NEW YORK, Nov. 8, 2018 /PRNewswire/ -- Dear John Elkann and the Board of Directors of Fiat Chrysler Automobiles, N.V. (FCAU),

As you are aware, ADW Capital Management, LLC and its affiliates ("We") are and have been committed, long-term owners of shares in Fiat Chrysler Automobiles, N.V. ("FCA" or "the Company").

We would like to begin this letter by applauding this management team and Board of Directors for their hard work over the years. To say FCA has set a high bar for the entire automobile industry would be a major understatement. From the turnaround of the legacy Fiat business over a decade ago, to the massively successful acquisition of Chrysler – and the Company's effective deleveraging thereafter, to the recent spinoffs/IPOs of CNH and Ferrari, this management team and Board of Directors' operational track record is unrivaled.

While we are extremely pleased with the results the Company has delivered over the years, we believe the market's perception of FCA as a struggling turnaround has persisted – and is clearly reflected in the Company's current valuation. The facts connected with the matter make it undeniable. Today, while FCA has premium brands which are secularly growing, the strongest balance sheet and highest growth profile of all US OEMs – the Company trades at a significant discount to its closest peers, GM and Ford.

Below, we will set forth the steps the Board could take to eliminate the "turnaround valuation" and allow the Company to deliver best-in-class shareholder returns.

Narrowing the U.S OEM Valuation Disconnect

Today, the Company is stronger than it has ever been. With record NAFTA margins, continued market share gains, untapped international growth opportunities for its premium brands and over €8bn in net cash Pro-forma for the Magneti Marelli sale, we believe that FCA is the best positioned OEM in the world. While the Company has had its fair share of challenges to overcome in the past, the story today is entirely different and must be valued accordingly.

We have identified several opportunities the Board can take to narrow the valuation gap relative to Ford and GM:

For the Company to eliminate the valuation disconnect this Board must first recognize the importance of changing its investor base. It is clear to us that the current investor base – consisting mostly of European investors, is not recognizing the value/importance of FCA's burgeoning and secularly growing American brands. These investors are overly focused on FCA's EMEA market and heavily discounting the secular growth/success the Company has had with Jeep and RAM in the NAFTA market.

We believe this issue is unintentionally self-inflicted and can easily be fixed. Today, while 95% of FCA's profits are generated in NAFTA – the majority of which are derived from Jeep and RAM, most U.S Index funds/Mutual Funds are unable to own shares in FCA given its lack of GAAP financials – which can be easily remedied. It is our understanding that the major bottleneck the Company has to US index constitution (ex. SP 500, SP 500 Value, Russell 1000, Russell 3000) – all indices GM is in, is the lack of US GAAP financials. Simply, if FCA issued U.S GAAP financials, the Company would then be able to file 10Ks/Qs – which would expand the universe of potential forced and unforced buyers who can only own stocks in certain indices. Qualitatively, given U.S investors operate within NAFTA and understand the market and the Company's primary products and profit drivers, they can ultimately assign a more appropriate valuation for our Company – comparable to that of GM and Ford's. In fact, not only would these investors value FCA for its differentiated secular growth/brands but could potentially trade out of Ford and GM if "they have to own auto somewhere." By fixing GAAP/index constitution, we also invite the swath of U.S income investors seeking a high dividend yield on a small payout ratio and durable/growing earnings. We believe this is low-hanging fruit that can significantly narrow the valuation gap without material operational risk.

A look at the following chart shows how undervalued FCA (adj. for Marelli sale) is relative to GM and Ford:



FCA Consensus GM Consenus Ford Consensus

FCA Internal Estimates GM (ex. Cruise) Ford (Restructured) Stock Price 14.63 € $36.88 $9.60

