Wednesday, April 29, 2009

Chrysler Fiat Done Deal With Spoonful of Taxpayers' Sugar

When Fiat SpA’s Sergio Marchionne predicted six months ago that only half a dozen car makers would have the scale to weather the credit crisis, analysts questioned whether the Italian company would be among them. Fiat sells little more than 2 million vehicles worldwide. Marchionne stated for car manufacturing to be a sustainable business a company must sell 6 million vehicles per year.

Now, 6 months later, with U.S. automaker Chrysler facing bankruptcy in 24 hours, Marchionne will announce Thursday that the Fiat Chrysler deal is done. "Chrysler will survive and avoid liquidation, whether that happens in or out of bankruptcy remains uncertain at this point," a source told Sources said Wednesday that despite the partnership, Chrysler could still wind up under Chapter 11 bankruptcy protection for a short time if some creditors don't agree to reduce their debt. Chrysler, which is subsisting on $4 billion in federal loans, is under a mandate from Mr. Obama to cut its labor costs and debt and complete an alliance with the Italian automaker Fiat by midnight tomorrow, April 30, if Chrysler is to get further government assistance.

But they said the government would agree to finance the restructuring rather than cut off Chrysler's aid and leave it destined for liquidation.

With union issues nearly out of the way and the debt resolved either in or out of court, Fiat agreed to cement the partnership with Chrysler.

"It'll be signed by tomorrow, I know that," an insider told

Fiat has agreed to contribute small cars, engines and other technology to Chrysler, in exchange for an initial 20 percent ownership stake and influence over Chrysler’s board and management. Fiat could increase its stake up to 35 percent by meeting certain performance objectives.

The basic idea of this alliance is certainly solid. Chrysler gains access to Fiat's extensive range of small car platforms, while the Italian automaker gets access to Chrysler's American factories and dealer network -- two pieces that could allow it to get back into the world's most lucrative market.

The Fiat alliance has also drawn full support from the U.A.W., whose members made big concessions to stave off the failure of Chrysler.

In a letter to Chrysler workers, the union’s president, Ron Gettelfinger, said the concessions were “essential to securing federal loans to keep Chrysler in business.” The union’s trust will, in effect, become Chrysler’s biggest shareholder overnight. It also may have a seat on the company’s reconstituted board of directors.

On Sunday, the Canadian Auto Workers ratified concessions to the automaker, and the United Auto Workers in the U.S. reached a tentative cost-cutting deal that members will finish voting on by Wednesday night.

Factory-level union leaders voted unanimously Monday night to recommend approval of the concessions.

Then on Tuesday, four major banks that hold 70 percent of Chrysler's $6.9 billion in secured debt agreed to a deal that would erase the debt for $2 billion in cash. The four largest banks in the group — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — have agreed to the terms. Together, they hold about 70 percent of Chrysler’s debt.

But a handful of hedge funds that hold the remainder of the debt have refused to go along, leading to further negotiations.

The people familiar with the deal said that if the hedge funds don't agree, Chrysler could go into a short "surgical" bankruptcy under Section 363 of the bankruptcy code.

If Chrysler enters bankruptcy, only a majority of the company’s secured lenders are needed to initiate the government’s debt proposal. The smaller lenders would have little power to stop the debt from being restructured in bankruptcy court, since the lenders holding the majority of the debt are on board with the plan, the people said.

If an agreement is reached, Chrysler would restructure outside of bankruptcy with government help, they said.

After Fiat's successful Chrysler courtship the fact remains that both companies are on life support, and the only question now is does Chrysler pull Fiat under with it. The good news for Fiat and its debt holders is that the green technology is valued at $8+ billion, strengthening Fiat's balance sheet which helps it re-negotiate its remaining $11B in debt.

Fiat knows that this deal between the two crippled companies is not the life preserver it needs. Therefore Fiat has moved on to negotiations to buy General Motor's Opel brand in Europe, which would add another 2 million units so that the three combined companies would have sales equaling Marchionne's goal of 6M units. Of course next year's sales will not match last year's, but by 2011 Fiat could have re-tooled Chrysler plants with its green technology just in time for the coming recovery Washington promises.

“Five years ago it was GM calling the tune for Fiat,” Stephen Pope, chief global strategist at Cantor Fitzgerald in London, told Bloomberg News. “Now, Marchionne may take the first-mover advantage in a wave of global consolidation.”

Marchionne, by insisting on not putting cash into Chrysler, is trying to avoid what Germany’s Daimler AG did -- paying $36 billion for Chrysler in 1998 only to sell it nine years later for $7.4 billion. Chrysler’s dire situation may help Turin, Italy-based Fiat succeed today where Daimler failed.

Fiat ranked No. 8 globally in car-making in 2007, including trucks and buses, according to the International Organization of Motor Vehicle Manufacturers.

Italy’s Agnelli family, Fiat’s controlling shareholders, picked Marchionne to run Fiat in 2004 from Geneva-based SGS SA, an Agnelli company he turned around by cutting costs. He had also tripled profit at Lonza, a Swiss maker of drug ingredients.

