November 26, 2012 / 12:36 PM / 5 years ago

UPDATE 1-Fiat Industrial and CNH approve merger

* Merger to be effective in Q2 2013

* Analyst sees possible stock re-rating

* Loyalty shares protect core shareholders’ voting rights

By Jennifer Clark

MILAN, Nov 26 (Reuters) - Italian tractor and truck maker Fiat Industrial is to take full control of U.S. unit CNH , with the enlarged group listing in New York where sector valuations are higher than in Europe.

CNH - 88 percent owned by Fiat Industrial - trades at a lower valuation multiple than U.S. peers Caterpillar and John Deere because of a lack of stock liquidity.

The two companies, already being managed as one, confirmed on Monday they had agreed to merge, creating the world’s third-largest capital goods company by sales.

On Nov. 22, they reached a preliminary agreement for a cash and share deal that would see Fiat Industrial acquire the 12 percent of CNH it did not own.

The two groups will be merged into an as yet unnamed new company in which investors will receive 3.828 shares per CNH share, and one share per Fiat Industrial share. The company will have secondary listing in Milan.

“We believe a U.S. listing for the group should allow some closure of these valuation discounts,” Citigroup, which rates the stock a buy, had said in a Nov. 22 research report.

CNH’s board had balked at an all-paper, no-premium offer made on May 30, as minority investors in the United States often obtain what is, in effect, a significant ‘squeeze-out’ premium.

The latest offer from Fiat Industrial - spun off from sister company Fiat in 2011 - included an additional $10 dividend per CNH share. Fiat Industrial shares were down 1.5 percent at 8.3850 euros at 1225 GMT.

On Nov. 12, Fiat Industrial announced a group executive council (GEC) to make decisions on operating performance and key strategic decisions. CNH chief executive and President Richard Tobin was named chief operating officer, making him the No. 2 executive in the GEC under chairman Sergio Marchionne.


The new company will introduce a “loyalty share” whereby investors who vote at the upcoming shareholder meeting to approve the deal will receive two votes per share if they hold them to the completion of the merger procedure.

The mechanism enables the merged group to use its stock for mergers and acquisitions without unduly diluting shareholders’ voting rights.

Fiat Industrial is controlled by Italy’s Agnelli family holding company Exor with a 30 percent stake. Fiat, also controlled by Exor, has 2.8 percent. After the merger, Exor’s stake will be diluted to 26 percent. Its voting rights, however, rise to 52 percent keeping it firmly in control.

Exor said on Monday it intended to maintain voting rights in the newly-formed company above the legal threshold for a mandatory takeover offer which, in Italy, is 30 percent.

Fiat Industrial’s financial advisor was Goldman Sachs and its legal advisors were Sullivan & Cromwell, Freshfields Bruckhaus Deringer, and Legance Studio Legale.

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