There is a reason why Fiat SpA says it is not putting any cash into a deal that could eventually give it a stake in Chrysler LLC. It is running out of the stuff as fast as the struggling U.S. automaker.
Fiat, which announced a deal this week an agreement that would give it 35% of Chrysler, on Thursday slashed its profit outlook for 2009 by about a third and revealed a debt load is three times its own previous forecasts, sending shares in Europe’s sixth-largest automaker down nearly 12 percent to 3.945 euros.
The Italian automaker’s debt, which excludes debt from financial services, soared to 5.9 billion euros ($7.66 billion) last year, surprising investors. Thursday’s share price was the company’s lowest in fifteen years.
Fiat also reported a 30-percent drop in fourth quarter profit to 663 million euros ($858 million), which beat analysts’ expectations. But Fiat officials said profit for 2009 would be in excess of 1 billion euros ($1.29 billion) compared to a previous forecast for between 1.5 and 2.3 billion euros.
Off the disappointing news, rumors surfaced in Italy that Fiat was in talks with France’s PSA Peugeot Citroen about a merger. Fiat officials tried to squelch those rumors.
The global Recession that is affecting all automakers has accelerated discussions between companies for new alliances to lower costs. “There are only a handful of car companies with enough manufacturing scale to see it through a prolonged Recession,” says Dr. David Cole, chairman of the Center for Automotive Research.
If Fiat and PSA are not talking about a merger, it is, say analysts likely the companies are talking about how to cooperate on similar products to lower their costs. Fiat and PSA are Europe’s leaders in small cars. The two companies have worked together since the 1970s and have two active joint ventures making vans and multi-purpose vehicles in the north of France and central Italy.
“There are a lot of ways for companies to cooperate on non-proprietary and commodity parts of the business without combining companies, which can, as history shows us, be more distracting than productive,” says Cole.
Fiat’s deal with Chrysler calls for the U.S. automaker to use Fiat’s vehicle platforms for small and mid-sized cars for its future models. The advantage for Fiat is that it can spread its development costs over additional sales volume that Chrysler can provide. For Chrysler, whose resources are depleted, it can demonstrate to its lenders that it has a pipeline for future small and medium sized cars after deals with Chinese company Chery failed to deliver a future product, and a separate deal with Nissan to provide small cars in South America is for the time being still a promise.
Chrysler is battling for survival, currently existing on U.S. government loans. With tax-payer funded loans, the company was entertaining a bankruptcy filing last month. The company has to demonstrate that it has financial viability to the U.S. Treasury by March 31, or risk having the government loans. If that were to happen, it would likely be forced into Chapter 11.
Fiat is accepting a 35% stake in the company in exchange for supplying future vehicles. The Italian automaker is also planning to help re-fit one of Chrysler’s U.S. factories to produce Chryslers and either Alfa-Romeos or Fiats in the future.
Fiat CEO Sergio Marchionne said he has no desire to run Chrysler from Italy, but would join Chrysler LLC’s board as one of Fiat’s three members of a new seven-member board.
Chrysler design chief Ralph Gilles said this week that the automaker’s design and product development team was about to start sessions with their counterparts at Fiat to determine what Fiat vehicles could be adapted to the U.S. market.
One car in particular that may be imported is the Fiat 500, a popular small car in Europe that draws on the styling themes of the 1960s Fiat 500. “The Fiat 500 has taken Europe by storm. They can’t make it fast enough” Gilles said. “It is such a fun package. I think Americans, given the chance, will fall in love with this thing,” he said at the Automotive News Congress held in Detroit this week.