UAW Trust Pushing Chrysler IPO Shows $3 Billion Shortfall

The trust responsible for paying the health-care costs of some union retirees of Chrysler Group LLC faces $3 billion in unfunded obligations as it works to get the most for its stake that Fiat SpA wants to buy.

The trust’s benefit obligations narrowed by $414.9 million to $13.4 billion during 2012, according to its amended financial statement. At the same time, the net value of its assets rose to $10.3 billion, driven mostly by an increase in the estimated value of its 41.5 percent stake in Auburn Hills, Michigan-based Chrysler. Fiat owns the other 58.5 percent.

While the shortfall was reduced from more than $5 billion a year earlier, the trust needs to maximize the value of its Chrysler stake to cover the future cost of retirees’ health care. Unable to agree on a price with Sergio Marchionne, the chief executive officer of Chrysler and Fiat, the trust last month forced him to file for a Chrysler initial public offering.

“The trust needs top dollar from its Chrysler shares to close the gap, but Marchionne, despite being CEO of Chrysler, is talking down the IPO in order to set the lowest possible buyout value in favor of Fiat,” Erik Gordon, a business professor at the University of Michigan, said yesterday in an e-mail. “He doesn’t seem to be worried about the conflict of interest and the ill-will he will face from the Chrysler work force.”

Counting on Chrysler

Another trust, representing GM retirees, was underfunded by $14.5 billion at the end of 2012, down from $18.9 billion a year earlier, according to its amended filing. The Ford retirees’ trust hasn’t amended its statement yet.

At Chrysler, Marchionne has been working for four years to merge it with Fiat to create an automaker better able to compete globally with the likes of GM, Toyota Motor Corp. and Volkswagen AG. The process of setting a value in the public offering may end the stalemate that has kept the two sides from reaching a deal that combines the two automakers.

Katie Merx, a Chrysler spokeswoman, declined to comment. Matt Wood, a spokesman for the trust, didn’t immediately respond to an e-mail seeking comment.

More than a third of the value of the Chrysler trust’s assets is in its ownership stake of the automaker, according to the filing, which listed $3.6 billion in joint venture interests, up from about $2.7 billion a year earlier. The trust provided health-care coverage for 61,214 people at the end of 2012, compared with 63,171 a year earlier.

Bankruptcy Product

The trust, which is structured as a voluntary employee beneficiary association, or VEBA, received its Chrysler holding as part of the automaker’s 2009 government-financed bankruptcy that gave control of the company to Fiat.

Since then, Chrysler’s success has exceeded analysts’ estimates. The company’s U.S. sales have risen for 42 straight months, and it’s been profitable for eight consecutive quarters, while Fiat has struggled through Europe’s long economic slump.

Marchionne is seeking greater integration between the two units, as well as access to Chrysler’s $11.9 billion in cash to fund an expansion of the Alfa Romeo brand.

Although Fiat has the right to buy the stake for around $6 billion, Marchionne is seeking to pay much less. He said last month the trust “should buy a ticket for the lottery” if it wants at least $5 billion for its holding.

Chrysler’s value has climbed to $13.5 billion, UBS estimates, as industry wide U.S. car sales may rise this year to a level last seen in 2007. That would mean the 41.5 percent stake owned by the VEBA is worth $5.6 billion.

GM Underfunding

While the Chrysler VEBA has made headlines for forcing the IPO, it is the smallest of the three accounts, which were established in the UAW’s 2007 national contracts negotiated by then-President Ron Gettelfinger. Covering more than 258,000 participants, the GM trust is more than four times as large as the one for Chrysler retirees.

At that time, Gettelfinger said the VEBAs should be able to last 80 years. Retiree medical liabilities at the GM, Ford and Chrysler totaled $114 billion at the end of 2006.

For every 1 percent increase in health-care inflation, the obligation for GM retirees would increase by $6.2 billion, according to that trust’s filing.

In the end, shortfalls will land on retirees.

The GM trust, in its filing, explained that it has the authority to “fund any deficiency through future increases in retiree cost-sharing or reduction of benefits, if necessary. However, the stated purpose of the plan is to provide benefits only to the extent of the assets available in the GM Separate Retirement Account in the trust.”

In September, Detroit-based GM said it plans to buy back almost half of the trust’s preferred shares in the automaker for $3.2 billion.

GM rose 0.6 percent to $35.89 at the close yesterday. The shares have gained 24 percent this year, compared with the Standard & Poor’s 500 Index, which increased 22 percent. Fiat added 1.4 percent to 6.08 euros. The shares have jumped 60 percent this year.

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