Fiat Acquires a Majority Stake in Chrysler

By Chris Haak

Last week, about two years after exiting bankruptcy protection, Chrysler Group LLC has repaid its outstanding government loans.  Between a $5.9 billion USD repayment to the US government (principal plus interest) and a $1.7 billion USD repayment to the Canadian government, the company repaid $7.6 billion USD of its obligations to the two countries’ taxpayers.  Today, Fiat announced that it has purchased the 6 percent of Chrysler owned by the US government for $500 million USD.

With the repayment of the outstanding loans and the purchase of 6 percent of Chrysler from the US Treasury, Fiat now owns a controlling 52 percent stake in Chrysler.  As such, Chrysler is once again no longer an American company.

At this stage, Fiat is anticipating the acqusition of an additional 5 percent stake once a 40 mile per gallon Dodge-branded vehicle is sold in the US; that is expected to happen this fall, which would give Fiat at 57 percent stake in Chrysler.  The Canadian government owns 1.5 percent of the company, and Fiat officials are in talks with Canada on the acquisition of that stake, which would take the Italian company’s ownership to 58.5 percent.

The final 41.5 percent of Chrysler is owned by the UAW’s VEBA healthcare trust.  It seems plausible that at some point, the UAW would want to divest of at least a portion of its stake, since being overweight in a company that has suffered more than its share of ups-and-downs over the decades may not be the best way to grow and preserve funds that will be necessary for providing retiree healthcare over the next several decades to tens of thousands of Chrysler’s UAW retirees.

So what does all of this mean for Chrysler and its stakeholders?  The company still needs to execute on its product roadmap.  The company is still too heavily dependent upon large, relatively inefficient vehicles like trucks, SUVs and crossovers, while its small-car lineup’s reinforcements from Fiat can’t come a moment too soon.  Repaying the government loans was a great move for many reasons; it’s a PR coup for both the company and the Obama administration; it saves Chrysler some $500 million USD in interest payments alone and also releases the company from executive-pay limitations that make it difficult to attract and retain top talent.

And the long-expected Chrysler IPO?  Despite previously making noise about it most likely occurring later this year, Marchionne seemed to downplay the possibility to reporters this week.  “I don’t think there’s a 100 percent guarantee of the fact that there is an IPO,” he said, noting that Fiat would discuss the timing (and even the “if” of an IPO) with the VEBA’s trustees.  He did note, however, that the IPO would be a good way to quickly unlock value.

Then there’s the matter of where the Italian-American automaker would be headquartered as their operations become increasingly intertwined.  Sergio Marchionne has said in the past that the combined company might be headquartered in the US, which angered Italian politicians who want the company’s decision-making core to stay near its Turin roots.

Regardless of the outcome of the IPO or headquarters decisions, Chrysler is still not out of the woods.  It needs its new models to resonate with buyers, and it needs to do a Ford-like debt repayment discipline.  If the company’s results continue to improve, it would seem that there’s the possibility of further debt refinancing that might reduce the interest rates below the prime-plus rates that Chrysler had to settle for last month.  Fiat’s CEO has gone on record as saying that is company needs to sell 6.6 million vehicles globally each year in order to meet its objectives.  With 3.6 million vehicles sold last year, there’s still quite a bit of work to do.