Fiat Recovery

Fiat, Italy’s biggest manufacturer, had run up 8 billion euros of losses in the four years before Marchionne became CEO. The executive, who shuns suits in favor of blue sweaters, brought Fiat back to profit in 2005 by eliminating jobs and speeding up the introduction of new models, turning the laggard of the European auto industry into one of the region’s most fashionable brands with the new retro 500 small car, the remake of the Punto and the Bravo compact.

Chrysler received $4 billion in loans from the government in early January and has been told it will get $500 million more. It may receive as much as $6 billion in additional loans by completing a Fiat alliance before April 30.

Plans are now underway for President Barack Obama to deliver a speech on Chrysler Fiat news Thursday morning, though people who have been briefed on the matter said that two versions of the speech are now being drafted-one if Chrysler has to file for bankruptcy protection, and another if it manages to avoid that outcome.

President Obama, speaking at a town-hall style event near St. Louis, said earlier Wednesday that he didn't know if a deal to save Chrysler would be completed.

"We're hoping that you can get a merger where the taxpayers will put in some money to sweeten the deal but, ultimately, the goal is we get out of the business of building cars, and Chrysler goes and starts creating the cars that consumers want," he said.

Under the original agreement between Fiat and Chrysler, the Italian company would get 20 percent of the third-largest U.S. carmaker in return for access to the Italian company’s small-car technologies. Chrysler wouldn’t get any cash from Fiat.

The UAW’s retiree health-care fund will own 55 percent of Chrysler in exchange for cutting half the automaker’s $10.6 billion cash obligation to the trust, people familiar with negotiations said. The tentative agreement was approved unanimously yesterday by UAW leaders, one of the people said, and must be ratified by union locals.

Daimler said yesterday it will cede its remaining 19.9 percent stake in Chrysler to Cerberus Capital Management LP and write off a $1.5 billion loan, steps needed for the U.S. automaker to avoid bankruptcy. Cerberus, which holds the rest of Chrysler, has said it would give up ownership to allow a reorganization without resorting to bankruptcy.

Opel, Magna

Fiat spokesman Gualberto Ranieri said he had no comment on the status of the company’s pursuit of any link with Ruesselsheim, Germany-based Opel beyond what Marchionne said April 23, when he told analysts that the Chrysler deal remained his “first and foremost objective.”

Fiat is competing against auto-parts supplier Magna International Inc. for a stake in GM’s European arm, German regional official Hendrik Hering said in an April 23 interview. Detroit-based GM, racing to restructure by June 1 to avoid bankruptcy, said this month more than half a dozen “serious” investors were interested in Opel.

Magna and Fiat have provided “markedly different” terms for preserving Opel’s workforce and factories, Guttenberg said. The minister reiterated that GM needs to provide more information on Opel to the government, which is being asked to back loans, and to any suitors. Fiat and Magna plan to hold talks with GM shortly, he said.

“Running all three looks beyond ambitious,” said Sanford Bernstein’s Max Warburton in London, who has a “market- perform” rating on Fiat. A tie-up with both Chrysler and Opel would amount to “building an empire while Rome burns.”

Warburton cited European losses at Fiat’s auto division and looming problems for its Iveco unit as truck sales slump. Marchionne should focus on Opel and drop Chrysler, which offers few synergies besides steel purchasing, he said.

Some Italian unions also are skeptical about Marchionne’s international moves. “Fiat can’t continue to not say anything about the future of workers in our country and present industrial plans in other countries,” Gianni Rinaldini, head of the Fiom-Cgil metalworkers union, said yesterday.

Responding to the concerns during the April 23 analysts call, Marchionne agreed that deals driven by empire-building ambitions are “nonsense,” maintaining that his plans were “purely based on industrial efficiency.”

A government-led plan to salvage Chrysler by merging it with Italy's Fiat may turn out to be a big fat lemon that could cost taxpayers billions more in rescue cash if the combination crashes.

The Obama administration has been scrambling to save Chrysler for months, but industry sources have questioned the merits of merging it with the Italian car manufacturer, which has its own set of woes.

For one thing, Fiat's car sales are getting help from the Italian government, which launched a plan to provide consumers with incentives to buy new cars.

Also, the Italian market, which represents about one-quarter of Fiat's sales, is expected to soften if not crash as the European economy starts to slide further into trouble. For sure sales of Fiat's high-end Ferrari and Maserati units will drop off in the wake of the economic crisis.

At this point, a government-imposed deadline for the restructuring of Chrysler slated for tomorrow is looming with a deal racing toward a conclusion.

However, it's the government's desire to speed toward a completion of a deal that has a lot in the auto industry and on Wall Street thinking that a slapdash hookup is a quick salve that could wind up totaling both enterprises.

Fiat in the three months ending in March lost 32 cents a share, or $500 million, after posting a 13-cent gain in the prior quarter and much higher earnings during the rest of 2008. Beyond that, it owes $11 billion and is rumored to be selling its farm equipment unit to raise money.

Part of Fiat's problem is it has too many employees in a declining auto market, and cannot easily fire workers.

So thanks to the U.S taxpayer these two struggling car makers have bought some time to fight another day. has a feeling this is not the end of the story. Stay tuned...

Click for WebVisionItaly-produced Fiat video.

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