DETROIT — Fiat SpA shares soared Thursday, one day after the Italian automaker announced it reached a deal to buy the remaining shares of Chrysler Group LLC from a United Auto Workers trust.
Wednesday, Fiat announced a deal to acquire the 41.5 percent of Chrysler it does not yet own in a deal valued at $4.35 billion. The deal ends a bitter feud between Fiat and the UAW Retiree Medical Benefits Trust, which manages health care for 117,000 Chrysler retirees, over the value of Chrysler stock. It also dramatically speeds up the ability of Chrysler and Fiat CEO Sergio Marchionne to fully merge the two global automakers.
Fiat currently owns 58.5 percent of Chrysler, while the UAW Trust owns 41.5 percent. When the transaction is complete, Chrysler will no longer be an independent business. Fiat may choose to report Chrysler’s financial results separately.
Max Warburton, an analyst for Bernstein Research, praised the agreement for its creativity and said the way it is structured will benefit Fiat because Chrysler is funding more than half of the deal.
“(Wednesday’s) news on Fiat’s purchase of the rest of Chrysler is surprising on many levels. Surprising in its timing … the most surprising aspect of all is the source of funding – over 50 percent of the upfront cash will come from Chrysler itself,” Warburton said in a research note published late Wednesday. “The structure of the deal is favorable to Fiat, and we would expect the announcement to drive a rally.”
Warburton also noted that under the terms of the deal, Fiat will not need to borrow additional money to acquire the rest of Chrysler. Before the agreement was announced, most analysts predicted that Fiat would need additional financing to prevent a credit rating downgrade because it was believed the automaker would need to spend $4 billion or more.
‘A bit of a coup’
But under the terms of the deal, Chrysler will use $2.6 billion of its own money, and Fiat will pay $1.75 billion in a deal that is expected to close June 20.
“This is a bit of a coup and will be seen as a big positive surprise – although in retrospect perhaps we should have seen this coming, given the complex arrangements and possibilities disclosed in various Chrysler documents,” Warburton said.
The trust, also known as a Voluntary Employee Beneficiary Association or VEBA, was created by the UAW and each Detroit automaker in 2007 as a way to alleviate the crippling costs of retiree health care that were negotiated many years ago before health care costs increased far faster than the general rate of inflation.
While the VEBA rejected earlier Fiat offers for the trust’s Chrysler shares as too low, eventually it needs to convert those shares to cash to pay for health care benefits of retired Chrysler union members.
Marchionne has sought to merge the two companies since 2009, when Chrysler emerged from Chapter 11 bankruptcy with Fiat as its controlling shareholder.
“In the life of every major organization and its people, there are defining moments that go down in the history books. For Fiat and Chrysler, the agreement just reached with the VEBA is clearly one of those moments,” Marchionne said in a statement Wednesday. “The unified ownership structure will now allow us to fully execute our vision of creating a global automaker.”
The UAW Trust credited its financial adviser, Brock Fiduciary Services, for negotiating the deal.
“This agreement is in the best interests of the Trust’s UAW Chrysler retiree members and their families who rely on the trust to provide vital health care benefits,” Robert Naftaly, chairman of the committee that governs the UAW Trust, said in a statement.
Fiat needed cash
Kristin Dziczek, an analyst with the Center for Automotive Research in Ann Arbor, Mich., said the UAW Trust valued its ownership of Chrysler at $3.6 billion at the end of 2012.
“It wasn’t in either party’s interest to go through with an IPO,” she said. “Since the UAW Trust can’t buy health care coverage with Chrysler shares, it was in their best interest to get as much cash as possible.”
Marchionne, meanwhile, needed access to Chrysler’s cash to finance Fiat’s costly European restructuring plan in Europe. That plan calls for the export of more Alfa Romeo and Maserati models from Italy and production of a Jeep subcompact in Italy.
Though Fiat, including Chrysler, earned $260 million in the third quarter of 2013, Fiat would have lost $340 million without Chrysler’s contribution.
Under the terms of the new agreement, Fiat will use $1.9 billion of Chrysler’s cash and $1.75 billion of its own money initially. Chrysler will pay $700 million more to the VEBA Trust in four equal annual installments. The first annual payment, $175 million, will occur when the transaction closes. Additional $175 million payments will be made in the next three years on the anniversary of the initial payment.