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Tomfoolery in Turin - Arbitrage Idea

August 26, 2011 | About:

New Holland, Case, Iveco, STEYR, Magirus, Kobelco....

they're all part of FIAT Industrial. The company, based in Turin, was spun out of FIAT group recently. By revenue, the company is outgunned by Caterpillar (NYSE:CAT) and VOLVO (VOLVY) but beats John Deere (NYSE:DE), Paccar, AGCO, Komatsu etc.

Mr. Market will happily sell or buy shares of the company at 3 for a market cap of EUR 3.5B.

- EDIT 15 Sept 2012- the link is now dead because the cheaper shares have been redeemed.

Mr. Market will happily sell or buy shares of the company at 6 for a market cap of EUR 7B.

What's unusual is that Mr. Market does this on the same day and on the same exchange (Frankfurt or Milan).

This creates a rare arbitrage opportunity.

Sell (short) 100 shares at 6 and simultaneously buy 100 shares at 3. Pocket EUR 300 and wait till the price converges as it inevitably must. This is one way to generate investable cash at an interesting time.

The shares costing EUR 3 have a higher and cumulative dividend. The ones at 6 have are junior in liquidation but hey, they have voting rights !

That's 3.5B worth of voting rights that are pretty useless, the Agnelli clan has control.

You can read about the different shares and their rights in the by-laws (article 20).

>> ...to each ordinary, preference and savings share, in equal amounts, any remaining net profit which Shareholders may resolve to distribute


With current assets of EUR 22B of which EUR 3.8B is cash, total liabilities of EUR 15B of which EUR 7B is debt and (estimated) EBITDA of 2B, the company is cheap at EUR 6 per share and an NCAV at EUR 3. http://www.fiatindustrial.com/it-IT/investor_relations/investors/presentazioni/FiatDocuments/Fiat%20Industrial_June%2028%20-%202011.pdf


Precisely because they're cheap, it's quite possible the ordinary shares run up. Even if the preferred run up in lockstep, the same percentage discount (50%) will lead to a paper loss.... patience.


Should the company buy back shares, they'll likely start with the preferred.

The company now lists the price of all share classes on its home page drawing attention to this ridiculous discount.

About the author:

I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website

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