Exor: Fiat Crisis to Ferrari Glory - [Business Breakdowns, EP.229]

0:02This is Business Breakdowns. business breakdowns is a series of conversations with investors and operators diving deep into a single business for each business we explore its history its business model its competitive advantages and what makes it tick we believe every business has lessons and secrets that investors and operators can learn from and we are here to bring them to you to find more episodes of breakdowns, check out joincolossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. I'm Zach Fuss, and today we are breaking down XOR. The origins of XOR date back to the end of the 19th century when Giovanni Agnelli founded the auto company Fiat. In 1923, Exor acquired the Juventus Football Club, which it still owns today. But over the company's 100-year-old history, a lot has changed. While some of the core assets remain the same, today Exor serves as an investment holding company. Its largest and most notable assets are Ferrari, CNH, Stellantis, Philips, and a number of other notable private companies.

1:26Additionally, they've shifted focus to bulking up their alternative asset management business, Tangato. Like many holding companies, XOR trades at a material discount to what the sum of its parts suggests. But management has been steadfastly working to close this discount by selling assets, reallocating capital, and repurchasing shares. Today, XOR is led by Jai Nelkan, the grandson of the late Giovanni Agnelli, the founder of the Exor empire. Elkan was named heir of his grandfather at the age of 21 and has fostered and reshaped the business to what it is today. To Breakdown Exor, I am joined by Krishna Mohanraj, a portfolio manager of the International Strategy at Diamond Hill.

2:10We hope you enjoy this Breakdown of Exor. All right, Krishna, thanks for joining us once again, this time to Breakdown on Exor, a business that has a storied history. Our listeners probably know a little bit about a lot of the parts of Exor, but I think bringing it all together today in this conversation to highlight the history of the business and what is in this family holding company will be really interesting. So just to kick things off, what is Exor? Zach, thank you. It's great to be back. Thanks for having me again. Exor is a fascinating business to talk about. It is a Dutch holding company controlled by the Agnelli family.

2:52Giovanni Agnelli was the founder of Fiat in the late 18th century, and their family wealth is managed through this holding company. It's a fascinating story for a couple of reasons. First, you've got the history, as you mentioned. Exor is a Dutch company on paper, but in its bones, it's all Italian. It's really the history of Fiat. So it's intimately tied with the history of industry in Italy. Although the 20th century Fiat was the industrial engineer of the country, Fiat's factories were dedicated to the war effort during the First World War. After that, I became a big part of the industry growth in Italy.

3:3180 % of the Italian auto market was Fiat. And moving into the Second World War again, post the war, Fiat was a big part of the rebuilding of Italian industry. The Fiat 500 was iconic, launched in 1957, huge global commercial success and put Italian engineering and design on the map. After that, you have the tie-up with Ferrari. So there is a lot to talk about when it comes to the history of Fiat. The second reason it's interesting is that it's a story that's still evolving. It's a holding company. It's always changing. You're not looking at one business in one sector. And especially when you've got someone like John Elkan at the helm.

4:09John Elkan is the great-great-grandson of the founder of Fiat. Someone who's uniquely qualified to be in that role. Someone who not only represents the family, but also someone willing to learn, not afraid to change and make changes at XOR. It means the XOR of 2035, it's not going to look anything like the XOR of today. And that makes the story much more worth following. So you alluded to the leadership of John, who I believe has been with the business intimately for the better part of the last, call it 20 or so years, but still a very young guy who's now shaping the direction of the firm. When you look through the history of the business and its leadership, how has every chapter changed as they made that transition?

4:51It's fascinating because you can actually look at the history of this company through three leaders who all have had an outsized impact on the group. Two of them were called Giovanni Agnelli. And the third one, of course, is John L. Can, who leads the group today. If we go chronologically, there were not one, but two Giovanni Agnellis in that history. One is the founder and the other is his grandson. Both are remarkable. The founder, of course, he was an entrepreneur, very strategic thinker. Under his leadership, Fiat transformed from just a startup carmaker to a large industrial conglomerate.

