.

Investment Risks 1) Low demand on vehicle sales, particularly minivans, larger utility vehicle and pick-up trucks could cause the business to suffer. Since auto manufacturers have such high fixed costs, a 10% decrease in vehicle shipments would lead to a 40% decrease in EBIT. 2) Credit rating is below investment grade any further deterioration may significantly affect access to capital markets. 3) If FCAU cannot increase profit margins, it will be tough to raise capital and compete with competitors. 4) A large portion of FCAU’s sales are done outside of Europe, for this reason the company has a large deal of exposure to currency movements.

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Industry Overview Automobile Manufacturing Industry

Key External Drivers

• Consumer confidence in the industry has increased during 2015 after plummeting in the recession, thus creating a potential opportunity for the industry. • High oil prices in 2014 led to consumers demand for smaller and more fuel-efficient cars. However, in 2015 oil prices have been at historical lows which has resulted in growth of larger more profitable cars. • As interest rates are at all-time lows, demand for cars rises because it costs consumers less to finance vehicle purchases.

Current Performance

After the recession, the economy is once again gaining momentum and vehicle sales are up.

Profits Rise: Rising consumer confidence and disposable income have led to increased demand to purchase cars. As a result, the average industry profit margin is expected to rise from 2.4% to 4.2% in 2015.

Contracting Operations: A large number of workers belong to the United Auto Workers union (UAW). Therefore, their wages are relatively higher compared to other manufacturing jobs. In 2015, the average wage is $79,107. As a result of the strong bargaining power, automakers have invested heavily in automation and in trying to reduce the need for more workers.

Global Demand: Exports are expected to increase significantly due to growing global demand in emerging markets such as India and China.

Industry Outlook

Companies are investing heavily in automating production processes in order to reduce the reliance on labor, thus increasing profits by about 4.3% in the next five years. Rising profits will encourage companies to increase production activity over the next five years.

Trade Growth: Due to increased demand for vehicles in emerging markets, exports are expected to increase despite the appreciation of the U.S. dollar.

Going Green: There has been ongoing competition in developing gas-electric hybrid vehicles to increase fuel efficiency.

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Business Overview

FCAU operates under seven reportable segments: four mass market vehile segments, two luxury brand segments and a global components segment

*Mass Market Vehicle Sales Segmented by Geographic Region

• (1) Abarth: Founded in 1950, Specializes in performance modification for on-road sports cars. • (2) Alfa Romeo: Founded in 1910, Italian Design lightweight sports and compact cars. • (3) Chrysler: Founded 1925, mid-size sedans, full size sedans, minivans. • (4) Dodge: Founded 1914, full line of primarily mid-size to large vehicles. • (5) Fiat: Founded 1899, Mini and small vehicles segment, primarily in Europe and LATAM. • (6) Fiat Professional: Launched 2007, light commercial vehicles, vans, ambulances, etc. • (7) Jeep: Founded 1941, SUV and off-road vehicles. Heritage, safety and versatility. • (8) Lancia: Founded in 1906, Small segment cars targeted toward the Italian market. • (9) Ram: Standalone basis from dodge in 2009. Full-size light and heavy-duty pickup trucks. Manufacturing facilities: 165 Research and development centers: 85

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Profit Margins and Revenue as Impacted by Spinoff

Segment-by-Segment EBIT Margins (2012-2014):

Pre-Spinoff Profitability Margins

Profitability Margins (2015) (6/30/2015) LTM Net Revenue LTM EBIT EBIT M ar g in LTM EBITDA EBIT DA M ar g in FCA (Pr e -Spinoff) € 106,261,000.00 € 4,289,600.00 4.04% € 8,450,600.00 7.95% Loss of Ferrari

