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Fiat to Gain Chrysler Control Early After Raising Holding

Fiat and Chrysler Chief Executive Officer Sergio Marchionne
Fiat and Chrysler Chief Executive Officer Sergio Marchionne. Photographer: Jason Alden/Bloomberg

April 21 (Bloomberg) -- Fiat SpA will pay $1.27 billion to reach a 51 percent stake in Chrysler Group LLC as Chief Executive Officer Sergio Marchionne is set to gain control of the American carmaker two years faster than planned.

Fiat aims to increase its Chrysler stake to 46 percent in the second quarter after completing refinancing needed for Chrysler to repay government loans, the Turin, Italy-based carmaker said today. The remaining 5 percent will come from the U.S. later this year after meeting previously agreed targets.

The Obama administration tapped Marchionne, who now runs both automakers, to revive Chrysler after it emerged from bankruptcy in 2009. In exchange for sharing technology, management and reaching operating milestones, the U.S. and Canadian governments are giving Fiat 35 percent of Chrysler without paying any cash. The original deal was for Fiat to buy the final 16 percent stake in 2013.

“It’s a promising a sign for Chrysler,” Jessica Caldwell, an analyst with Edmunds.com, said in an interview today at the New York International Auto Show. “There was a time in which you literally didn’t know what the fate of Chrysler was.”

Fiat gained 29.5 cents, or 4.6 percent, to 6.87 euros, the highest since Feb. 18, in Milan trading. The shares have climbed 2.6 percent this year, valuing the automaker at 8.48 billion euros ($12.4 billion).

Chrysler Debt

Chrysler owes the U.S. and Canadian governments $7.53 billion, according to a Feb. 25 filing with the U.S. Securities and Exchange Commission. Marchionne needs to reach a refinancing deal with banks to pay back the government debt before he can exercise his option to buy the additional 16 percent. The CEO today declined to comment on the refinancing talks.

“Today’s announcement takes us one step closer to exiting the U.S. taxpayers’ investment in Chrysler,” Timothy Massad, the Treasury Department’s acting assistant secretary for financial stability, said in a separate statement. “We are looking forward to the full repayment of our loan to Chrysler, which today’s announcement from Fiat is contingent upon.”

Marchionne, who says Fiat will pay cash to exercise the option, is saving money by making the purchase earlier because the cost is linked to the Auburn Hills, Michigan-based company’s earnings. Marchionne is pushing Chrysler to post its first net income this year since emerging from bankruptcy as he works to finish the refinancing.

Improved Earnings

Chrysler expects to almost triple what the carmaker calls modified operating profit to more than $2 billion in 2011 from $763 million last year, and to earn as much as $500 million in net income. Modified operating profit excludes interest, taxes and items such as pension-related costs.

“Fiat should save more than $400 million by exercising the call option in the second quarter instead of in the following quarters,” Gabriele Gambarova, a Banca Akros analyst in Milan with a “buy” rating on Fiat stock, said in a note to investors. “As long as Chrysler’s results improve, the call option exercise would have become more expensive.”

Fiat, which had 13.1 billion euros of liquidity at the end of March, reported yesterday that first-quarter profit gained 9.1 percent powered by the Ferrari brand and demand in Brazil. Earnings before interest, tax and one-time items, which Fiat calls trading profit, advanced to 251 million euros.

Marchionne said today that the timing of a planned initial public offering of Chrysler will depend on the American carmaker’s performance and market conditions.

Increased Holding

Fiat received an additional 5 percent in Chrysler from the U.S. government last week, giving it a 30 percent holding, by reaching targets that included opening Fiat’s dealerships in Brazil to Chrysler products.

Fiat expects to get the final 5 percent needed to reach a 51 percent majority by the end of the year from the government after meeting a requirement for Chrysler to assemble a Fiat-derived car in the U.S. that gets 40 miles per gallon. Marchionne said Fiat may consolidate Chrysler even before receiving the last 5 percent.

“It makes little sense to maintain these as separate entities,” Marchionne said on a conference call with analysts, adding it’s “almost irrelevant” how and when a full merger between the two takes place because “the operational integration started in 2009.”

Deeper Ties

Sharing parts between models and brands is a key feature of the Fiat-Chrysler makeover. Future models will cut costs by sharing parts that comprise up to two-thirds of an auto’s value.

In compact cars, more than 20 Fiat-Chrysler models will be based on the same technology. They include a Fiat sedan destined for a new factory in China, which will mark its belated entry into the world’s biggest market, as well as the 40 miles-per-gallon Dodge for U.S. buyers.

“Fiat, together with Chrysler, will create a stronger automobile group, with a full range of products, present in every market around the world and able to compete with the best,” Fiat Chairman John Elkann said in today’s statement.

To contact the reporter on this story: Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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