Fiat reaches US$4.35 billion deal to fully take over Chrysler

Italian carmaker will pay US$4.35 billion to acquire the portion of Chrysler it does not already own, paving the way for a full merger

PUBLISHED : Thursday, 02 January, 2014, 11:50am
UPDATED : Friday, 03 January, 2014, 1:39am

Italian carmaker Fiat struck a US$4.35 billion deal to gain full control of Chrysler, ending more than a year of tense talks that have obstructed chief executive Sergio Marchionne’s efforts to combine the two carmakers’ resources.

The agreement, announced on Wednesday, cements Marchionne’s reputation as the industry’s consummate dealmaker about a decade after he took the helm of Fiat as a newcomer to the car business, analysts and bankers said.

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 No 3 US carmaker.

“This is an increasingly American company now, because in Europe, and especially in Italy, the business conditions remain difficult,” said Andrea Giuricin, transport analyst at Milan’s Bicocca University. “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 per cent stake in Chrysler it did not already own from a retiree healthcare trust affiliated with the United Auto Workers union. The trust, known as a voluntary employee beneficiary association or veba, will receive US$3.65 billion in cash for the stake, US$1.9 billion of which will come from Chrysler and US$1.75 billion from Fiat.

After the deal closes, Chrysler has committed to giving the UAW trust a further US$700 million over three years.

This is an increasingly American company now, because in Europe, and especially in Italy, the business conditions remain difficult
Andrea Giuricin, Bicocca University

The deal is expected to close on or before January 20. Fiat said that because of how the deal is structured, it would not need to increase capital 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 US$9 billion. When factoring in the additional US$700 million, Chrysler is worth US$10.5 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 cracking one on the face of it, and he doesn’t need to do a capital increase.”

Marchionne, who has run both carmakers since Chrysler’s 2009 US government-funded bankruptcy restructuring, aims to merge Fiat and Chrysler into the world’s seventh-largest carmaking group.

But he has been at odds over the US carmaker’s worth with the trust, which was pushing for a payout of more than US$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.

The unified ownership structure will now allow us to fully execute our vision of creating a global automaker
Sergio Marchionne, Fiat/Chrysler chief executive

In a statement, 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 are at present 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 line-up.

The UAW trust was created in 2007 as a way for General Motors, Ford Motor and Chrysler to offload their obligations to pay retiree health care benefits.

Medical benefits for GM, Ford and Chrysler retirees 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.