Profitability Margins (2015) (6/30/2015) LTM Net Revenue LTM EBIT EBIT M ar g in LTM EBITDA EBIT DA M ar g in Ferrari (Post-Spinoff) € 2,800,097.00 € 422,473.00 15.09% € 673,000.00 24.03% Although Ferrari is the most profitable Segment of Fiat-Chrysler, the segment has very little growth potential. Since the Ferrari brand is built on exclusivity, unit sales are restricted. In 2014, the number of Ferrari units sold in the year ended December 31, 2014 only reached 7,000. Because of the low volume/high cost business structure the Ferrari segment contributed 2.87% of Fiat-Chrysler’s total revenue. Ferrari will be unable to grow earnings much further than they already have in the long run because control of Ferrari (as discussed in the shareholder analysis) will remain in the hands of and Pierro Ferrari, two parties who believe that exclusivity is one of the main value drivers of the Ferrari brand. Chairman of the Ferrari (RACE) board, Sergio Marchionne, has stated that as an independent entity, Ferrari will be able to increase annual units sold to 10,000 without diluting the value derived from the small supply of luxury vehicles. In the short run, this 42.86% increase in units sold will help to drive the top line of Ferrari’s income statement, yet this expectation is speculative and not promised. Even if Ferrari were to expand the units produced per annum, margins will likely remain in a range between 12%-18% (EBIT/Revenue) as Ferrari vehicle design requires extensive R&D expenditures. This steady, recession proof and predictable business structure is what will allow Ferrari to bear a heavy debt load from Fiat-Chrysler upon spinning off from the conglomerate.

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Post-Ferrari Plans

Profitability Margins (2015) (6/30/2015) LTM Net Revenue LTM EBIT EBIT M ar g in LTM EBITDA EBIT DA M ar g in FCA (Pos t-Spinoff) € 103,460,903.00 € 3,867,127.00 3.74% € 7,777,600.00 7.52% To combat the loss of their most profitable segment, Fiat-Chrysler plans to expand their remaining luxury brands including Alfa Romero and Maserati. As a result of the spinoff, Fiat-Chrysler’s EBIT margins will decrease from 4.04% to 3.74%. The Maserati Brand is less profitable than Ferrari on an EBIT to Revenue basis, yet still greatly exceeds the industry average EBIT margin which is approximately 4.0%. Maserati’s LTM EBIT margin was 10.74% and contributed to 2.36% of LTM Revenues. Currently, Maserati is reported as its own segment and its EBIT margins can be calculated from current financial statements. The plan which has been discussed in Fiat Chrysler’s MD&A also includes expanding Alfa Romero to a global brand mainly by redeploying the vehicle in the NATAM segment. It is likely that the contributions from Maserati’s growth accompanied by the increased push to sell more units of Alfa Romero will offset the reduction of sales and profitability resulting from the Ferrari spinoff. In addition to the expansion of Maserati and Alfa Romero brands, Fiat-Chrysler also plans to push Jeep (the fastest growing car brand in the world) on a global level. The company has taken the first steps to enhancing Jeep vehicle demand on a global basis by creating smaller and more fuel efficient vehicles such as the Jeep Renegade. An interesting strategy which Fiat-Chrysler has also initiated experimentation with was discovered with the creation of the Jeep Renegade. Fiat-Chrysler believes that it can further cut costs by building multiple models on the same frame, for example, the Renegade was produced utilizing a vehicle frame produced for Fiat vehicles. FCA has disclosed intent to attempt to use this production model for a larger array of vehicles going forward which is also expected to improve margins of the company’s non-luxury vehicles.

