The word on Wall Street is that the Ferrari IPO will go ahead next week, with around 10 percent of the shares being offered to the public. The current owner, Fiat Chrysler Automobiles (FCA), will then redistribute 80 percent of the shares amongst its stockholders, while the remaining 10 percent will remain in the hands of the Ferrari family. The goal is to raise around $1 billion from the 10 percent, which would give the company a valuation of $10 billion, which is half the value of FCA.
Sergio Marchionne, the FCA and Ferrari boss, believes that Ferrari warrants the valuation because it is a unique company, with one of the strongest brands in the world, despite the fact that it sells only 7,000 cars a year. Given that the starting price for a Ferrari is $205,000, one can understand why he feels that way. Ferrari regularly makes a profit, despite an expensive Formula 1 programme, although the signs are that this is largely paid for by sponsors (notably Philip Morris International and Shell), and by money from the Formula One group. Ferrari enjoys a very special deal with the Formula One group and its takes five percent of the revenues from the sport before any other price money is decided upon. This means that Ferrari gets at least $200 million from the Formula One group in one form or another. It is hard to imagine that with all other F1 revenues taken into account (engine sales and merchandising/licensing) that the programme does not run at a profit. At the same time, Ferrari is able to use the technology developed in F1 for its road cars AND F1 provides the only advertising that Ferrari ever does so, all in all, F1 is vastly important to the company.
Marchionne understands this but he believes that Ferrari also has potential as a luxury goods business. The restrictions on production – to preserve the exclusivity of the cars – means that growth is limited, except if the firm leverages its brand in other ways. That is tricky balancing act, because the need to be exclusive means that selling hat and teeshirts is probably not the way to go. Cars need great deal more investment than watches, handbags, wallets and other luxury items, which is why car companies cannot get valuations that other luxury firms can achieve. The word is that after the IPO Ferrari is going to expand production to 10,000 on the basis that there market for luxury cars in expanding in places like China and so the product will still be exclusive even if there are more of them about. This is probably true. Porsche has shown that one can expand the range to different machinery and glitzy design items without upsetting the brand. However, there are some who may baulk at the idea of a Ferrari SUV. Having said that, as an independent company, Ferrari must be aware of US emissions rules which mean that the emissions must be averaged out across the different models of a manufacturer’s range. Thus Ferrari needs some low-emission models to bring down the impact of the sexy gas-guzzlers to avoid the need to pay fines.
Ferrari may diversify into other businesses: speedboats, watches, theme parks, hotels and so on, but this needs careful thought.
Ferrari hopes to buck the current trend of IPOs in the US, which is not good. The proceeds raised in US IPOs this year are down by more than 44 percent and this week the markets were patchy with First Data, a global payment technology company, ending up with shares below its anticipated launch price. The supermarket company Albertsons, owned by Cerberus Capital Management, decided to call off its IPO after the market was perturbed when Wal-mart lowered its sales forecasts.
It will be interesting to see who Ferrari does…