Chrysler / 2 January 2014, 09:34am / Stephen Jewkes and Deepa Seetharaman
Fiat has struck a $4.35 billion (R45 billion) deal to gain full control of Chrysler, ending more than a year of tense talks that have obstructed Fiat boss Sergio Marchionne's efforts to combine the resources of the two companies.
The agreement, announced on Wednesday, cements Marchionne's reputation as the industry's consummate dealmaker, a decade after he took the helm of Fiat as a rookie in the car business.
But it remains to be seen whether a merger will be enough to cut Fiat's losses in Europe. Marchionne's plan to shore up Fiat depends on the ability to share technology, cash and dealer networks with Chrysler, the third-biggest US car company.
Andrea Giuricin, a transport analyst at Milan's Bicocca University, commented: “This is an increasingly American company now, because in Europe, and especially in Italy, the business conditions remain difficult.
“Fiat has already lost many of its market positions in Europe and it won't be easy to recover that.”
Fiat will acquire the 41.46 percent stake in Chrysler it did not already own from a pensioners healthcare trust affiliated with the United Auto Workers union. The trust, known as a voluntary employee beneficiary association or VEBA, will receive $3.65 billion (R38.4 billion) in cash, $1.9 billion (R20 billion) of which will come from Chrysler and $1.75 billion (R18.4 billion) from Fiat.
After the deal closes, Chrysler has committed to giving the UAW trust another $700 million (R7.4 billion) over three years.
The deal is expected to close on or before 20 January; Fiat said that because of how the deal is structured it will not need to make any capital increase through a rights issue.
The VEBA's payout is less rich than some analysts expected. The sale of the UAW trust's stake values Chrysler at less than $9 billion (R94.5 billion). When factoring in the additional $700 million, Chrysler is worth $10.5 billion (R110.4 billion).
“We thought they were going to have to pay a lot more than that,” a London-based analyst at a major investment bank said. “The market's going to love this - Marchionne's done it again. He's brought in a deal that looks like a winner on the face of it and he doesn't need any extra capital.”
Marchionne, who has run both companies since Chrysler's 2009 US government-funded bankruptcy restructuring, aims to merge Fiat and Chrysler into the world's seventh-largest auto group.
But he has been at odds over Chrysler's value with the trust, which was pushing for a payout of more than $5 billion (R51.5 billion). In September the trust exercised an option enshrined in bankruptcy documents to force Chrysler to file for an initial public offering.
Wednesday's deal will allow Chrysler to avoid an IPO.
Marchionne called the buyout a defining moment for the two companies.
“The unified ownership structure will now allow us to fully execute our vision of creating a global automaker,” he said.
The Chrysler buyout talks have been closely watched by debt and equity investors as Fiat's long-term plan to cut losses in Europe depends on its ability to deepen ties with Chrysler.
Chrysler is now a profit centre for Fiat, but the two companies currently are forced to manage their finances separately. A full merger will make it easier - but not automatic - to combine the cash pools of the two companies, giving Fiat more funds to expand its product lineup.
The UAW trust was created in 2007 as a way for General Motors, Ford and Chrysler to offload their obligations to pay pensioner healthcare benefits.
Medical benefits for GM, Ford and Chrysler pensioners are handled in separate accounts and each account was initially to be funded with cash. But during the 2009 financial crisis, the VEBA agreed to accept stakes in GM and Chrysler in lieu of cash. - Reuters