Post Spinoff Profitability Margin Conclusion In the short-run, as a result of the spinoff, the overall profitability of Fiat-Chrysler will decrease from 4.04% to 3.74% on an EBIT to Revenue basis. This decrease in EBIT margin will be combatted by an expansion in the company’s other high-margin luxury vehicles such as Maserati and Alfa Romero. In addition, Fiat-Chrysler is looking to cut costs though new production strategies which involve cross allocation across multiple models of uniform framework to decrease specialization of the building blocks of each individual model. The intention of this initiative is to increase profit margins for non-luxury vehicles. Looking beyond EBIT to earnings (EBIT- Interest-Taxes), the spinoff of Ferrari is likely to help Fiat-Chrysler’s earnings results. Currently, on a P/E basis, Fiat-Chrysler trades at a much higher multiple than the industry 19.50X (Industry Mean: 1.70x), however it trades at a discount on an EV/EBIT basis 5.14x (Industry Mean: 13.3x). This is because of the large interest expense resulting from Fiat Chrysler’s heavy debt load. The infusion of cash proceeds from the spinoff (€8.66MM) along with subtraction of spun off debt (€2.8B), will help decrease the debt load and over time decrease interest expense making earnings results more attractive. The combination of the Fiat-Chrysler business growth strategy and the reduced interest expense will cause the margins of the entire company to increase in the long-run, likely exceeding the earnings growth and margin growth which would have been present as a result of Ferrari because of the cap on unit sales for the luxury brand.

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Market Share and Sales Growth by Segment

Segment Market Share Trends & Unit Sales Trends NAFTA Region 2012-2013 2013-2014 NA FTA Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th US 8.96% 0.20% 16.17% 1.00% Canada 6.56% 0.40% 11.54% 0.80% Mex ic o -6.45% -1.20% -10.34% -1.20% Total 7.94% 0.20% 14.53% 0.90% 2014: 4th Largest By Units 12.4% Market Share *Strong growth in US & Canada, falling sales in Mexico LATAM Region 2012-2013 2013-2014 LATAM Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th Brazil -8.76% -1.80% -8.43% -0.30% Argentina 30.59% 1.40% -20.72% 1.40% Other LATAM 0.00% -0.10% -27.45% -0.60% Total -4.89% -1.00% -10.93% 0.20% 2014: Brazil: Largest by Units 21.2% Market Share *Slowing growth in Brazil & Argentina, however retaining market share in Brazil APAC Region 2012-2013 2013-2014 APAC Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th China 126.32% 0.40% 41.09% 0.20% India -9.09% 0.00% 20.00% 0.10% Australia 47.83% 1.00% 29.41% 0.90% Japan 6.67% 0.10% 12.50% 0.00% South Korea 25.00% 0.40% 20.00% -0.20% APAC 5 Major Markets 77.98% 0.20% 35.57% 0.20% *Strong YOY unit sales growth in all APAC segments, however market share falling in South Korea EMEA Region 2012-2013 2013-2014 EMEA Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th Unit Sales Grow th (YOY) Mar ket Shar e Gr ow th Italy -9.88% -0.90% 0.80% -1.00% Germany -11.11% -0.20% -20.00% 0.10% UK 12.50% 0.10% 11.11% 0.00% France 0.00% 0.20% 0.00% 0.00% Spain 17.39% 0.40% 33.33% 0.60% Other -12.77% -0.40% -1.63% -0.20% Eur ope -7.17% -0.30% 2.98% -0.20% Other EMEA 12.30% 0.00% -8.03% 0.00% Total -4.58% 0.00% 1.26% 0.00% 2014: 7th Largest by units 5.9% Market Share *Strong growth in UK and Spain, slowing growth in Germany.

10 Fiat Chrysler Automobiles NV (FCAU)

Capital Structure & Credit Rating as Impacted by Spinoff

Current Fiat-Chrysler Credit Ratings:

Moody's S&P Fitch Ratings Company Rating Grade Rating Outlook Rating Outlook Rating Outlook FCA B1 Stable BB- Positive BB- Stable Speculative

Fiat took on a heavy debt load during 2010-2011, when it acquired Chrysler from the UAW after they filed for Chapter 11 Bankruptcy (See Fiat-Chrysler Merger Details). In order to finance the acquisition, Fiat increased Long Term Debt increased from €10.37MM to €27.09MM (as seen in chart above). Current Competitor Credit Ratings:

