Marchionne Prepares Final Hand in Chrysler Merger GameTommaso Ebhardt
Sergio Marchionne, who has spent four years pursuing a merger between Fiat SpA and Chrysler Group LLC, plans to file an initial public offering for the American carmaker in the coming days. It’s an IPO that he’ll do everything he can to avoid letting happen.
The share sale preparation is part bluff by Marchionne, who heads both carmakers and plays cards with staff on flights between Italy and the U.S. The ultimate goal is to use the process to strike a deal with the United Auto Workers’ retiree health-care trust, or Veba, the only other shareholder in Chrysler, said two people familiar with the matter.
The Veba has been holding out on selling its Chrysler shares for a price that’s at least $1 billion more than Fiat wants to pay. The IPO gambit is meant to set a market value and force the Veba, or voluntary employee beneficiary association, back to the bargaining table.
If all else fails, Marchionne still has a standing agreement to pay about $6 billion for the stake. Should the IPO market point to a higher value than that, he could exercise his option to buy at the fixed price. If investors indicate the shares are worth less than that, Marchionne would only need to offer more than the market valuation to take control.
“Marchionne’ll make a call once the price is set, keeping in mind the downside is the $6 billion,” said Philippe Houchois, an analyst at UBS in London.
The Fiat CEO, who said Sept. 13 that an IPO filing could be as early as this month, has made a career out of this type of gamesmanship. In 2005, he threatened to exercise an option that would have required General Motors Co.’s predecessor to take over Fiat’s debt-strapped auto business. The ploy ended up netting the Italian manufacturer $2 billion to unwind the agreement and regain full control of its car-making unit.
“I wouldn’t underestimate Marchionne’s ability to achieve his goal given his track record,” said George Galliers, an analyst at ISI Group in London. “You have this strange situation where Marchionne is both the one who will presumably market the IPO and is also a potential buyer of the stake.”
The GM deal saved Fiat from a possible collapse. An agreement for Chrysler now could give the Turin-based company another lease on life. A merger with the U.S. manufacturer, which is 58.5 percent owned by Fiat, would create more of a global competitor for industry leaders Toyota Motor Corp., GM and Volkswagen AG.
Buying the trust’s 41.5 percent stake will help Marchionne access Chrysler’s $11.9 billion in cash to fund a turnaround in Europe, where Fiat is losing money and market share. Fitch Ratings today confirmed its negative outlook on Fiat.
“Material uncertainties remain regarding the extent of investment to increase Fiat’s stake in Chrysler,” Tom Chruszcz, a Fitch analyst, wrote in a e-mailed statement. “A Chrysler IPO could possibly take place in early 2014 and help set a value on the stake Fiat does not own and for which they are at loggerheads with the other owner, the Veba Trust.”
Size is critical to Fiat, which largely sells low-margin mass-market cars. The company delivered about 1.8 million vehicles last year, making it less than one quarter as big as Toyota, GM and VW, according to data compiled by Bloomberg Industries. Even with Chrysler, the group’s 4.2 million in sales was still smaller than Ford Motor Co.’s 5.7 million.
Marchionne, who said last week that he’s looking to pay less than $5 billion for the holding, expects the market to apply a minority discount on the stake, said one of the people, who asked not to be identified because the discussions are private. A representative of the Italian carmaker declined to comment. Matt Wood, a spokesman for the Chrysler Veba, didn’t respond to a voice message or e-mail.
Fiat valued VEBA’s holding at $3.2 billion in July, based on the price it offered for a 3.3 percent tranche it has an option to buy. That valuation was determined by a formula agreed upon in 2009, rather than a market price.
Fiat and the trust are in court disputing the price Fiat has to pay for the first 3.3 percent option that was exercised last year. The court case, which may not go to trial before 2015, has delayed Fiat’s efforts to tighten its control of Chrysler and put more pressure on Fiat to cut a deal with the Veba.
Fiat started accumulating Chrysler stock in 2009 after getting an initial 20 percent stake as part of a government-backed bailout of the U.S. carmaker, which was losing as much as $100 million a day at the time. The Veba got its holding as part of the rescue package and has the right to force an IPO of Chrysler under the deal. The trust is now requesting a listing for a 16.6 percent stake, which would set a value for the entire holding.
A merger with Chrysler would allow Fiat to forge a group with vehicles including brawny Dodge cars, sleek Maserati sedans, rugged Jeeps and sporty Alfa Romeo compacts. The goal is to spread development costs and share parts across the group and fund an expansion of upscale Italian models for export worldwide to end losses in Europe, where factories are underutilized. Fiat this week extended layoffs for 7,500 workers by one year at its Mirafiori and Grugliasco factories because of a lack of demand.
“Fiat really needs the cash flow generated by Chrysler to relaunch Alfa Romeo and transform it into an upscale brand that generates profit for the entire group,” said Giuseppe Berta, a Fiat historian and business professor at Milan’s Bocconi University. “Without Chrysler, Marchionne would never find enough resources.”
Fiat would have posted a 1.04 billion-euro loss in 2012, excluding Chrysler. The Italian company has continued to struggle this year as delays in new projects have eroded its competitiveness in Europe. Fiat’s market share in the region dropped to 6.2 percent through August from 6.5 percent a year ago, making it smaller than luxury manufacturer Bayerische Motoren Werke AG, according to data from the ACEA trade group.
Marchionne, always the gambler, said last week that he doesn’t need a deal with the trust and is prepared to buy the Chrysler shares after a market price is set through the IPO, which could take place by the first quarter of 2014.
“I will work my buns off to get the best possible reception in the equity market, but there’s a limit to my talents,” Marchionne said last week. If the trust wants more than Fiat is offering, it “should buy a ticket for the lottery.”