Fiat Chrysler Automobiles N.V.

IM: FNYSE: Expected October 2014

Michael Guichon, Columbia Business School

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Investment ThesisMarket significantly underestimating transformative nature of Chrysler consolidation and the value of the companys business units. Chrysler alone is conservatively worth 16.5bn and Ferrari/Maserati are worth 6.9bn (~90% of current EV), minimizing downsideChrysler acquisition improves the firm by reducing management distraction, leveraging future production and R&D synergies and FCAs improved credit profileFCAs value is misunderstood due to a cumbersome capital structure, several obscured assets and economic weakness in key marketsFCA has great brands managed by excellent capital allocators and they are taking share in key marketsFCA trades at 4.0x normalized earningsFair Value: 16.50 (8.0x base normalized EPS of 2.05)2Recommend investors buy Fiat shares with a target share price of 16.50; over 90% upside Company OverviewFCA is the 6th largest automobile manufacturer globally1CEO Sergio Marchionne hired in 2004 by founding Agnelli family (31% owners) and encouraged to sell the Fiat Auto subsidiaryFinding no buyers interested in a low margin, Italian focused car company, he began growing the business with the goal of expanding Fiats presence globallyFiat acquired 20% of Chrysler after its 2009 bankruptcy. On January 21, 2014 it acquired 100% ownershipFiat and Chrysler have been run by CEO Sergio Marchionne since 2004 and 2009 respectively3Source: Fiat 2013 Annual ReportGeographical Breakdown of Segment Unit Volumes:Breakdown by Type:1By revenuesHow the Chrysler deal is transformationalThe Chrysler purchase was a very value accretive deal; Fiat paid $4.4bn in cash for a business that generated $3.1bn in EBIT in 2013The addition of Chrysler changed Fiat from a regional car manufacturer into the 6th largest in the world Operational synergies a larger manufacturing base with a more diverse group of product cycles will allow the combined company to achieve higher average levels of capacity utilization and increase sales in formerly underserved areas around the worldThe use of common components and vehicle platforms between Fiat and Chrysler will reduce design and manufacturing costs Increased scale allows FCA to generate high ROI from investments in R&D, i.e. R&D synergies with Ferrari and Maserati

4Marchionne inherited a loss making Italian car/tractor/parts maker in 2004 and created a global automotive giant Key Drivers of Normalized EarningsNormalized Earnings Potential2.05 with Europe at Breakeven (base case, expected in 2016)2.55 long term with modest European recoveryNormalized earnings yield of 24%-30%Continued strong performance/market share gains of Chrysler in North AmericaReturn to high single digit/low double digit margins in LATAMCash balance reduced by 10bn to delever. Average weighted cost of debt falls 120bps to 5.3%

6A return to normal earnings driven by Italian/Brazilian recoveries, Chrysler performance and capital structure rationalizationCapital Structure

Capital StructurePreviously, complicated ownership structure and debt covenants prevented Fiat from accessing Chryslers liquidity and led to an excessive cash balance at Chrysler and a highly inefficient overall capital structureWith full ownership of Chrysler, cash will start to be more fungible between Fiat and Chrysler, FCA can begin to reduce its gross debt burdenThe simplified company has a much better credit profile and this has been reflected in an improvement in credit default swap levelsFCAs cost of 7 year debt is currently 4.3% in EURFCA is rated BB-/B1/BB- (S&P, Moodys, Fitch)Debt/EBITDA = 3.9x, interest coverage = 1.5xIn 2017, Debt/EBITDA = 2.4x, interest coverage = 3.4xFuture credit rating upgrades are likely

8Rationalizing the companys capital structure will increase pre-tax earnings significantlyNorth AmericaChrysler/North America (Value: 16.6bn)Given Chryslers 2013 EBITDA of approximately 4.4bn, FCAs EV is trading at 5.8x Chryslers LTM EBITDAChrysler has maintained steady margins in recent years while growing revenue in the US and Canada by taking market shareSince Marchionne took control, North American market share grew from 9.2% in 2009 to 11.5% in 2013, which is still below 2007 pre-crisis level of 12.6%Chryslers previous underperformance can largely be attributable to management, which is no longer a concern given Marchionnes strong track record1US, Canada and Mexico respectively represent 83%, 12% and 5% of North American Chrysler vehicles soldChrysler has steadily improved operations in North America versus Ford and GM 10

