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Thursday, 23 November 2017

US IPO: Ferrari’s US$982.4m IPO

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Hot laps

For defying a background of woeful new markets and still achieving a premium valuation – based on a purveyor of scarves rather than motor cars – Ferrari’s US$982.4m NYSE flotation is IFR’s US IPO of the Year.

Call it extreme due diligence. Ahead of Ferrari’s US$982.4m New York listing in October, Wall Streeters buckled up in production cars driven by Formula 1 test drivers and hurtled around Ferrari’s private race track in Maranello at speeds of up to 300km/h.

The adrenalin rush of those “hot laps” did not stop there.

The most high-profile US IPO of 2015, Ferrari overcame a perilous new issue market to achieve pricing at the top of the US$48–$52 range. After seven days of marketing, the book was 20 times oversubscribed with no bids below the range.

The final price valued Ferrari above many luxury brand names and well above the low single-digit multiples of mass-market carmakers.

Parent Fiat Chrysler Automobiles sold 10% of Ferrari in the IPO and plans to distribute its remaining 80% stake to its shareholders in early January. The remaining 10% is held by Piero Ferrari, son of founder Enzo.

The value creation was stunning, especially in light of FCA’s historically depressed market valuation.

“I have always had the view this was the most valuable asset sitting inside Fiat,” said Sergio Marchionne, FCA’s chain-smoking and straight-talking CEO of 12 years who doubles as chairman of Ferrari. He was talking in an interview with IFR in November.

But Ferrari’s status as a household name did not change the fact that six of the seven IPOs prior to its deal were priced below range or were withdrawn.

“There were fundamentally difficult positioning elements to telling the story and extremely tough market conditions, both broadly and specific to the IPO market, that made the execution very challenging,” said UBS’s Americas ECM head James Palmer. UBS was sole global coordinator, as well as a joint bookrunner alongside Bank of America Merrill Lynch, Allen & Company, Santander, BNP Paribas, JP Morgan and Mediobanca.

Marchionne and the banks had to convince investors that rather than the average 2.9 times EV/Ebitda multiple commanded by Ford, BMW and General Motors, Ferrari could get somewhere between the 10.2 times average of pure luxury brands such as Prada, Burberry and LVMH and top-end “aspirational comp” Hermes’ 17 times. Final pricing was a multiple of 12.5.

Bankers concluded that emphasising Ferrari’s exclusivity, pricing power and customer loyalty would underscore Ferrari’s luxury credentials.

Ferrari highlighted plans to grow Ebitda by 50% to €1bn in 2019 as sales rise to 9,000 cars from 7,500 this year. The company’s predictable revenues and cashflow, even through deep recessions, offered an even more compelling argument.

A counterpoint was Ferrari’s higher capital intensity, though its strong return on invested capital of around 35% was not far off Hermes’ 44%.

Tantalising

Possibly the most tantalising angle was Ferrari’s plan to extend its brand beyond cars.

Though it remains unclear whether Ferrari will build a motorcycle, a powerboat or just a handbag, Marchionne has promised more news around Ferrari’s 70th anniversary in 2017.

The Ferrari brand “does not have to justify the intrusion into the non-car space” and “has almost the genetic right to do it”, he said.

Underwriters’ bookbuilding strategy leant heavily on the notion that the book needed to be fully covered almost from launch in light of market conditions.

Though not common practice in the US, the syndicate broke with tradition by conducting pre-roadshow meetings with select investors a week before launch. About 10 accounts from New York, Boston and London travelled to Maranello to enjoy privileged early access to management within the bounds of pre-marketing rules.

With an implied inducement to bid early, these accounts helped the deal achieve oversubscription just two hours after launch late on Friday October 9.

Orders grew steadily throughout the roadshow, which included meetings with 500-plus investors and 10 large group events.

Though Marchionne grumbles that all roadshows are “painful” and this one “intense”, he is convinced Ferrari saw the right investors.

“It would have been very easy for to us to go through our Rolodex at Ferrari and effectively approach the top 50 customers of Ferrari,” he said. “That would have been the wrong answer because the value we would have got from that exercise may have been a number that reflected the attachment to the brand as a user of the product as opposed to its economic value.”

The decision not to push for above-range pricing was wise, though the stock has still struggled in its early days. The shares opened up 17% on their first trade and ended their debut day up 6%, but in mid-November had fallen to US$46.

To see the digital version of the IFR Americas Review of the Year, please click here .

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com .

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