Fiat SpA is in talks for as much as $10 billion in financing from a pool of banks to buy the Chrysler Group LLC stake it doesn’t own and refinance the two automakers’ debt, people familiar with the matter said.
The banks, which include Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc. and BNP Paribas SA, are discussing loaning Fiat the money to purchase the 41.5 percent of the American carmaker held by the United Auto Workers’ retiree health-care trust, said the people, who asked not to be identified because the discussions are private. Other banks could also take part in the financing, one of the people said.
Chief Executive Officer Sergio Marchionne, who runs both Fiat and Chrysler, has spent the last four years remaking the two regional automakers into one global carmaker that can better compete with Toyota Motor Corp., General Motors Co. and Volkswagen AG. A full combination of the two would create a group with the mass-market Fiat, Chrysler, Jeep and Dodge brands, along with the Maserati and Ferrari high-end marques.
“The merger is the right choice for Marchionne and the only possible option to avoid Fiat being marginalized or bought by a competitor in the medium term,” said Emanuele Vizzini, chief investment officer of Investitori Sgr in Milan. “I see it as likely that they will get favorable financing by the end of the summer and then list in the U.S.”
The shares gained 19 cents, or 3.3 percent, to 5.93 euros at the close of trading today in Milan. The stock has climbed 56 percent this year, valuing the Turin, Italy-based manufacturer at 7.41 billion euros ($9.66 billion).
Fiat, which has accumulated a 58.5 percent holding since taking control of Chrysler in 2009 as it emerged from bankruptcy, aims to complete the purchase of the remaining stake by the end of the summer, the people said.
Fiat will probably wait for the decision in a legal dispute between the carmaker and the health-care trust over the value of its Chrysler stake before moving forward, Chairman John Elkann today reporters today in Turin.
Fiat has received verbal agreements at this point from some of the banks, while no final deal has been signed, the people said. Representatives for Fiat, Goldman Sachs, Bank of America, BNP Paribas and Deutsche Bank declined to comment.
Fiat is planning a two-step deal, with the Italian carmaker first buying the stake, and later refinancing the debt of both companies at lower interest rates, the people said. Italy’s biggest manufacturer may pay as much as $3.5 billion for the rest of Chrysler, UBS estimates. The two together had 7.1 billion euros of net industrial debt at the end of March.
“It seems discussions are progressing on Fiat’s plan to buy Chrysler, and Marchionne is getting closer to his plan of merging the two carmakers and forging a global player,” said Philippe Houchois, an automotive analyst with UBS AG in London. “Debt alone can help provide short-term financing, but something other than pure debt will be needed to improve the capital structure.”
One option being explored is to create a new company in the U.S., merge Fiat and Chrysler into it and issue shares in the combined entity, one of the people said. Current Fiat owners would exchange their shares for a stake in the new company, the person said.
Exor SpA, the investment vehicle that holds the founding Agnelli family’s 30 percent Fiat stake, would end up with a minority holding in the merged company, the person said.
“Exor is absolutely convinced that Fiat and Chrysler will have a future together,” Elkann, who heads the family’s businesses, said today at Exor’s annual meeting. It’s premature to decide whether Exor will invest cash into Fiat or if the carmaker needs a capital increase, Elkann said.
Marchionne has already begun operating the two carmakers as one entity, integrating the management teams and sharing technology and production capacity among the various brands.
Future models will cut costs by sharing parts that comprise as much as two-thirds of a vehicle’s value. In compact cars, around 20 models will be based on the same technology, including the Alfa Romeo Giulietta, the Fiat Viaggio sedan produced at a new factory in China and the fuel-efficient Dodge Dart for U.S. buyers. Fiat is also planning to build a small Jeep SUV at an Italian plant starting in 2014.
Marchionne, who has said an automaker will need to sell 6 million vehicles annually to be viable in the long term, aims to increase production at under-used Italian factories by building 16 new high-end cars. Fiat and Chrysler together sold 4.2 million vehicles in 2012. That compares with 9.07 million at VW, 9.2 million at GM and 9.75 million at Toyota.
Fiat and the health-care trust are in court disputing the price for a portion of the shares Fiat is seeking to buy by exercising options. The Italian carmaker may end up paying more than it is currently offering, the Delaware judge overseeing the case suggested last month.
The judge has until late July to make a ruling in the case, according to the court’s guidelines, which stipulate a decision should come within 90 days of oral arguments.
Marchionne is considering moving Fiat’s headquarters to the U.S. from Italy after the merger as the main revenue and profit sources shift to North America, three people familiar with the matter said earlier this month.
No final decision on the headquarters has been made and other options are being examined, the people said. Fiat said the headquarters issue is not on its agenda at the moment. Marchionne said last month that he favored a primary listing in New York for the company. The merged company will have both Fiat and Chrysler in its name, Elkann said.
The CEO, who has suggested in the past that he may leave the automaker after 2015, said last month that he’d like to complete the merger of the two companies in June of next year, when he completes his 10th year at the helm.
“Having spoken with Marchionne, I know he will stay with us for many years to come,” Elkann said today when asked if Marchionne would step down two years from now.
Elkann named executives such as Richard Tobin, Fiat Industrial SpA’s chief operating officer; Lorenzo Sistino, head of Iveco trucks; Alfredo Altavilla, Fiat’s European chief; Mike Manley, head of the Jeep brand; and Cledorvino Belini, head of Fiat in Brazil, as managers who have been groomed by Marchionne and could eventually run the company.