Moody's S&P Fitch Ratings Company Rating Grade Rating Outlook Rating Outlook Rating Outlook Volkswagen A2 Negative A- Recently Downgraded A Recently Downgraded Investment Grade BMW A2 Positive A+ Stable No Fitch Rating Investment Grade Daimler A3 Positive A- Stable A- Stable Investment Grade Ford Baa3 Stable BBB- Stable BBB- Positive Investment Grade Nissan A3 Stable A- Stable BBB- Positive Investment Grade Hyundai Baa1 Stable A- Stable BBB+ Stable Investment Grade GM Ba1 Stable BBB- Stable BBB- Stable Point of Transition* Ba3 Postivie BB- Positive BB Stable Point of Transition* Renault Ba1 Positive BBB- Stable BBB- Stable Point of Transition* *Point of Transition is used to describe competitors who have been rated investment grade by at least 1 of the 3 rating agencies. Current Competitor Debt Multiples/Capital Structure:

Current Competitor Debt Multiples/Capital Structure Ratio Low Mean Median High Current Ratio 0.90x 1.20x 1.20x 1.70x Short Term Liquidity Quick Ratio 0.50x 0.90x 0.80x 1.60x Total Debt/Equity 87% 180% 139% 467% Total Debt/Capital 47% 61% 58% 82% Long Term Solvencey Total Liabilities/Total Assets 58% 74% 76% 88% EBIT/Interest Exp 3.30x 15.54x 16.50x 35.20x EBITDA/Interest Exp. 7.00x 26.07x 29.20x 52.30x Debt Coverage Total Debt/EBITDA 3.00x 6.34x 6.00x 10.50x Net Debt/EBITDA 0.30x 4.70x 4.20x 8.80x

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Current and Pro-Forma FCAU Debt Multiples/Capital Structure:

w/Cash on Balance Sheet Use Cash Proceeds to Pay Down Debt Ratio FCA (Pre-Spinoff) FCA (Post-Spinoff) FCA (Post-Spinoff) Current Ratio 1.30x 1.31x 1.31x Short Term Quick Ratio 0.96x 0.96x 0.96x Liquidity Total Debt/Equity 220% 194% 188% Total Debt/Capital 69% 66% 65% Long Term Total Liabilities/Total Assets 86% 85% 85% Solvencey EBIT/Interest Exp 1.81x 1.85x 1.91x EBITDA/Interest Exp. 3.56x 3.72x 3.84x Debt Coverage Total Debt/EBITDA 3.82x 3.72x 3.61x Net Debt/EBITDA 1.32x 0.93x 0.93x High-Debt Industry Although currently non-investment grade, Fiat Chrysler’s short-term liquidity multiples are within line with its investment grade competitors. As seen from comparing the tables above, Fiat-Chrysler’s Current Ratio and Quick Ratio are comparable to the industry Mean and Median. The industry operates with a high amount of debt. As shown by the industry range Total Debt/Equity ranges from 87%-467%. High Debt/Equity Ratio Fiat-Chrysler, before spinning off Ferrari operated at the top of this range with a Total Debt/Equity of 220% which appears to be a problem area affecting FCAU creditworthiness, however the spinoff has given the company the ability to reduce debt. The reduced debt has decreased the Total Debt/Equity Ratio to 194% and if Fiat- Chrysler further uses the cash proceeds from the 10% Ferrari IPO to pay down long term debt, the ratio will be reduced to 188%, which is just above the industry average (180%). Low Interest Coverage Multiples Another problem area in the FCAU debt structure is the interest coverage ratios, specifically EBIT/Interest Expense and EBITDA/Interest Expense. Prior to the spinoff, the EBIT/Interest Expense: 1.81x, was far below the industry range (industry low: 3.30x), Similarly, EBITDA/Interest Expense 3.56x, was far below the industry range (industry low: 7.00x). These ratios are very poor as a result of the expensive debt FCAU used to acquire Chrysler in 2011. The spinoff which reduced debt helped this problem area as well. As a result of the spinoff the FCAU EBIT/Interest Expense increased to between 1.85x-1.91x and the FCAU EBITDA/Interest Expense increased to between 3.72x-3.84x. The low end of the above ranges is calculated assuming cash proceeds from the IPO remain on the balance sheet, while the high end of the ranges is calculated assuming those cash proceeds are used to further pay down debt. Unattractive Interest Expense and Earnings Due to the high interest expense present in FCAU debt, the interest expense takes up a large portion of EBIT and EBITDA, manipulating the company’s earnings. Therefore, although FCAU trades on a discount based on EV/Revenue, EV/EBIT and EV/EBITDA, it trades at a steep premium on a P/E basis. As the interest expense is reduced through debt reduction, the ratios will move towards each other because interest expense will no longer absorb such a large portion of earnings.

