Analysis: Ferrari, Billions in Assets and Testosterone

It's set to be the reddest, raunchiest, raciest stock market listing of all time, but just how do you put a price tag on Ferrari, Fiat's factory of supercars and dreams?

Investment bank Mediobanca came up with one answer on Thursday as it announced it was leading a consortium that would buy 34 percent of flame-red Ferrari in a deal valuing the Maranello racing stable at $2.4 billion (1.8 billion pounds).

Seemingly snatching a mandate to bring Ferrari to the stock market from a syndicate led by Deutsche Bank, Unicredito's UBM and IntesaBci, Mediobanca also said it planned an initial public offering of the shares by June 2003.

But before then, Mediobanca said it would sell a 12.5 percent tranche in Ferrari to an unnamed consortium of Italian and foreign banks -- even as some of the most likely candidates, such as Unicredito and IntesaBci, distanced themselves.

Assuming the deal goes through, it would bring Ferrari back into the arms of the powerful finance house that bankrolled a number of historic Fiat deals before a series of recent spats.

From Fiat's perspective it is an attractive option because the Turin-based conglomerate will get a guaranteed sum for the 34 percent stake and any upside for its remaining 56 percent holding if Mediobanca gets more than expected for the float.

But the question of the valuation is key to the success of all these operations. Conventional wisdom suggests Ferrari could be worth about $1.3 billion. The rest, as brand valuation expert Jan Lindemann of consultants Interbrand put it, is all hormones.

The Brandsman's View

"This is the ultimate testosterone brand you can find. You won't get anything close to it," Lindemann told Reuters.

"Ferrari goes way beyond the understated image of Aston Martin or Porsche. You can't really use all that engine power, you can't carry luggage and you can only take one passenger -- that's the whole point."

Lindemann says that if Ferrari, which also includes the classic Maserati sportscar brand, really is worth $2.4 billion, then $1.4 billion of that is in the brand name, reeking as it does of the race track and high glamour.

"The actual car building is not that difficult. Ferrari is an iconic brand and there aren't that many of those around. You can parallel the success in Formula One with increased sales," he said.

The Analyst's View

Lindemann believes an independent Ferrari would need to make more affordable cars if it were ever to become financially viable without the cost benefits of being part of Fiat -- the UK starting price for a new 360 Modena is a cool $158,000, while a 575 Maranello will set you back $250,000.

In fact, Ferrari would have to become a bit more like Porsche and BMW, rather than a luxury goods brand in the style of jeweller Bulgari or fashion house Gucci. And here's where the $2.4 billion valuation gets more difficult.

"We do not understand why Ferrari should deserve a valuation which is nearly twice that of Porsche," said Arndt Ellinghorst of brokers WestLB Panmure.

"If we value Ferrari on basis of 2003 Porsche multiples, we arrive at a total value of 1.3 billion euros, and Porsche has delivered consistently strong margins over the past three years," he said in a research note.

"Ferrari still has to prove that the introduction of Maserati to the U.S. will be a success and that it will lift Ferrari to a higher level of profitability. Therefore, many questions on the valuation remain open."

The Mediobanca price tag values Ferrari at 2.4 times 2001 sales, compared with 1.77 times for Porsche. One London-based analyst, baking in a little added brand value, reckoned Ferrari would be worth 1.45 billion euros.

"Realistically, the valuation implied from the reports on Mediobanca, if true, make you think the bank might be thinking something else in addition to 'what a fantastic asset'," the analyst said on condition of anonymity.

"Mediobanca has a vested interest," he added in reference to the exposure the Italian bank is taking to an asset whose value is at best uncertain.

The Banker's View

"Are Mediobanca going to be able to position this appropriately?" asked one senior investment banker of the Italian group's efforts first to find a home for the 12.5 percent stake and then to list the share.

"The argument that has to be sustained in terms of valuation is very complex. But even if people ultimately believe the story, some one has to explain it. Looks like they've gone out on a limb," the banker added.

Right now, the Ferrari business is making money, while Maserati is loss-making, along with the Formula One business, which will be particularly vulnerable once an impending ban on tobacco sponsorship comes into force.

To get an idea of what the priapic Italian brand name means to Ferrari car sales, substitute "Woking" for "Maranello," and "also-ran" for "Michael Schumacher," and you get the McLaren racing team, whose brand value must be of questionable value to sponsor Mercedes.

Mediobanca's dilemma is this: when it brings Ferrari to market, it will need to attract luxury-goods-type valuations to cover its exposure. But to make Ferrari a viable stand-alone company, it needs to make cheaper cars and risk losing its remarkable cachet.

The one thing it can't afford to lose is the testosterone.