14.63 € $36.88 $9.60 Shares Out. 1,550 1,411 3,977

1,550 1,411 3,977 Market Cap 22,677 € $52,034 $38,179

22,677 € $52,034 $38,179 Automotive Net Cash 8,000 € $2,083 $3,807

8,000 € $2,083 $3,807 Restructuring Cost 0 € $0 $11,000

0 € $0 $11,000 Autonomous Asset Value 0 € $14,600 $0

0 € $14,600 $0 Entreprise Value 14,677 € $49,951 $34,372

14,677 € $35,351 $45,372 2019 EBIT Estimate 7,800 € $10,000 $6,500

9,500 € $10,000 $6,500 EV/EBIT 1.88x 5.00x 5.29x

1.54x 3.54x 6.98x Special Div. Adjusted P/E 4.07x 6.45x 7.18x

2.91x 6.45x 7.18x P/E Net of Cash 2.89x 6.19x 6.46x

2.06x 6.19x 6.46x Unfunded Pension 8,545 € $17,350 $14,965

8,545 € $17,350 $14,965 EV/EBIT (Adj.) 2.98x 6.73x 7.59x

2.44x 5.27x 9.28x















NAFTA EBIT Margin % 10.2% 10.2% 8.8%

11.0% 10.2% 8.8% Global EBIT Margin % 6.7% 6.9% 4.7%

8.0% 6.9% 4.7% Cruise Value (latest funding) $14,600











Ford Restructuring (planned) $11,000











MM Sale (announced) 6,200 €











Special Dividend (FCA announced) 2,000 €













Lastly, to ease the shift to the new investor base and better reflect the new paradigm of focusing on its profitable/growth brands, the Company could be renamed JeepRAM.

Capital Allocation

We believe there is a substantial opportunity for FCA to eliminate its valuation disconnect by "reshuffling the deck." Bluntly speaking, today's collection of assets under the FCA umbrella make no sense from a strategic or industrial point of view. In fact, the Company can create enormous shareholder value if some of these assets were separated/merged:

As previously mentioned, while we recognize the sentimental and historical importance of the Fiat Brand, we believe the most logical path forward would be to spinoff/merge it with a European strategic. It is irrefutable that EMEA is a structurally lower margin/ROIC business. Simply put, the time/effort needed to run this business efficiently would be better used in our profitable/growth markets. As Sergio once said, "I look at return on invested time, forget about invested capital, return on invested time and the effort that's required to make EMEA reasonably profitable, not excessively profitable but reasonably profitable, one would have to wonder why one is doing it, because it is fraught with difficulty. It is an incredibly complex jigsaw puzzle" – Q1 2018 FCA Earnings Call. We believe this asset would be of significant interest to many mass market European OEMs. The most notable of these is Peugeot. With the successful acquisition and turnaround of GM's European business recently, Peugeot has demonstrated the enormous synergies that can be achieved with scale in this market. We believe the Fiat/EMEA business would be extremely valuable to them. In the case this opportunity is pursued, the Proforma FCA would be a higher margin Western Hemisphere/American pure play – focused on its highly profitable NAFTA business and growth internationally.

The second most logical "reshuffle" would be to separate the Alfa Romeo/Maserati ("AM") business from FCA. Based on our estimates, at the current valuation of 1.54x EBIT, we believe AM is significantly undervalued within the "HoldCo." To unlock the value of this asset, the Company has many readily available options. Firstly, FCA can spinoff/IPO the business to shareholders. In fact, the chance to access the markets today at attractive terms and finance the business' immediate capital needs for the 2022 plan would enable a full standalone company today. Furthermore, AM's commercial relationship with Ferrari on powertrains/engines further strengthens the spinoff/IPO opportunity. In the case FCA is not ready to "split the baby", there is also the opportunity to create a tracking stock for AM – allowing the Board to gauge investor interest while improving the "HoldCo" cost of capital. Nonetheless, both scenarios would cause AM's natural investor base to be substantially different than "HoldCo's." Unlike FCA's current investor base, these investors would price-in the quality of the brands and their future profits – ultimately valuing the business more appropriately. In the event the Board would rather monetize this asset through a sale – we believe many OEMs would "rush to the negotiating table" to get their hands on this business given its growth potential and margin profile.

One other accessible opportunity for FCA would be to increase the dividend payout ratio. The market today is significantly underestimating FCA's earnings durability and growth which is reflected in today's implied dividend yield. While the aforementioned steps to change the investor base should eventually help, we believe that increasing today's relatively small payout ratio will create a new dynamic. In fact, we believe that an increased payout ratio will imply that you believe in the durability/growth of our future earnings and this will ultimately inspire confidence and reward us with a higher multiple.

The Case for OEM Consolidation

The enormous value created for shareholders by combining Fiat and Chrysler nearly ten years ago is indisputable. Sergio so candidly expressed this in his "Confessions of a Capital Junkie" presentation, "Capital consumption rate by OEMs is unacceptable—it is duplicative, does not deliver real value to consumers and is pure economic waste." We believe that Sergio's thoughts on consolidation are more relevant than ever. Being the only rational/ROIC focused OEM in the world, FCA can and must take advantage of this opportunity today.

