Will the next owners of the all-American Jeep brand be Chinese?
Automotive News reported on Monday morning that the CEO of Chinese automaker Great Wall Motor Company (NASDAQOTH: GWLLY) confirmed that her company is interested in buying the Jeep brand from Fiat Chrysler Automobiles (NYSE: FCAU) and expects to begin negotiations soon.
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FCA's shares rose almost 7% in the wake of the report on Monday, suggesting that investors are taking the idea seriously. Here's what we know about the potential deal, and why this deal could turn out to be a lot more complicated than a simple sale of Jeep.
What we know about Great Wall's interest in Jeep
That report apparently led Wang Fengying, Great Wall's CEO, to confirm her company's interest in buying the Jeep brand in an email to the News. A Great Wall spokesperson clarified that while Great Wall has indirectly expressed its interest in buying Jeep to FCA, it hasn't yet made a formal offer or met with FCA's board of directors.
FCA issued a statement on Monday morning that said much the same thing:
(FCA's statement is referring to its current five-year business plan, first presented to investors in May of 2014. FCA plans to present a new five-year plan next spring.)
So will FCA's board be willing to agree to a sale of the Jeep brand to Great Wall? I don't think so. As I said above, I think any deal that happens here is going to end up being considerably more complicated.
Why FCA is unlikely to sell Jeep by itself
It's hard to tell exactly how much money Jeep brings in for Fiat Chrysler. FCA reports global financial results for its Maserati luxury brand, but it doesn't break out financial results for its other brands. And the profitability of specific vehicle models is a closely guarded secret, at FCA and most other automakers.
But that said, we can look at FCA's most recent quarterly results and get a pretty good idea as to how important Jeep is to the company's overall bottom line.
For starters, we know that FCA's NAFTA region (the U.S., Canada, and Mexico) accounts for a disproportionate share of its 1.87 billion euros of "adjusted EBIT" (its operating profit minus one-time items) -- about 70% last quarter.
And we know that Jeep is the best-selling brand in FCA's NAFTA region, accounting for about 35% of the just over 619,000 vehicles FCA sold in the region in the second quarter.
While we don't know the specifics, it's likely that Jeep accounted for significantly more than 35% of FCA's profits in the NAFTA region last quarter. On a per-sale basis, the Jeep brand is almost certainly far more profitable than FCA's global mass-market Fiat brand. And some Jeep models, like the Grand Cherokee, are among FCA's most profitable products anywhere.
Long story short: Without Jeep, FCA would be a lot less profitable, both overall and (almost certainly) in terms of profit margin.
What FCA's board is likely to tell Great Wall
Unless Great Wall makes a very rich offer for the Jeep brand, I suspect that FCA will respond by saying that Jeep isn't for sale by itself. Great Wall may want only Jeep, but FCA will want to sell the whole company (with the likely exceptions of the Alfa Romeo and Maserati brands, which could be spun off as Ferrari was in 2015.)
FCA still lags many of its global rivals in profitability, and it has more debt than most. If U.S new-car sales start to slide (and they will at some point), FCA-without-Jeep could have a tough time staying in the black. It would be likely to fall below breakeven very early in a recession, long before rivals like General Motors (NYSE: GM) or Ford (NYSE: F) start to swing to losses.
Simply put, I don't think FCA can afford to sell Jeep, unless the purchase price is very rich -- or unless selling Jeep puts it in a position to sell most of the rest of the company to another buyer. We'll see.
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