Fiat threatens a pullback from Chrysler

Bloomberg NewsSeptember 24, 2013 

— Fiat, the majority owner of Chrysler Group, has threatened to pull back from future commitments to the American automaker if a health care trust succeeds in selling its stake in an initial public offering.

“Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us,” Chrysler said in the filing for the share sale. “This could include decisions on capital preservation and allocation, investments and locations of production facilities.”

Realigning the partnership would be a worst-case scenario for Sergio Marchionne, who runs both automakers and is looking to use the sale process to get the market to weigh in on Chrysler’s value and end the stalemate preventing a full merger.

The warning to the United Auto Workers retiree trust, which owns the 41.5 percent of Chrysler not held by Fiat, is ultimately meant to prevent the trust from selling shares on the market and instead force an agreement with the Italian automaker on the price. Marchionne is offering at least $1 billion less than what the trust wants and banking on investors being loath to pay a premium in an IPO opposed by Fiat.

“Marchionne is laying his cards on the table and very clearly explaining that a Chrysler IPO is not in Fiat’s interest as the ownership of Chrysler is crucial,” Giuliano Noci, a marketing professor at Milan Polytechnic, said by phone. “He doesn’t hide his real intentions.”

Marchionne, 61, has spent the past four years seeking to unify the companies and create a global player with the scale to compete with Toyota, General Motors and Volkswagen. Buying the trust’s stake would give Fiat access to Chrysler’s $12 billion in cash to help fund a turnaround in Europe, where Fiat is losing money and market share.

Fiat said Tuesday in a statement that there “can be no assurance” a listing will take place and that the number of shares to be offered and price range have not yet been determined. The proposed sale by the trust, also known as a VEBA, is for $100 million in stock, an amount used to calculate fees that may change, according to a regulatory filing Monday.

“It’s a game of chicken,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business and Michigan Law School. “If the IPO prices too low, the VEBA loses. If it prices higher than Marchionne wants to pay, he is cornered, and will end up paying a premium.”

The trust received the holding as part of Chrysler’s government-backed bankruptcy in 2009. Fiat has the right to buy the entire stake for $4.25 billion, plus 9 percent annual interest calculated from January 2010, which would amount to about $6 billion at the end of this year.

If the IPO does go ahead, it would follow GM’s own $18 billion offering in November 2010 and the revitalization of Detroit’s auto industry after the government-led bailouts. U.S. auto sales totaled 1.5 million in August, the most in one month since May 2007.

Fiat already relies on Chrysler to sustain the group’s profit amid losses in Europe, where the car market is on pace to fall a sixth straight year to the lowest since regionwide record keeping began in 1990.

Fiat started accumulating Chrysler stock in June 2009 as part of the government and labor-union bailout of the U.S. automaker, which was losing as much as $100 million a day. Rather than paying cash for the initial 20 percent holding and subsequent 15 percent stake, Fiat provided management and technology and helped Chrysler meet performance milestones.

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