Chrysler/North America (Value: 16.6bn)Were Chrysler to trade in the market on a standalone basis at peer multiples, it would be valued significantly higher than 16.6bnFrom 2010 to 2013, Chrysler grew EBITDA at a 21.0% CAGR versus -5% for Ford and -1% for GMFord and GMs TEV/EBITDA LTM are 11.5x and 4.8x respectivelyGiven EV/EBIT and EV/EBITDA multiples for Ford and GM, Chrysler would be worth between 24.0bn and 37.1bn, or 90% to 138% of FCAs current EV with net pension obligations yet still trades at a discounted valuation

11How you improve a brand2007 Jeep Grand Cherokee V8Base price: $34,69013 mpg city, 20 mpg highway0-60 in 9 seconds122014 Jeep Grand Cherokee V8Base price: $36,79018 mpg city, 26 mpg highway0-60 in 7 seconds

Chryslers reorganization strategy is focused on improving its products and relying on existing brands to drive consumer demand and take market shareFCAs global reach will help Chrysler sell into new markets and increase penetration in emerging marketsProducing Chrysler brands for European markets in Italy will reduce idle capacity and have a meaningful impact on profitabilityChrysler does not need to completely reinvent itself in order to succeedValuation of North AmericaChrysler has steadily gained market share and maintained consistent margins since Marchionne took over in 2009Jeep is the #1 SUV brand in the US; Ram trucks sales have experience double digit growth rates since 2009New Jeep and Ram models will help Chrysler continue top line growth13

InternationalFiat - Focus on Capacity UtilizationA recovery in European automotive demand, particularly in Italy, will naturally increase Fiats capacity utilization and lead to margin expansionIncreasing demand of higher margin luxury brands in Italy will improve profitability significantlyPlans to shut high cost production facilities in Italy will remove the only assets that are losing money on an operating basisThe forecast shown incorporates a further 12% drop in Brazilian sales, after a 10% drop in 2013 from 2012, and a significant decrease in EBIT margin15Marchionne becomes CEOIn this high fixed cost business, utilization = profitabilityEuropeFiat Europe (Value: 4.2bn) Italian RecoveryAutomotive demand has fallen more in Italy than in peer countries that avoided severe dislocation in local credit marketsFiats Italian sales were worth 7bn in 2013 (29% market share), making it the most exposed to the European PIIGS among large auto manufacturersReduced banking solvency concerns will lead to a recovery in automotive financingFiat is very well placed to benefit from the recovery in Italian demand for durable goodsA recovery to 2.2mn sales per year would imply a 5bn increase in Fiats revenue if market share remains roughly constant17A return to normalcy in Italian credit markets will drive a recovery in automotive demand

How to relaunch Alfa Romeo18

A timeless brand and key technology from Ferrari/Maserati gives Marchionne the wherewithal to turn around Alfa Romeo Increasing volumes of higher margin luxury brands by employing idle capacity in Italian plants will have a meaningful impact on profitabilityGoal of tripling production to 300,000 units/year would add nearly 1bn of EBIT2007 Alfa Romeo GT Q2Base price: $42,4000-60 in 8.2 seconds2014 Alfa Romeo 4CBase price: $55,0000-60 in 4.2 secondsValuation of EuropeImproved capacity utilization and gradual rollbacks of sales incentives should lead a return to profitabilityOperational synergies with Chrysler will improve overall efficiency and allow for higher normalized EBIT margins in the future19

Latin AmericaLatin America/Brazil (Value: 5.5bn) Fiat is the largest auto manufacturer in Brazil and had the highest reported profit in the region in 2013In Brazil, low interest rates led to unsustainable growth in consumer and business lendingThe coming recession will likely involve sharp increases in non-performing loans and a significant reduction in the availability of creditLong-term fundamentals of Brazilian automotive demand (growing population and gradually increasing living standards) remain positive21Fiat has a dominant position in Brazil where long term fundamentals remain positive Valuation of Latin AmericaFiats Brazilian business has a history of being fast growing and consistently profitable with high returns on capital, and it deserves a higher multipleFiat has 22% market share in Brazil and a large domestic manufacturing base a necessity in a country with high local content requirements22While 2011 EBIT margins may not be sustainable, the Brazilian business is very profitable and total market demand will grow

