NEW YORK (TheStreet) -- Spurned by General Motors (GM) - Get General Motors Company (GM) Report, Fiat Chrysler Automobiles (FCAU) - Get Fiat Chrysler Automobiles N.V. Report may decide to get smaller and raise cash rather than seek to merge with another automaker by selling Magneti Marelli, its Italy-based auto parts subsidiary.
A report from Europe, citing three sources, said at least two U.S.-based private-equity companies wish to join with other parts suppliers to buy the company from FCA. Such a deal could generate $3.3 billion for the automaker, whose main headquarters is in Auburn Hills, Mich. An FCA spokesman said Monday morning that the parts subsidiary isn't for sale.
One offer of $2.7 billion in June was refused as too low, the report said, citing an unnamed source, adding the automaker wouldn't sell for less than $3.3 billion.
With the company heavily in debt and selling fewer vehicles than Fiat CEO Sergio Marchionnehe considers necessary for financial stability, he has been publicly advocating for "consolidation" among automakers. Earlier this year, GM acknowledged that he had asked the automaker to open discussions. Mary Barra, GM's CEO, declined, while hiring Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. (GS) Report to advise on FCA's approach.
Magneti Marelli sells a variety of parts globally to many automakers. It has revenue of about 6.5 billion euros and employs about 38,000 workers. Consolidation among parts suppliers has trended strongly of late, with Magna International (MGA) - Get Magna International Inc. Report announcing an agreement to buy German transmission manufacturer Getrag Group last Thursday for $2.7 billion; and BorgWarner (BWA) - Get BorgWarner Inc. Reportsaying last week that it will purchase Remy International (REMY) for $1.2 billion.
The crux of Marchionne's argument for industry consolidation centers on the high cost of investment for advanced safety, environmental and regulatory technology, which makes it difficult to sustain profitably unless an automaker is able to sell at least 6 million to 7 million vehicles globally. FCA, in the midst of a five-year, $50 billion investment push, currently sells fewer than 5 million vehicles around the world under its Fiat, Chrysler, Dodge, Ram and Jeep brands, with Alfa Romeo under development as a worldwide luxury brand.
Since the initial public offering of FCA shares in October 2014, the stock has increased 75% in price, compared with an 11% increase in the Dow Jones Industrial Average.
Since Chrysler's bankruptcy in 2009, Marchionne has managed to stitch the U.S. automaker together with Fiat and steadily increase sales and earnings, winning kudos from analysts and others. Yet the industry's cyclicality -- demand is now weakening in China, for example -- suggests that Marchionne is looking down the road to ensure his company can withstand the next downturn.
FCA could shed or consolidate its own brands to save money without giving up too much size. At least one automaker, Honda (HMC) - Get Honda Motor Co., Ltd. Sponsored ADR Report, has proven that a moderately sized, efficiency-minded global player can maintain financial stability at roughly half the scale of Toyota (TM) - Get Toyota Motor Corp. Sponsored ADR Report, GM or Volkswagen -- with only two brands: Honda and Acura. (Honda also sells motorcycles and other products, though the North American car business dominates its results).
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.