MILAN - Fiat, the majority owner of Chrysler Group, has threatened to pull back from future commitments to the American automaker if a health-care trust succeeds in selling its stake in an initial public offering.
The warning to the United Auto Workers retiree trust, which owns the 41.5 percent of Chrysler not held by Fiat, is ultimately meant to prevent the trust from selling shares on the market and instead force an agreement with the Italian automaker on the price. Sergio Marchionne, who runs both automakers, is offering at least $1 billion less than what the trust wants and hoping investors aren’t eager to pay a premium in an IPO.
“Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us,” Chrysler said in the filing for the share sale. “This could include decisions on capital preservation and allocation, investments and locations of production facilities.”
Realigning the partnership would be a worst-case scenario for Marchionne, who is trying to end an impasse preventing a full merger.
“Marchionne is laying his cards on the table and very clearly explaining that a Chrysler IPO is not in Fiat’s interest as the ownership of Chrysler is crucial,” said Giuliano Noci, a marketing professor at Milan Polytechnic. “He doesn’t hide his real intentions.”
Marchionne, 61, has spent the past four years trying to unify the companies and create a global player with the scale to compete with Toyota, General Motors and Volkswagen. Buying the trust’s stake would give Fiat access to Chrysler’s $12 billion in cash to help fund a turnaround in Europe, where Fiat is losing money and market share.
Fiat said Tuesday in a statement that there “can be no assurance” a listing will take place and that the number of shares to be offered and price range have not yet been determined. The proposed sale by the trust, also known as a VEBA, is for $100 million in stock, an amount used to calculate fees that might change,according to a regulatory filing Monday.
“It’s a game of chicken,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business and Michigan Law School. “If the IPO prices too low, the VEBA loses. If it prices higher than Marchionne wants to pay, he is cornered, and will end up paying a premium.”
The trust received the holding as part of Chrysler’s government-backed bankruptcy in 2009. Fiat has the right to buy the entire stake for $4.25 billion plus 9 percent annual interest calculated from January 2010, for a total of about $6 billion at the end of this year.
If the trust moves forward with the IPO, it would follow GM’s $18 billion offering in November 2010 and the revitalization of Detroit’s auto industry after the government-led bailouts. U.S. auto sales totaled 1.5 million in August, the most in one month since May 2007.
Fiat has already exercised options to buy 10 percent of Chrysler from the trust and has rights to buy an additional 6.6 percent next year. Fiat has yet to take possession of the holding as the two sides argue in court over the price. The trust, which has the right to request an IPO for the remaining 24.9 percent, asked in January to register a 16.6 percent stake.
“It still looks like a longer, drawn-out process through which Fiat is forced to pay more for the asset than it would like and can afford,” Fraser Hill, a London-based analyst at Bank of America Merrill Lynch, said Tuesday in a research report.
JPMorgan Chase is managing the IPO, Monday’s filing shows. The health-care trust would sell all the shares in the offering, and neither Auburn Hills, Mich.-based Chrysler nor Fiat would receive any proceeds. Chrysler would change its name to Chrysler Group Corp. before the IPO, according to the filing.
Marchionne plans to handle the presentation to investors, saying this month: “I’ll work my buns off to get the best possible reception in the equity market, but there’s a limit to my talents.”
Ron Bloom, a Lazard Ltd. vice chairman, will assist Marchionne in trying to strike a deal with the trust, people familiar with the matter said this month. The adviser represented the U.S. four years ago in talks that led to Fiat taking control of Chrysler from the government.
Bloom became President Barack Obama’s top manufacturing adviser after the U.S. auto bailouts in 2009 that saved GM and Chrysler. Before joining the bailout team, Bloom was an adviser to the United Steelworkers union and a manufacturing specialist at Hamilton, Bermuda-based Lazard.
Merging with Chrysler would allow Fiat to tighten cooperation among the brands of both companies.
Fiat already relies on Chrysler to sustain the group’s profit amid losses in Europe, where the car market is on pace to fall a sixth straight year to the lowest since region wide record keeping began in 1990. Group net income, including minority holdings, totaled about $1.9 billion in 2012. Without Chrysler, Fiat would have posted a loss of about $1.4 billion.
Fiat started accumulating Chrysler stock in June 2009 as part of the government and labor-union bailout of the U.S. automaker, which was losing as much as $100 million a day. Rather than paying cash for the initial 20 percent holding and subsequent 15 percent stake, Fiat provided management and technology and helped Chrysler improve performance.
Information for this article was contributed by Leslie Picker, Mark Clothier, Elizabeth Wollman, Brian Lysaght and Francesca Cinelli of Bloomberg News.
Business, Pages 25 on 09/25/2013