JPMorgan at Chrysler Side After Being Burned in Bankruptcy
JPMorgan Chase & Co. (JPM), the lender that lost almost $2 billion during Chrysler Group LLC’s 2009 bankruptcy, is now its chief adviser as the automaker’s two owners haggle over its value.
JPMorgan will advise Chrysler in the event of its sale to majority shareholder, Fiat SpA, said people with knowledge of the matter who asked not to be identified because the information is private. The bank was also listed this week as the lead underwriter of an initial public offering of Chrysler shares owned by the company’s other shareholder, a United Auto Workers retiree trust.
The dual role highlights the complicated path Chrysler has been forced to take to resolve a dispute between its two backers. Sergio Marchionne, the chief executive officer of both Chrysler and Fiat who has spent four years seeking to merge the companies, is at loggerheads with the UAW’s trust over the value of its 41.5 percent stake in Chrysler. Letting public investors put a price on the stake, through the IPO process, is one way to resolve the matter.
“From a banker’s viewpoint, more transactions are preferred to less,” said Jay Ritter, a professor of finance at the University of Florida. “In either an IPO or a merger, the acquisition of the remaining stake offers opportunities to collect fees.”
The New York-based bank isn’t alone. The UAW’s trust, known as a VEBA, has picked Deutsche Bank AG (DB) to represent it on both the IPO and the potential stake-sale to Fiat, people said.
Tasha Pelio, a spokeswoman at JPMorgan, declined to comment, as did Mayura Hooper at Deutsche Bank, Shawn Morgan at Chrysler, and a spokesman at Fiat. The Wall Street Journal reported Deutsche Bank’s role on the deal earlier.
Marchionne, meanwhile, finds himself in the position of running the company that’s being listed and also the controlling shareholder that’s opposed to the IPO. One question advisers to Chrysler, Fiat and the health-care trust have grappled with is how Marchionne will square Fiat’s unwillingness to pay a high valuation for Chrysler, while he pitches the company to public investors on a road show, said people familiar with the matter.
So far no one has a good answer to that question, said two of the people. Chrysler acknowledged Marchionne’s awkward role in the share sale preparation, saying in a filing this week that he “may have a conflict of interest with respect to matters involving both companies.”
Banks pitched for roles in the offering in early March at Chrysler’s Auburn Hills, Michigan headquarters, one of the people said. The meetings included senior executives of the retiree trust and the two carmakers, including Chrysler Chief Financial Officer Richard Palmer, the person said. Also present was Alain Lebec, a senior managing director at Brock Capital Group LLC, which is advising the VEBA, two people said.
JPMorgan was chosen by Chrysler even though the bank had a contentious past with Marchionne. It was the largest lender to Chrysler before its 2009 government-backed bankruptcy, and Marchionne and the U.S. Treasury pushed it for concessions -- often butting heads with JPMorgan Vice Chairman Jimmy Lee, said one of these people. Lee represented all the secured lenders, including other banks such as Citigroup Inc., in the negotiations.
The company’s secured lenders, who were owed about $7 billion, received $2 billion in cash from the U.S. government. JPMorgan held $2.6 billion of the total debt, taking a loss of almost $2 billion at the time. Since then, the recovery rate has improved and JPMorgan’s loss is closer to $1.64 billion, said a person with knowledge of the matter.
Since then, JPMorgan CEO Jamie Dimon has e-mailed with Marchionne and spoken with him a few times in New York, said two people. Chrysler has held off from hiring other banks besides JPMorgan, in part because it knows the IPO may never happen, one of the people said.
Chrysler and its advisers will move ahead with the IPO process, which includes setting an estimated price range for the stock and embarking on an investor road show to gauge demand, said one of the people. That may eventually culminate in a private sale of the stock to Fiat at a price based on that public-market demand, according to the people.
JPMorgan’s pitch to investors will center on Chrysler’s North American focus, its management team, and the ability to improve earnings as engineering, research and development, and marketing costs are reduced, said one of the people. Chrysler delivered 643,000 vehicles in the second quarter, and only 61,000, or 9.5 percent, of them were outside North America, compared with 51 percent of Ford’s sales and 65 percent of GM’s.
The advisers will argue that is a positive because demographics and new-housing starts show U.S. auto sales, especially those of trucks, are poised to improve further, the person said. U.S. auto sales surged 17 percent last month, pushing the annual rate to a pre-recession level.
Chrysler reported a modified operating profit margin of 4.5 percent in the quarter, compared with Ford’s 6.4 percent operating margin for its automotive operations and 5.1 percent at GM, excluding its financing arm, according to Bloomberg Industries. Advisers will say those margins can improve because Chrysler has been over-spending the last four years on engineering, R&D and marketing to make up for a dearth of spending before and during the bankruptcy.
The advisers will also tout Marchionne’s reputation as a strong manager who has overseen the integration of two automakers. This may prove challenging, with Fiat also saying that the relationship between the two companies may be threatened by the IPO itself.
“If the IPO will take place, there will be two companies, and that’s different than having a single one,” John Elkann, the Turin, Italy-based company’s chairman, said yesterday in Milan when asked by Bloomberg News if the listing would put the alliance at risk. “There is no doubt” that a listing would alter Fiat’s relationship with Chrysler..
Chrysler’s value has climbed to $13.5 billion, UBS estimates, as industrywide U.S. car sales gained in August to levels last seen in 2007. That would mean the 41.5 percent stake owned by the VEBA is worth $5.6 billion.
Fiat may end up paying $4.9 billion, $700 million less than the actual value, to buy the holding and end the dispute with the trust because the Italian carmaker has an option to purchase part of the stake at a lower price, according to UBS.
The VEBA, which stands for voluntary employee beneficiary association, received the holding as part of the 2009 bankruptcy. Although Fiat already has the right to buy the stake for around $6 billion, Marchionne is seeking to pay much less, saying this month that the trust “should buy a ticket for the lottery” if it wants to get at least $5 billion for its holding.
Fiat has already exercised options to buy 10 percent of Chrysler from the VEBA and has rights to buy an additional 6.6 percent next year. It has yet to take possession of the holding as the two sides fight in court over the price.
The VEBA, which has the right to request an IPO for the remaining 24.9 percent, asked in January to register a 16.6 percent stake. The filing this week didn’t specify how large of a stake the VEBA plans to sell.
JPMorgan, led by Lee, also represented General Motors Co. (GM) in a 2010 IPO, in which shareholders including the U.S. Treasury Department sold more than $18 billion of stock in the Detroit-based automaker, including an over-allotment option, beginning its exit from a government bailout.
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