5:30It really became the symbol of Italian engineering. And he was also very political, politically influential, was a senator in Italy for over two decades. So that was the first Giovanni. Then you have the second Giovanni, the grandson. He was called Gianni. He was a character both in business and outside. He was groomed by his grandfather to take over the business. And he transformed Fiat into a global company over a period of almost 40 years at the helm. Crucially, he formed a partnership with Ferrari, which over the years has become a masterstroke for the family's fortunes. And outside the business too, he made a mark as a global fashion icon, dashing, colorful, international figure.

6:11He was very much in the international who's who of that time. So that was the second Giovanni. Then you have John Elkan now. He's the grandson of Giovanni and great, great grandson of Giovanni, the founder. And at just 21, he was nominated to inherit the leadership from his grandfather, somewhat mirroring the way his own grandfather was chosen to be there. So there's a nice symmetry to that story as well. You have these three key people who I think were responsible for building pretty much what has become XOR today. But really, XOR of today was set up much, much later in the story in 2009. And the reason was to simplify how the family's assets were managed.

6:53Because before that, it was a complex mess. And in many ways, what Elkan has managed to achieve is to simplify that ownership under the XOR umbrella. In fact, the original holding company of the assets goes all the way back to 1927. It was called IFI. Agnelli set it up to hold his investments, primarily his shares in fiat and also some other businesses. Along the way, there was also a second holding company called IFIL, which further complicates how the family fortune was structured and managed. With XOR, all this has become simple. You've got both the holding companies merged. Everything was borne under the XOR umbrella.

7:35The legal headquarters was moved to the Netherlands. The listing was moved there as well later. So everything came under a single country regulatory authority. It all made sense because you get full exemption on capital gains and dividends, a very competitive tax rate, extensive tax treaties globally. So it made sense for a global company to be based in the Netherlands. All that was done under Elcan. There you have both a long history of the fiat group, but also under Elcan, over the last maybe 20 odd years, we've seen a lot of change. It's interesting because if you look at some of these family-led holding companies which have listings, they're typically extremely complicated.

8:16I think about the Bollaret Group in France, but this one actually, in the scheme of things, is somewhat straightforward. Obviously, John Elkhand, the architect of a lot of that. And today, we have what's primarily listed companies inside of this tax-efficient holdco. So I guess it's a good time to present of the 40 billion plus assets that they own. What is inside of this holding company today that he's effectively cleaned up over the course of the last 15, 20 years? Today, if you look at XR, you've got stakes in listed global companies, and then you have the private investments. It's weighted very much towards the public's.

8:5470 % of gross asset value and gross asset value is roughly, let's say, 45 billion euros. 70 % of that is in four companies, Ferrari, Stellantis, CNHI, which is Case New Holland, and Philips. Then you've got maybe another 6 % or 7 % in smaller listed investments, Ibeco, Juventus, which is a football club, Clarivate. The rest is in private investments, so a range of investments there. Louboutin and Changzia, which are in luxury, The Economist magazine, Veltec, which is a Danish tools company in the energy sector. You also have an asset management firm that they set up a couple of years ago called Lingotto.

9:38If you think about that evolution, it's probably worth talking a little bit about how much that's changed. In 2009, when Exor was born, it was predominantly a mass market auto company with a few other assets thrown in. But with this transformation and the unlocking of value in fiat, it looks very, very different today. Ferrari is the largest asset. And like they say, Ferrari is not a car company and Stellantis, which is the auto company, is only about 10 to 12 % of assets. So if you think about the composition of today's business, John is paramount in architecting that. So what is it that's influenced him to craft the company in this way?

10:21What else is there to learn about John who seems to be one of the more underrated business builders of his generation? The first thing to say is when Elkan comes into the tick of action at Fiat, things were really, really bad. He was nominated as heir in 1997 when he was only 21. And that itself was because of a family tragedy. Gianni's own son dies of cancer in 97. But really only in 2003, 2004 does Elkan take over. His grandfather dies in 2003, his great uncle in 2004. So at the ripe age of 27, he becomes the sole family representative at the firm. And at that time, both financially and operationally, the company was struggling.

