Ferrari: The 2015 Initial Public Offering

The case is regarding the October 2015 initial public offering pricing decision for the Italian motor
company Ferrari. Ferrari was a subsidiary unit of Fiat Chrysler management (FCA) as 90 per cent
stake of Ferrari was owned by FCA. The management of FCA decided to trade Ferrari was a
separately traded company and hence was preparing for listing the company on the New York stock
exchange with an intent of selling 10 per cent shares in the IPO.

Ferrari was started in 1939 by Enzo Ferrari who was facing financial issues and as a result, liquidated
50 per cent shares to Fiat which later went on acquire 90 per cent stakes. Fiat’s technical and
managerial knowledge helped Ferrari increase not only production levels but also cut costs in the
process. Montezemolo, who was hired by fiat for management of Ferrari was successful in reaching
to the markets where Ferrari was not either present or sales level were low. A huge amount of
revenue was also generated through sales of merchandise, services and spare parts.

FCA was planning for an evaluation of about $9.8 billion, and by the market analysis, they got the
idea that there is a demand for about 17.18 million shares. So, they were targeting the Pre-IPO price
of about $48 to $52, and by this, they plan to raise nearly $1 Billion, and this money would help
them service their souring debt. FCA was also hoping to move some part of its debt to Ferrari. So,
the decided IPO price at $48 to $52 which would ensure not only the targeted valuation but also
enable them to get the required amount of capital for debt as well as expansion purposes. Rest of
the 80 per cent stakes with the FCA would be distributed among existing shareholders via a stock
dividend. This way all of the 90 per cent shares would be available for public trading and the Ferrari
Family would continue to own 10 per cent of the Ferrari shares. One more reason for the IPO was
the profit margins of Ferrari was more than the rest of its brand holding. Management of FCA
thought if they could become independent entities from FCA, valuation of the group could be more
than the valuation of a standalone unit. This will also increase the presence of Ferrari in the US
market along with giving the right to generate Debt and Equity at own term to the Ferrari
management team.

The issues for the IPO that FCA was facing mainly the pricing and to an extent the fluctuations in the
US dollars to Euro value. Pricing the share at some undervalued price would mean loss of valuation
and loss of raised capital. The higher price would result in low adoption rate by the public as well as
the saturation of the price point in the future which would result in negative market sentiment and
low confidence for follow on public offerings (in case of any). There have been instances where the
European firms have been able to launch their IPO by the price that corresponds to 8 to 26 times
EBITDA. The recent example is that of an automobile company which targeted valuation of about 9.9
times of EBITDA. So, the value of USD 48 to USD 52 was very much relevant and FCA would be able
to cover its debt needs. Further price escalation would again foster not only Ferrari’s market
capitalization but also the group’s one.

Pre IPO process is 3-months long process where a number of norms have to be cleared. What makes
the process complicated is the difference in the tax rates for production and office works in the
Country. There were several prerequisites that FCA needed to fulfil from developing a business plan
to establishing a relationship with IBs, lawyers etc.