Chrysler moves closer to Fiat

Chrysler moved closer toward selling the company—or at least, the brands and plants that potential buyer Fiat Auto wants to keep—in bankruptcy court yesterday. What happened doesn’t seal the deal, but bankruptcy judge Arthur Gonzalez said Chrysler can start preparing a sale in which the company will be divided in two, with the good assets going to Fiat and the bad ones being liquidated.

Bear with me while I explain some of the legal ins and outs of this one. The judge’s decision is an important one because a group of dissident creditors who refused to take 29 cents on the dollar for their debt have argued that Chrysler’s assets have not been auctioned off in a proper fashion. They say that the government is ramrodding a Fiat-Chrysler marriage. If the court gave them more time, perhaps other buyers for Chrysler might step forward. That would drive up the price of the assets, and hence, make the collateral securing their loans more valuable. Then they could get more than 29 cents on the dollar.

While the dissident creditors, who make up about 10% of the $6.9 billion in debt that was crammed down to $2 billion, have legal standing to argue the case, their premise that another bidder will step forward is on shaky ground to say the least. My reason is simple. Who wants Chrysler? It’s in bankruptcy, has declining market share and only a few strong product lines. Its brands command weak prices and buyers in lower tiers of credit. Years of cost cuts have shipped expertise out the door.

Who might bid? Not private equity. Every other private investor has already watched Cerberus crash and burn with its $7.4 billion Chrysler adventure. Not the Indian and Chinese carmakers. They don’t want to deal with the legacy problems of an old U.S. carmaker. Chrysler executives knocked on their doors and no one stepped forward. Not General Motors. They have enough problems, according to GM CEO Fritz Henderson. Given Daimler’s disastrous investment in Chrysler and BMW’s horrid experience with Britain’s Rover Cars, the Germans are not exactly beating the bushes for M&A deals.

Renault-Nissan President and CEO Carlos Ghosn would love to get a bigger piece of the U.S. market. But he has had a couple of chances and balked. Billionaire Kirk Kerkorian made a bid for Chrysler before Cerberus bought it with the understanding that Renault-Nissan would partner up with the U.S. carmaker if a deal was done. Ghosn stayed in the background and no deal happened. Chrysler representatives spoke to Mr. Ghosn in late December and told him Fiat was interested. If he wanted Chrysler, they said, he better make a move. He didn’t.

Chrysler executives have said in sworn affidavits that they tried to hail anyone who will listen (and probably even a few who didn’t want to) in an effort to sell the company. But those efforts went begging. Chrysler’s best vehicles are trucks, suvs and minivans, most of which would get hammered by a spike in fuel prices. Its sales are sinking fast and only bankruptcy can help erase a mountain of long-term liabilities. And by the way, with nearly every automaker in the world burning cash in the face of a severe recession, there aren’t many car companies pining for more brands to sell and more factories to run.

Frankly, Chrysler is lucky to have found Fiat, even though its CEO, the dynamic Sergio Marchionne, is not willing to put cash into the company. He is bringing technology, but is only doing the deal because the U.S. government is willing to fund Chrysler and shepherd it through bankruptcy. In the end, Judge Gonzalez will probably let the “sale” go through. Fiat won’t pay cash for it. They will give Chrysler vehicles and technology and perhaps assume some liabilities. Then we will see if the lone suitor can turn the company around.

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