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Attractive Net-Debt It is worth noting that FCAU has a large amount of cash on the balance sheet. When calculating Net Debt/EBITDA, it is clear that FCAU’s 0.93x is far below the industry average of 4.70x. This shows that despite the large interest expense and the speculative credit rating, the debt coverage abilities and creditworthiness of FCAU are being underappreciated by the market.

Management

John Elkann (Chairman) Elkann obtained a scientific baccalaureate from the Lycee Victor Duruy in Paris, and graduated in Engineering from the University of . Elkann has served as the executive Vice President of FCA NV from May 2004- September 2004. He is currently CEO of Exor, S.p.A., a major shareholder of FCA, holding 29.19% of the common shares outstanding with voting power of 44.31%. He is also a General Partner at Giovanni . Sergio Marchionne (CEO) Marchionne has a degree in Industrial Engineering and Management from Polytechnic University in Turin and in Economics from the University of Cassino among 4 other honorary degrees. Marchionne holds the honour of Cavaliere Del Lavoro, an Italian commerce award. Marchionne holds a Bachelor of Arts with a major in Philosophy from the University of Toronto and a Bachelor of Laws from the Osgoode Hall Law School at York University, as well as an MBA and Bachelor of Commerce from the University of Windsor. Marchionne has been the CEO at FCA NV since October 13, 2014. Marchionne was the CEO, President and COO since 2009. He served as the CEO of FCA Italy since February 2005. Richard K. Palmer (CFO) Bachelor of Science in Microbiology from University of Warwick (UK). CFO & SVP of FCA US, LLC since 2009. Formerly was the CFO of (one of Fiat’s component segments) from 2003-2005.

Major Shareholders

Exor is the largest shareholder of FCA owning 29.19 percent interest in our issued common shares (as of February 27, 2015). However, as a result of the loyalty swing voting mechanism, Exor’s voting power is about 44.31 percent.

As a result, Exor could strongly influence all matters submitted to a vote of FCA shareholders, including approval of annual dividends, election and removal of directors and approval of extraordinary business combinations.

Exor is controlled by e C. S.a.p.az, (“G.A.”) which holds 51.39 percent of its share capital. G.A. is a limited partnership with interests represented by shares (Societa’ in Accomandita per Azioni), founded by Giovanni Agnelli and currently held by members of the Agnelli and Nasi families, descendants of Giovanni Agnelli, founder of Fiat. Its present principal business activity is to purchase, administer and dispose of equity interests in public and private entities and, in particular, to ensure the cohesion and continuity of the administration of its controlling equity interests. The managing directors of G.A. are , Tiberto Brandolini d’Adda, Alessandro Nasi, , Gianluigi Gabetti, Gianluca Ferrero, Luca Ferrero de’ Gubernatis Ventimiglia and .

13 Fiat Chrysler Automobiles NV (FCAU)

The following persons own directly or indirectly in excess of three percent of the common shares of FCA as of February 27th, 2015:

Trends & Capital Stucture

As shown in the graphs above, since 2010 FCAU has been striving to improve their capital structure and ensure that they will remain able to pay all interest expense payments as they arise. The company’s main struggle the past few years has been its profitability and we feel that this continued decrease in Debt/EBITDA levels will allow the company to provide significant value to shareholders through high profit margins and retained wealth.