11:05They've been through four CEOs in three years. And for a while, it looked like the firm won't survive. So that's really the context of the start of Elkan, if you will. The second thing to say is that he had almost the perfect background for what this group needed. Very global mindset. Born in New York City, schooled in the UK, Brazil, France. Engineering school in Turin. Multiple global internships. Works for a couple of years at GE. Another very global experience. He was fluent in four languages. And since 1997, his grandfather had gone out of the way to include him as a silent participant in a lot of business phone calls.

11:43later reviewing what was said, etc., to give him a vicarious sense of the business. While it was definitely a trial by fire at the start, he also had a lot going for him when he started. One of the first things he does when he takes over was play a role in the selection of Sergio Macchione as CEO of Fiat. This was very controversial at the time because Macchione was an outsider, but it ended up being a brilliant decision. Macchione was known to the family. he had turned around this testing company called SGS and made a lot of money for the family. So he was known to them, but still a long shot.

12:19And Mark Yoni really went to work at Fiat. First, he manages to get about$2 billion from General Motors to get rid of a put option that Fiat had with them on Fiat's auto business. At that time, the last thing that GM wanted to do was to take on a struggling auto business from Fiat. So they pay him$2 billion to cancel that. Sergio then goes about almost single-handedly taking control of the car business, cutting costs, driving the team to execute. The family also had to put in capital to renegotiate bank debt. And from the brink of disaster, they turn it around. By the time the financial crisis hits, Fiat is in a position to not just survive, but actually merge with Chrysler.

13:00That move to hire Marchionne made a huge difference. Marchionne ends up not only transforming Fiat, but also becoming a legend in the auto industry, he also went a long way towards the education of John Elkan. Even today, Elkan, every opportunity he gets, he pays homage to Sergio as both a personal mentor and a transformative figure in his life. Exor is formerly in 2009. Fiat itself was transformed from a struggling conglomerate into its pieces. You've got Stellantis, the auto business after the merger with Chrysler and Peugeot, CNHI, Iveco, and of course, Ferrari. 15 years, the amount of change in XR has been staggering.

13:43If you look at the listed investments, maybe the big four in 2009, three of the big four are no longer in the portfolio. So that tells you the extent of change. So if we talk about today's big four, which I'll attribute to Ferrari as the largest, Stellantis, CNH, and then Philips, which we'll discuss later. How do you think about those big four in the context of the portfolio today? What is important to think about as it relates to each of those independent of one another, and maybe starting with Ferrari? What can you say about Ferrari? I think you have a whole episode on Ferrari and business breakdowns.

14:23For XOR, it's been the gift that keeps on giving over the last decade or so since listing the value unlock in Ferrari has been incredible. It continues to be the big driver of NAV per share growth for XR. With Ferrari, the big question has always been this. Is it a car company or is it something more? Is it an ultra premium luxury company? And if you hear John Elkhan talk about it, it's not a car company. It's a very special company, something beyond great. The ethos of Ferrari is motor racing and selling cars is almost an afterthought. That's what makes them unique. XOR, as we know, they are trying to build great companies and what they have with Ferrari is something beyond great already.

15:04If you look at what the market is saying, the market agrees. It's clearly saying this is not a car company, but I think that's a question that will be asked over and over again. The EV transition is coming and that'll raise that question again. And I think that will be a further reconfirmation that they're nothing like a car company, but that is still TBD, I think. The main thing to mention from a portfolio standpoint is the size of the Ferrari stake as a percentage of NAV now. I think it started at 15 % and went as high as almost half the portfolio. In February, XOR sold about 3 billion worth of shares with the intent of using the proceeds towards both buybacks and additional investments.

15:46So in a sense, they are signaling a few things, acknowledging that Ferrari has become a huge part of the portfolio. They like concentrated, but I think they're comfortable with a concentration level of 25 to 30 percent and Ferrari had grown much beyond that. Also, they are signaling that they find their stock with an NAV discount, which we'll talk about, to be hugely undervalued and all things equal. They want to invest in something that they know best and what do they know better than XOR itself. So an intent to buy back shares while reducing over concentration in their Ferrari stake. When you talk about listed investments, Ferrari would be the number one investment for them.

