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Fiat-Chrysler Merger Takes Backseat to Europe Fix

Fiat SpA (F), the majority owner of Chrysler Group LLC, is putting efforts to fix its European operations ahead of finishing a full merger between the two companies, Chief Executive Officer Sergio Marchionne said.

“Our primary objective right now is fixing the European environment and getting that up and running so we can restore the full Fiat level of profitability that it needs to achieve,” Marchionne said yesterday on Chrysler’s quarterly earnings conference call. Marchionne, 60, who heads both companies, said he’s still targeting a combination of them by 2015.

Fiat, which owns 61.8 percent of Chrysler, presented a plan to turn around the European operations that are generating wider losses and led the Turin, Italy-based company to cut its 2014 profit goal by 31 percent to 5.2 billion euros ($6.7 billion). Other European automakers also are struggling as industrywide sales head for their biggest annual decline in 19 years.

Chrysler, boosted by demand for 200 sedans and Jeep Grand Cherokee sport-utility vehicles, on Oct. 29 reported third- quarter net income of $381 million, an 80 percent increase from a year earlier. The Auburn Hills, Michigan-based company also confirmed its forecast for 2012 profit of $1.5 billion.

Fiat yesterday reported 20 billion euros of available liquidity at the end of the third quarter, down from 22.7 billion euros as of June 30. The company expects to generate cash from operations in the last three months of the year, according to a statement.

Fiat’s Plan

With Fiat’s capital position, it’s “highly unlikely” that the company would be able to “finance a takeout” of the minority stake in Chrysler,” Marchionne said on the call.

The business plan update that Fiat presented yesterday, which didn’t include a monetary investment figure, calls for the introduction of 19 new models that will be produced from Italy through 2016. Of those vehicles, 15 will be made both for export and Europe’s market, according to an investor presentation.

“If I were to take a look at cash utilization, given our plan here, there’s no room left for the acquisition of the minority interest in Chrysler,” Marchionne said yesterday on Fiat’s conference call.

When asked by an analyst if he would consider ways to raise capital to complete a Fiat and Chrysler merger, Marchionne said that “everything is on the table.” He has previously discussed the possibility of an initial public offering of Fiat’s Ferrari supercar division.

Court Dispute

Fiat said last month that it asked a U.S. court to confirm the price it has to pay to increase its controlling stake in Chrysler after failing to reach an agreement with the United Auto Workers’ retiree health-care fund. The fund, known as a VEBA, owns the remainder of Chrysler.

The Delaware Chancery Court probably will rule on the matter by the end of the year, Marchionne said on the Fiat call.

As part of Chrysler’s 2009 bankruptcy, Fiat was granted a call option to purchase a portion of the VEBA’s stake every six months through June 2016. The agreement covered 40 percent of the trust’s holdings.

The VEBA is able to request a registration to sell some of its Chrysler stake beginning in January 2013, Marchionne said on the Fiat call.

“Once registration is in place, then I think they could ask that we take it public, and we will comply if they so desire,” he said.

Fiat is “standing by” its call options and will exercise them as they become due, Marchionne said.

Premium Brands

Fiat’s updated business plan calls for the carmaker to focus product development toward its Alfa Romeo, Maserati and Ferrari premium brands to improve margins rather than close one or more plants in Europe. The Italian automaker has capacity available in the region, and its U.S. partner is more constrained in North America.

Chrysler will use 107 percent of its production capacity in its home region this year, Fiat estimated in yesterday’s investor presentation. The U.S. automaker in 2010 used just 73 percent of capacity, measured on the basis of 16 hours of output during 235 workdays a year.

Fiat reduced its forecast for Europe industry sales for this year through 2014 by a combined 10 million units. The automaker now sees 2014 deliveries of 14.1 million, from a previous estimate of 18.2 million.

In an effort to find a solution to woes in Europe, Marchionne approached PSA Peugeot Citroen and General Motors Co. (GM) earlier this month about a pan-European combination, three people familiar with the matter said. The Fiat CEO is looking for a partner to break the Italian carmaker out of its isolation in the region after GM’s Opel unit and Peugeot (UG) announced an alliance earlier this year.

Opel-Peugeot

Marchionne, who unsuccessfully bid to buy Opel when GM considered selling the unit in 2009, said yesterday on the Fiat call that he has not spoken to GM about Opel since that time. The CEO also said he meets regularly with Peugeot executives and family members because of historical ties.

“Don’t read anything into having a coffee at the bar,” Marchionne said. “There are other things than combinations and mergers that people talk about from time to time.” GM and Peugeot representatives declined to comment yesterday.

The French government has had to support Peugeot by backing 7 billion euros in new bonds for its financing arm. Ford Motor Co. (F) is closing three plants in Europe, Daimler AG scrapped its profit target for next year, and Volkswagen AG posted its largest drop in earnings since 2009 in the third quarter.

Italy Woes

Fiat’s problems are compounded by its troubled home country, which accounts for half its European sales. Its plants in Italy, where car sales are on pace to plunge this year to the lowest level in more than three decades, are running at 50 percent of capacity, below the 80 percent threshold typically considered profitable.

Chrysler, on the other hand, is benefiting from a rising U.S. auto market. Light-vehicle deliveries are on pace to increase at least 10 percent for the third consecutive year, the first such streak since 1973. The full-year industry sales are headed to exceed 14 million, for the best annual total since 2007, according to researcher Autodata Corp.

U.S. light-vehicle sales for Chrysler rose 24 percent in the first nine months and its share of the U.S. market increased to 11.5 percent from 10.6 percent a year earlier, according to Woodcliff Lake, New Jersey-based Autodata. Deliveries of the 200 sedan during the period surged 71 percent to 100,267 and the Grand Cherokee climbed 31 percent to 112,075.

“We’ve been able to hit all the targets that we have set for ourselves,” Marchionne said on Chrysler’s conference call.

To contact the reporter on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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