14 Fiat Chrysler Automobiles NV (FCAU)

Fiat-Chrysler Merger Timeline • April 2009: Chrysler files for Chapter 11 Bankruptcy • June 2009: Chrysler emerges from bankruptcy with the United Auto Workers (UAW) pension fund, Fiat, the United States government and Canadian government as its principal owners • 2011: Fiat acquires close to 60% ownership from the other parties • January 2014: Fiat completed the acquisition of the remaining 41.5% from the UAW making Chrysler a wholly owned subsidiary

In fiscal 2011, Fiat’s cash balance increased from €11,709 (mm) to €17,526 (mm) and LTD increased from €10,369 (mm) to €27,093 (mm). A majority of both of these spikes can be attributed to the merger with Chrysler.

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Ferrari Spinoff

Overview

On October 29th, 2014 the Board of Directors announced that it had authorized the separation of Ferrari from FCAU. The independent Ferrari company was priced on October 20th, 2015. At a price of €45.84 per share and 188,921,600 common shares outstanding, Ferrari is valued at €8.66 B.

In the terms of this spin off Sergio plans to sell 10% of Ferrari (€866 million) to the public and redistribute the remaining 80% of FCAU’s ownership to FCAU shareholders.

1) FCAU is spinning off €2.8 B in long term debt. a. Prior to spin off: Net Debt/EBITDA: 1.32x and Total Debt/EBITDA: 3.82x b. Post spin off: Net Debt/EBITDA: 0.93x and Total Debt/EBITDA: 3.72x 2) The sale of 10% will provide FCAU with €866 million in cash to pay down debt, decrease interest expenses and increase profit margins. 3) The terms of the spin off incentivise major share holders to hold onto the new company, Ferrari NV. Each shareholder of the spun off Ferrari NV will have the opportunity to participate in a loyalty voting program. Under the conditions of the program, every shareholder who holds onto their share of Ferrari for at least 3 years will effectively receive two votes for each common share of Ferrari that they own.

Profitability Margins (€) (6/30/2015) LTM Net Revenue LTM EBIT EB IT Ma r g i n LTM EBITDA EBITDA Margin FCA (Pre-Spinoff) 106,261,000 4,289,600 4.04% 8,450,600 7.95% Ferrari (Post-Spinoff) 2,800,097 422,473 15.09% 673,000 24.03% FCA (Post-Spinoff) 103,460,903 3,867,127 3.74% 7,777,600 7.52%

The Ferrari Spinoff consisted mainly of three transactions. It started by Ferrari issuing a note payable with Fiat borrowing a principal amount of €2.8 billion. Ferrari then took about €1.1 billion in cash from its cash management pool and receivables from financing activities of €1.3 million to pay the €428 million outstanding liability that was outstanding with FCAU prior to the spinoff. The remaining €672 million was moved to Ferrari’s cash account. This balance in cash was then used to pay down the €2.8 billion note with FCAU. In addition, the remaining balance of €2.1 billion was refinanced to debt with third parties, thus completing the spinoff. These transactions were all intercompany and as a result, both companies’ balances were offset by one another. The following table consists of journal entries for the Ferrari debt spinoff and it highlights the impact it has had on all the different accounts:

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Transaction Account Balance A Equity Attributable to Owners of the Parent € 2,800,000 Debt with FCAU € 2,800,000 Issuance of FCAU note to Ferrari for spinoff

B Cash € 671,696 Debt with FCAU € 428,039 FCA Cash Management Pool € 1,098,395 Receivables from Financing Activities € 1,340 Payment of outstanding debt with FCAU using cash management pool

C Debt with FCAU € 2,800,000 Cash € 671,696 Debt with Third Parties € 2,128,304 Settlement of FCAU note through payment of cash and debt refinancing. One of the most significant aspects of the Fiat-Ferrari Spinoff is the significantly large amount of debt that Fiat has piled onto Ferrari. This has led to FCAU’s debt levels dropping significantly by €2.8 billion, thus making the company look more attractive from a creditor’s point of view. As a result, this will lead to Fiat having an improved credit rating, thus raising it to investment grade, which will improve Fiat’s ability to access capital markets. This will make the company much more attractive in the long run while being priced at a steep discount relative to the extractable value of the company.