16:26If you think about their listed investment portfolio and the big four, they kind of check the box on a handful of industries. Ferrari, an automobile company, but with a luxury overhang. Stellantis, then your next company, and what's a cyclical industry in auto? Clearly, the involvement of Sergio Marchion and changing the trajectory of their auto business is paramount. But today, it's a challenge sector. How do you think about the stake in Stellantis and what are they doing in order to help improve the outcome to drive NAV at Exor. Perhaps it's worth talking about Stellantis, CNHI, and iWecko together because they all came from the conglomerate.

17:08They're all in their own ways cyclical, capital intensive. They are all in some phase of a turnaround with challenge-driven markets. Wecko is a little bit different because of their defense exposure. With Stellantis, it is the product of a mega merger between Fiat, Chrysler and Peugeot. Mark Ione, in a very famous presentation a long time ago, talked about essentially the overcapitalization of the auto industry. And one of the biggest themes for Fiat was to reduce that by consolidation in the industry. So Stellantis is a product of that. It is definitely a car company. There's no question about that.

17:47And the market says that clearly, if you think about the multiples and the troubles that they've seen over the last few years, it is a difficult business. They have done their best to make the transition to EV. They have done their best to address the overcapacity. But essentially, it is very clear that it's trouble. You can see that from the multiple. The valuation is undemanding. From a portfolio perspective, the exposure as a percentage of assets for XOR is about 10%. It's quite low compared to the historic exposures. Then you have CNHI, which again came from the old fiat conglomerate. It is the more cyclical on-highway trucks business, was spun out as Iveco.

18:27And the ag equipment business, which is a more higher quality, less cyclical business, became CNHI. They are the number two global player in that space after John Deere. A lot has happened at CNHI over the last three, four years to simplify the company, invest in technology. But again, it is facing a cyclical low in its end markets, still a work in progress. We have a new CEO who's actually an insider from Iveco. For a very high quality business, the valuation is not demanding. It's another asset to look out for in the coming years. And then on Iveco, it's a global maker of commercial trucks, buses, defense vehicles, spun off in 2022.

19:07The interesting thing is they're trying to separate out the defense business as a spinoff or a sale. And as you can imagine right now, there is a lot of pocket demand for anything in the defense sector. There is also chatter on M &A for the core business as well, including some potential conversations with the Indian company Tata Motors. A lot more current news around Ivico, but it is a smaller stake for them in terms of share of PNAV. If you look at the three businesses, I would say they're reasonable to cheaply valued businesses facing both idiosyncratic and weekend markets. From a portfolio standpoint, it feels like you're getting assets which are fairly undervalued.

19:46And we will talk about the NAV as a whole and what the stock trades as a discount to NAV. But in the underlying NAV, with the exception of Ferrari, I wouldn't call any of the other listed companies as overly valued. to round out the conversation on the listed companies and we'll dive deeper into some of them. I know we have left Juventus, Clarivate, and then Phillips, which I want to set aside, just given the continued interest there. But Juventus probably takes more mindshare than it really does economic share, just given how high profile sports are today, but somewhat of an immaterial stake for them.

20:22And then Clarivate, which is an interesting one, given that has very significantly underperformed as a listed company, but just curious how those assets came to be part of the portfolio and the varying degrees of importance and support for their broader capital allocation strategy. If you start with Juventus, I have a lot of positive things to say about capital allocation in general, but Juventus always raises some eyebrows. It is a storied asset. Over the long term, it seems to be worth a lot more than at least recent troubles and valuations would suggest. But you have to definitely ask the question, economically, does it move the needle in terms of XOR's chosen metric and AB per share?

21:09It is definitely a quote-unquote legacy asset. I can't find a better word for it. And you have to ask why they need to own a stake in a football club with a very checkered recent history, not just in performance, but also in terms of corporate governance scandals. Entire board, including the president, had to resign. The president was an Agnelli to add to everything. This is clearly a family passion, football, and the family's relationship with Juventus goes back generations. So it's a tiny part of asset value. So a fair question is why bother? Isn't it just a headache that takes away from what is really crucial for NAV per share growth?

