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When I look at an S-1 initial public offering filing there are a couple of sections that interest me the most. At the top of the list is the “Use of Proceeds” section.
This is the section of the S-1 that led me to take a skeptical view of the GoDaddy (NASDAQ: GDDY) and Bojangles (NASDAQ: BOJA) IPOs, for example – both of which stated that they would use the proceeds of their IPOs to pay off private-equity investors and company insiders.
I don’t know about you, but I don’t like the idea of buying into an IPO that is set up to give liquidity to existing shareholders who wish to exit the stake they’re selling to you.
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Though we’ve heard of a Ferrari spinoff since its parent company – Fiat Chrysler Automobiles (NYSE: FCAU) – first discussed it back in October, it wasn’t until we saw the S-1 filing just recently that we learned the IPO was actually on track. Now investors have a chance to look through the filing and learn a fair amount about how the IPO – which is expected to occur in early 2016 – will be structured.
It is not the case that investors in the Ferrari IPO are buying from private equity and venture capital investors looking for an exit. However, after looking closely at the S-1 filing and the associated commentary from Fiat Chrysler CEO Sergio Marchionne, it’s clear that there are certainly a couple of structural issues with the Ferrari IPO that you need to know about.
Yellow Flags
First, Ferrari’s growth is likely limited.
Yes, the company sells cars that start at around $200,000. But it only shipped 7,255 cars in 2014. It is this “scarcity” that makes its cars so rare and valuable. It also gives the company ample time to properly focus on each car to ensure that the quality and brand identity are not compromised.
As such, Ferrari’s growth is limited both by buyers willing to pay that much for a car and the company’s desire to avoid diluting the brand.
Second, the IPO is likely to pop artificially.
Chrysler Fiat values Ferrari at roughly $11 billion. Legendary founder Enzo Ferrari’s son, Piero Ferrari, has stated that he plans to keep his 10% stake. For its part, Chrysler Fiat only plans to make 10% of the company available in the IPO, or roughly $1.1 billion worth of stock.
Considering the high-flying nature of recent IPOs, as well as the allure of anything named Ferrari, I expect this IPO to draw attention from all over, particularly from investors with deep pockets for whom owning a piece of the legendary car manufacturer is more important than the price it takes to purchase that piece.
Following the Ferrari IPO, Fiat Chrysler will still own 80% of the company, so it is certain that new Ferrari investors will lack any sense of actual control over the company and its board.
If nostalgia or the cultural importance of the brand are calling to you and you think buying a piece of Ferrari is important to you, be my guest. But I consider nostalgia to be a poor basis for an investment thesis.
With a scarcity of shares and the importance of vehicle scarcity limiting the company’s growth, this seems like yet another IPO I’d like to avoid. Knowing that Fiat Chrysler will still hold 80% of the company to dump as it desires is yet another reason to steer clear of the Ferrari IPO. This feels like Chrysler Fiat trying to raise cash.
Frankly, I’d rather hold on to mine.
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