If history is any indicator of the past, OEM consolidation is bound to happen again. Your chairman John Elkann highlights the importance of consolidation in his 2015 EXOR letter to shareholders, "If we look at the defense industry in the US, which is certainly complex: prime contractors have gone from 16 to 6 from 1980 to 2010 driving ROIC from 10% to 40%. Or at the pharma business, which went through massive consolidation: the top 20 before 1995 became 11, with ROIC increasing from 34% to 50%. The sad reality is that the ROIC in the car business – a 'modest' 7.8% in 2014 - is far distant even from the numbers these industries started with before consolidation." Clearly, the benefits of OEM consolidation are too large to ignore but you need to remind the proper constituencies of the massive economic value and corresponding waste in the industry.

While we believe it would make sense for FCA to merge with either of its North American peers – it is clear to us that the most attractive OEM today would be GM.

The math related to a merger of FCA and GM is jaw-dropping. The Fiat and Chrysler merger created ~2% in total cost savings on sales per annum from 2010-2014. In Sergio's "Confessions of a Capital Junkie", he estimates that an OEM merger today would lead to €4.5bn of total cost savings PER ANNUM over four years.

These cost savings would be derived from shared platform development, SG&A leverage, elimination of budget duplication for powertrains and optimized manufacturing investments & production allocation.

Pro Forma - GM & FCA 2022 (€ in BN)

















2018 GM

2019 FCA (EX MM)

Synergy

Combined (2022)















Revenues 123.9 €

118.8 €





242.7 €















EBIT 8.7 €

9.5 €

18.0 €

36.2 €















Margin (%) 7.0%

8.0%





14.9%















Net Profit 7.4 €

7.5 €





28.6 €















Merger of Equals EPS for FCA Shareholders





9.2 €















EPS Multiple of Consolidated OEM Industry





12.00x















Value to FCA Shareholder in Merger







110.8 €

Without modeling the company's standalone growth to 2022, investors can achieve a ~8x return. Given our management team/Board of Directors has a proven track record of executing on such an opportunity, we urge the Company to be the agent of change and drive OEM consolidation.

Finally, in the case GM and Ford are unwilling to sit down and discuss this opportunity – we believe there would still be an opportunity for FCA to "force them to the negotiating table." In fact, given the extremely attractive potential to create enormous long-term value, FCA can easily partner with a large GM/Ford shareholder or "activist" to advocate a merger. Simply, we are confident that a fact-based discussion and use of common sense around long-term value creation with either GM or Ford would make the case for a merger unquestionable. Furthermore, we believe the current political environment, which is supportive of productivity and efficiency, provides the perfect opportunity for FCA to begin engaging with GM or Ford. Most importantly, the vast majority of the synergies realized through consolidation are non-employee facing. The cost savings are largely duplicative R&D and platform – and do not affect line workers. In fact, a stronger and less wasteful industry that is more profitable and consumes less capital allows for safer and higher income jobs over time.

Today, FCA is the best positioned OEM in the world. We believe the time has come for the Board to begin exploring the necessary measures to finally narrow the persisting valuation disconnect and better reflect the enormous value of the assets within the Company.

We believe better communication – investor road shows, conferences, etc. will inspire confidence in the market. These are things Sergio never had to do because he was always making his points known publicly. Moreover, expanding the universe of potential buyers through index constitution and by "reshuffling the deck"/exploring strategic opportunities, FCA can position itself to play offense in the future. Capitalizing on these opportunities also eliminates the market concerns currently plaguing our share price, notably, capital efficiency, use of cash, and potentially decremental margins in the case of a downturn. We see the benefits of consolidation/rationality manifested in the trading of airline stocks today – that could be us too! Most importantly, we believe these simplifying actions will improve management's focus and allow the team to achieve not only a higher return on invested capital but also a higher return on time – in the words of our former maestro Sergio.

We are extremely pleased with the operational returns this management team and Board of Directors have delivered to all shareholders over the years. However, we believe that in order to finally deliver best-in-class shareholder return, this Board must begin executing on the important items highlighted in this letter.

Although the great Sergio was extremely keen on another OEM merger, 2015 was early in the eyes of the market. Today, however, we are in a position of strength. The value that can be generated on behalf of all shareholders is too large to ignore and the time to act is now. We too miss our coach, but our team was hard conditioned for excellence over the last 14 years. It is our turn now to make the Boss proud and play offense.

Respectfully yours,

Adam D. Wyden

Cautionary Statement Regarding Forward-Looking Statements:

The information herein contains "forward-looking statements." Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "targets," "forecasts," "seeks," "could" or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Our forward-looking statements are based on our current intent, belief, expectations, estimates and projections regarding the Company and projections regarding the industry in which it operates. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

SOURCE ADW Capital Partners, L.P.