21:45And the only possible reason it's in portfolios is because it's a family passion. So it is what it is. Clarivate is a lot more interesting. Clarivate is an analytics company spun off from Thomson Writers. They serve the academic market, the scientific market, life sciences, intellectual property, assets around it. It's a subscription business. It provides things like literature reviews, competitive intelligence, data on patents, trademarks, et cetera. Now, if you think about where XOR is thinking about going in the future. In places like healthcare, technology, Claravit not only is an interesting investment in itself, but it provides one of the building blocks, I think, for them in that ecosystem where they want to step into the future.

22:30We will talk about Philips and Institute by Ameru, other investments in that space, and they all seem to kind of fall in that bucket. So it is quite an interesting investment in the context of the portfolio and where they want to take the portfolios. I think this is maybe a good point to check in on broadly valuation here. What's always striking about these publicly listed holding companies is when they traded such a significant discount to what the listed constituents would support on valuation. And then, of course, this is a business that also has investments that are not listed, which we'll discuss in some level of detail.

23:07But what is this setup here as it relates to their published nav and the listed interests and the way that the stock trades and then further how they are making efforts to close that discount to NAV in a way that are material? The mechanics of the valuation is super simple. The asset base is dominated by publicly listed companies. A full 70 % of assets is listed. You have a market price for them. You can make reasonable assumptions on the private assets based on disclosures, subtract net debt, and you end up with a reasonable estimate of spot NAV. You don't need to be too precise here because the stock trades at a big discount to this nav, anywhere from 50 to 60%, depending on your assumptions.

23:49And you're going to find the discount quite attractive. So the mechanics of the valuation itself is pretty straightforward, but you have some big questions. The big question is the underlying assets, both the listed ones and the unlisted ones, what are the true valuation for them? But also, what should the discount be? What should the NAV discount be for a publicly listed holding company like this? So starting with the first question, if you look at the big four public assets, Ferrari, Stellantis, CNHI, Philips, Ferrari is of course a unique asset. We said that it's an exceptional business, but it trades at a steep multiple and they seem willing to trim at these prices.

24:28So that's something to think about. The other three are all global businesses, Stellantis, CNHI, Philips, each facing a difficult business cycle. And in the midst of turnarounds. None of them are trading at steep multiples. So if I put all of these together, I would say, Olin, you're getting a diverse mix of global businesses at reasonable prices. Now to the NAV discount, I think it's interesting to see what the market is saying. Now having a NAV discount is a part and parcel of being a holding company. There's no getting away from it. Having said that, in the case of Exo, that discount has been unusually high for a very long period of time.

25:04So why is that discount high? The market, of course, loves companies that are doing unique things and are exceptional at them. Ferrari, of course, Hermes would be another example. But if you think about it, a holding company is the exact opposite of a pure pay exceptional business. I would say the NAV tells you the asset value of today, but for a holding company, it's hard to tell where it would be in five years from now. And it appears the market is saying they don't believe that they can maintain that NAV per share growth like in the recent past. The NAV growth at XR in the last three, four years, even longer, has all come from Ferrari.

25:39If you remove Ferrari, this ends up being an odd collection of turnarounds in markets that have both cyclical and structural headwinds. And then you have this collection managed by a third party who acts with a time horizon that might be much, much longer than what most market participants want. So why bother when you can own Ferrari directly if you want an exceptional company at a steep multiple, or if you want to play a value on Philips or CNHI selectively, depending on your conviction. So that is the debate really. And it's a fair debate. In all this, what I'd like is how pragmatic Elkan is when he talks about the discount, not defensive, not complaining that the market is wrong, but I think correctly recognizing that the discount is an amazing opportunity for them, an opportunity for XOR to invest in themselves, to invest in something that they know very well and buy back their own stock.

26:30The decision this year to trim Ferrari to buy back stock, it raised some eyebrows, but it was an excellent one in this context because it allowed them to buy back stock at very steep discounts to NAV. As an investor, if you need to be in this, you need to have a long-time horizon, and you need to believe that there is alignment between Elcan and the minority shareholders. Over time, you will see NAV per share growth. you shouldn't be in it hoping for a narrowing of the discount because that is not in management's control. So go a bit deeper on that topic as it relates to their broader capital allocation policy, but also governance.