Luxury & Performance BrandsA unique, obscured asset with the best operating and financial performance in the industryLuxury Brands Ferrari & Maserati (Value: 6.9bn)Stable, high margin business with real pricing powerVery attractive R&D synergies found using 2-3 year old Ferrari technology in Maserati carsUncertain if Fiat willing to monetize but given margin, growth and pricing power Ferrari is a 4bn - 7bn asset (3.50- 5.50/sh) 1,2 Agnelli family has been supportive of value maximizing spinoffs (Fiat Industrial spun off to shareholders in late 2010)Using the valuation of Ferrari peer Aston Martins sale of 37.5% of the company to Investindustrial in 2013 would value Ferrari alone at 7bn 3Successful relaunching of Maserati in 2002 gives confidence in Fiats ability to reestablish the Alfa Romeo brand outside of Europe241Net to Fiats 90% ownership of Ferrari.2No true public comparable companies exist. Toyota and BMW have the highest margins of public automakers (9.5-10.5%) and trade at 9.0-9.5x EBIT Multiples3http://www.bloomberg.com/news/2012-12-07/investindustrial-to-purchase-37-5-stake-in-aston-martin.html

Luxury Brands Ferrari & Maserati (Value: 6.9bn)EBIT to grow from 535mm in 2013 to 923mm in 2015 as Maserati production increases from 15,400 units/year 50,000 units/year (all capacity is online and Maserati gross margins now higher than Ferrari) Pricing power:12% and growing EBIT margin business (vs. 3.5% for FCA) Two year waiting list for Ferrari (intentionally limiting sales to 7,000 units/year)22,500 orders outstanding for Maserati1Maserati currently participates in only 22% of luxury market segmentsLaunch of Luxury SUV and E segment high end sedan in 2015 provides exposure to 100% of 1 million unit/year market 251October 15, 2013 Fiat Group Luxury and Finance Borsa Italiana, MilanAfter relaunching in the US in 2002, Maserati has now primed the market for even more rapid, profitable growthValuation of Luxury Brands - FerrariBusiness deserves premium multiple given brand is one of the few with real pricing powerMargins are highly resilientFerrari intentionally supplying below actual demand, models assumes no growth in units

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1Net to Fiats 90% ownershipConservative multiples relative to peers yields significant valueValuation of Luxury Brands - MaseratiMaserati was relaunched in the US in 2002, and after absorbing several years of start up costs now exhibits similar gross margins as FerrariCapacity has been expanded to support 50,000 units/year in 2015 from 15,400 last yearSignificantly higher room for growth in this segment of the market

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A highly profitable, high growth businessAsiaValuation of Asian BusinessDespite being late to Asia, the Jeep products have been hugely successful in recent years and consumer demand remains very strongShipments increased 58% year over year to 163,000 in 2013FCA has sales points in 126 Chinese cities and there are nearly 500 cities with populations over 500,00029

Current penetration only focused on 1st tier cities, future growth to be driven by build out in 2nd and 3rd tier citiesManagement Track RecordManagement & Track Record31Fiat under Marchionne has a great track record of creating value for shareholdersSome market participants point to missed goals from the 2010 5-year plan as a sign that management is unreliable, but this is unfair because the Euro crisis could not have been predicted by management a year in advanceMarchionnes incentives are fully aligned with shareholders as he has vested options on 5mn shares with a strike price of 13.37 in addition to 10.7mn shares with a strike of 6.583 Under Marchionnes stewardship, FCA has generated best in class financial performanceValuation

Sum-of-the-Parts33Recommend investors buy Fiat shares with a target share price of 16.50; over 90% upside Market significantly underestimating transformative nature of Chrysler consolidation. Chrysler alone is conservatively worth 16.5bn and Ferrari/Maserati are worth 6.9bn, which minimizes downsideChrysler acquisition improves the firm by reducing management distraction, leveraging future production and R&D synergies and FCAs improved credit profileFCAs value is misunderstood due to a complicated capital structure and several obscured assetsFCA has great brands managed by excellent capital allocators and they are taking share in key marketsFCA trades at sub 4.0x normalized earningsFair Value: 16.50 (8.0x base normalized EPS of 2.05)1Net to Fiats 90% ownership of FerrariSpecial Thanks ToThomas SchweitzerSam Whitetschweitzer15@gsb.columbia.eduswhite15@gsb.columbia.edu