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Balance Sheet with Separated Financials

Pro Form a Prior to Separation With Separation Transactions Balance She e t FCAU + Fe r r ar i Pro Form a Ferrari Pro Form a FCAU Balance She e t as of: Jun-30-2015 June-30-2015 June-30-2015 Currency EUR EUR EUR Units Thousands Thousands Thousands Current Assets Cash and Cash Equivalents € 21,117,000.00 € 257,527.00 € 20,859,473.00 Investments 42,000.00 42,000.00 Current Securities 232,000.00 232,000.00 Trade Receivables 3,207,000.00 154,290.00 3,052,710.00 Inventories 12,283,000.00 352,425.00 11,930,575.00 Receivables from Financing Activities 3,516,000.00 1,181,204.00 2,334,796.00 Asset Held for Sale 6,000.00 6,000.00 Other Current Assets 2,815,000.00 83,047.00 2,731,953.00 Other Financial Assets 890,000.00 6,523.00 883,477.00 Current Tax Receivable 292,000.00 10,159.00 281,841.00 Assets Sold w ith a Buy-back Commitment 2,702,000.00 2,702,000.00 Total Current Assets 47,102,000.00 2,045,175.00 45,056,825.00

Non Cur r e nt As s e ts Other Assets 128,000.00 128,000.00 Net Property, Plant and Equipment 28,008,000.00 588,697.00 27,419,303.00 Investments Accounted for Using the Equity Method 1,537,000.00 1,537,000.00 Deferred Tax Asset-net 3,504,000.00 148,707.00 3,355,293.00 Other Intangible Assets 9,776,000.00 282,683.00 9,493,317.00 Goodw ill and Intangible Assets w ith Indefinite Useful Lives 15,183,000.00 787,178.00 14,395,822.00 Other Investments and Financial Assets 557,000.00 48,351.00 508,649.00 Total Assets 105,795,000.00 3,900,791.00 101,894,209.00

Current Liabilities Trade Payables 22,427,000.00 577,939.00 21,849,061.00 Current Tax Payable 186,000.00 181,673.00 4,327.00 Other Financial Liabilities 845,000.00 165,833.00 679,167.00 Other Current Liabilities 12,640,000.00 669,701.00 11,970,299.00 Payables from Financing Activities 1,340.00 Total Current Liabilities 36,098,000.00 1,595,146.00 34,504,194.00

Non Current Liabilities Debt w ith FCA - Debt w ith Third Parties 32,298,000.00 2,266,943.00 28,931,322.00 Deferred Tax Liabilities 278,000.00 22,713.00 255,287.00 Minority Interest (Non-Controlling Interest) 359,000.00 12,158.00 346,842.00 Other Provisions 11,761,000.00 139,493.00 11,621,507.00 Employee Benefits 10,323,000.00 77,500.00 10,245,500.00 Deposits in FCA's cash management pools 1,098,395.00 Total Non-Current Liabilities 55,019,000.00 2,518,807.00 52,498,853.00

Shareholders' Equity Total Shareholders Equity (Equity Attributable to ow ners of the parent) 14,678,000.00 -213,162.00 14,891,162.00 Total Liabilities & Shareholders Equity 105,795,000.00 3,900,791.00 101,894,209.00

18 Fiat Chrysler Automobiles NV (FCAU)

Valuation Comparables

Comparable Companies:

Company Comp Set Company Name TEV/Total TEV/EBITDA LTM - TEV/EBIT P/Diluted Re ve nue s LTM Latest LTM - Latest EPS Be f o r e Volkswagen AG (XTRA:VOW3) 0.7x 5.4x 8.5x 4.9x Bayerische Motoren Werke Aktiengesellschaft (DB:BMW) 1.6x 10.4x 13.9x 10.4x Daimler AG (XTRA:DAI) 1.2x 10.1x 13.3x 10.9x Peugeot S.A. (ENXTPA:UG) 0.3x 3.4x 6.5x NM General Motors Company (NYSE:GM) 0.6x 5.6x 9.4x 13.1x Renault Société Anonym (ENXTPA:RNO) 1.2x 9.8x 14.5x 8.8x Hyundai Motor Company (KOSE:A005380) 0.8x 8.9x 10.7x - Ford Motor Co. (NYSE:F) 1.2x 12.4x 28.1x 16.9x SAIC Motor Corporation Limited (SHSE:600104) 0.3x 9.5x 12.7x 6.9x Nissan Motor Co. Ltd. (TSE:7201) 1.0x 7.5x 15.5x 10.5x

Industry Summary:

Sum m ary Statistics TEV/Total TEV/EBITDA LTM - TEV/EBIT P/Diluted Re ve nue s LTM Latest LTM - Latest EPS Be f o r e High 1.6x 12.4x 28.1x 16.9x Low 0.3x 3.4x 6.5x 4.9x Mean 0.9x 8.3x 13.3x 10.3x Median 0.9x 9.2x 13.0x 10.4x FCAU Multiples Prior to Spinoff and Post-Spinoff:

FCAU TEV/Total TEV/EBITDA TEV/EBIT P/Diluted Re ve nue s EPS Fiat Chrysler Automobiles N.V. (BIT:FCA) 0.30x 3.30x 6.40x 19.5x Fiat Chrysler Automobiles Post Spinoff 0.19x 2.59x 5.21x - Explanation: The valuation multiples presented for FCAU prior to the spinoff includes the Ferrari segment. The post-spinoff valuation multiples presented for FCAU are calculated independent of the Ferrari segment. In order to produce an equity value (for EV calculation), it is assumed that the trading share price of Ferrari (RACE) is priced into the trading share price of FCAU at a ratio of (1/10)*RACEPRICE. The FCAU share price assumption used in this trading comparable analysis is the same as used in the SDCF analysis, the independent share price of FCAU non-inclusive of Ferrari is €9.09. From the above trading comparables analysis, it is apparent that FCAU trades on a discount to the industry on an EV/Revenue, EV/EBITDA and EV/EBIT basis. However, the value reflecting the company’s equity alone P/E is a steep premium to the market 19.5x earnings. The reason for this price discrepancy is that the market is placing a high reliance on earnings. The earnings which FCAU is presenting is not representative of the company’s wealth generating power, due to the high interest expense associated with the Debt obtained for the Chysler Merger. The Ferrari Spinoff will allow FCAU to begin servicing the high level of debt, incrementally bringing down interest expense and therefore increasing presented earnings. As earnings become more representative of the company’s earnings power, the P/E multiple will decrease and the EV multiples will likely increase.

19 Fiat Chrysler Automobiles NV (FCAU)

Debt Maturity Schedule

20 Fiat Chrysler Automobiles NV (FCAU)

Ownership of FCAU

Ferrari is owned primarily by Exor, which is an Italian investment company. It owns 29.19% of FCAU and holds 44.31% of voting power based on the loyalty voting program. Exor is 56% owned by Giovanna Agnelli, a company which is owned by the , the founder of Fiat. Other notable owners are Baillie Gifford & Co. with 9.41% ownership and Sergio Marchionne, the CEO of Fiat, with 2.14% ownership. Furthermore, Ferrari, as part of the spinoff, is launching and IPO of 10% of its shares to the Public Market. Ten percent of Ferrari is also owned by Pierro Ferrari, a member of the Ferrari family that founded the luxurious car brand. The remaining 80% will be distributed to existing FCAU Shareholders in January 2016. For every ten shares of Fiat owned, the shareholder will receive 1 share of Ferrari. Also, Pierro Ferrari, Exor, and Sergio Marchionne have pledged their participation in the Ferrari Loyalty Voting Structure which will effectively double their voting power in Ferrari. As a result, there will be no significant change in control for Ferrari except the fact that it will now be trading publicly on the New York Stock Exchange.

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