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Relative Valuation36Source: Bloomberg as of 5/2/2014. Luxury Brands valued at 6.952bnAcross most metrics, Fiat trades at a sizeable discount to peersBear CaseDespite success of Chrysler, FCA remains free cash flow negative and the company needs a recovery in Europe to return to positive cash flowFCA is operating in a cyclical and capital intensive industry and the company carries substantial leverageObstructive European labor laws will prevent FCA from rationalizing production and achieving high levels of capacity utilizationCredit overhang and rising non-performing loans could lead to a funding stop in BrazilHigh expectations for Jeep and Maserati leave room to disappoint

37Risks and MitigantsContinued troubles in the global economy, particularly Italy and Brazil, could hurt automobile salesConsumers will eventually need to purchase new cars as maintaining older ones becomes prohibitively expensiveLarge ownership by Agnelli family approximately 31% of the company. If they look to exit their position, problems could ariseJohn Elkann, who is Gianni Agnellis grandson, is Chairman of the company. The family has mostly been passive, but is looking to maintain its large stake. Elkann has demonstrated considerable faith in Marchionnes abilitiesMarchionne has said he will stay through 2016, but it is uncertain what will happen if he decides to leave then. He said it is highly likely that his successor will be an internal candidateMarchionnes options give him substantial incentives to stay and improve shareholder valueThere are large pension liabilities, with approximately 6bn in unfunded employee benefits and other provisionsThe trend here is positive as unfunded amount decreased from 8bn in 2012 to 6bn in 2013Should the company issue convertible debt, there could be potential dilution in share valueUnsubstantiated rumor, no real need for additional equity in the business38Chrysler AcquisitionFiat acquired Chrysler through a series of transactions between June 2009 and January 2014 for a total cash outlay of approximately $4.4bnThe initial transaction was a Section 363 bankruptcy sale for 20% of Chrysler, which occurred after it declared Chapter 11 bankruptcyCreditors appealed the sale, but were eventually overruled to preserve going concern value and prevent liquidationFiat increased its ownership by meeting performance targets and shrewd negotiating with the US Treasury, Canadian Government and VEBA TrustFiat purchased the remaining 41.5% from VEBA trust for $4.35bn in January 2014, which included $1.75bn in cash from Fiat, $1.9bn from Chrysler and an additional $700mn in contributions over the next four yearsFiats cash outlay of approximately $4.4bn compares with $7.4bn that Cerberus paid for 80% of the company in 2006 and $37bn that Daimler-Benz paid in 1998, although these amounts include Chrysler Financial, which Cerberus sold to TD for $6.3bn in December 20103920%5%5%16%7.5%5%41.5%363 Bankruptcy Sale (4/30/2009)Performance Event 1 (1/10/2011)Performance Event 2 (4/11/2011)UST Call Options (5/24/2011)Remaining Call Options (7/21/2011)Performance Event 3 (1/5/2012)Purchase From VEBA Trust (1/5/2014)Fiat Ownership StakeMarchionnes negotiating prowess secured Chrysler at an extremely attractive valuationOverview of OwnershipThe Agnelli family is the largest shareholder in the company, holding just under 31%Once the firm lists on the NYSE (expected in October), there will likely be a large shift in shareholder base40Source: Capital IQ

Agnelli family has a history of supporting value creative initiatives at its companiesOverview of ManagementSergio Marchionne:Has been CEO of Fiat since 2004 and has led Chrysler since 2009Oversaw the turnaround of SGS1, which is the worlds leading inspection, verification, testing and certification company, over 13 years. The Agnelli family sold its 15 percent SGS holding in 2013 at a 14x EBITDA valuation for 2bn, netting a capital gain of 1.5bnUnusually nonconformist style and acts as an owner of the businessFocuses on creating a more collaborative culture between units to enhance shareholder value

John Elkann:Grandson of Gianni Agnelli and current scion of the Agnelli dynastyHas served as Chairman of Fiat SpA since 2010He is currently CEO and Chairman of Exor2Member of the Board of Directors of News Corp and is a board member of Fiat Industrial, The Economist Group and Banca Leonardo41

Best in class management operating business as an owner1Agnelli family portfolio company2Agnelli family holding company for Fiat, Fiat Industrial shares

CEO IncentivesMarchionne currently has options to purchase 10,670,000 shares at a strike of 6.583 per share with expiration of January 1, 2016 and other options to purchase 5,000,000 shares at a strike of 13.37 per share with expiration of November 3, 201442Managements interests are well aligned with shareholdersDebt Maturity Schedule43Summary Model45

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