Fiat announces $1.27 billion deal for purchase of additional 16 percent Chrysler stake

The 2011 Fiat 500 is being made specifically for the American market at an assembly line in Toluca, Mexico, a Chrysler plant that once turned out PT Cruisers.

MILAN — Italian automaker Fiat is closing in on its goal of taking a majority stake and full control of Chrysler LLC by the end of the year, announcing a deal Thursday to buy another 16 percent share sooner than expected at a price of $1.3 billion.

Fiat SpA will exercise an equity call option, bringing its stake to 46 percent, once Chrysler has repaid $6.6 billion in outstanding loans to the U.S. and Canadian governments, which Fiat said would happen in the second quarter of 2011.

Fiat expects to gain another 5 percent, for a majority 51 percent share, by the end of the year.

“This is a fundamental step toward the completion of the momentous integration of Fiat and Chrysler, initiated less than two years ago, that will result in the creation of a global automaker,” Fiat and Chrysler CEO Sergio Marchionne said in a statement.

Chrysler is making progress with several banks in an effort to refinance the U.S. and Canadian government loans, which Marchionne has said carry high interest rates that average 11 to 12 percent per year.

But the refinancing agreement is still being negotiated and won’t be announced Thursday, said a person briefed on the talks.

The company is working to get all parties on board, including the banks, governments and the United Auto Workers health care trust, which now is Chrysler’s largest stakeholder at 59 percent, said the person, who did not want to be identified because the negotiations are private.

Chrysler was initially handed $9.4 billion in loans from the U.S. government Canadian governments, which own 8.6 percent and 2.2 percent of the company, respectively.

Fiat has had operational control of Chrysler since taking a 20 percent stake in June 2009 in exchange for small car and more fuel-efficient engine technology, along with management know-how. But further integration is expected as Fiat’s stake increases and Chrysler launches a public offering, which could come as early as this year.

Marchionne said the company accelerated the exercise the call option “to bring about, in the shortest possible time, the birth of a single group capable of fully leveraging the joint development of the respective international activities.”

Marchionne told analysts Wednesday that integration was well under way, with significant synergies on the purchasing level where the carmaking units Fiat SpA and Chrysler LLC combine forces with the newly formed Fiat Industrial, which makes farm, construction and truck units.

Analysts had expected Fiat to exercise the call option before Chrysler launches an IPO in order to get a better price.

“The timing was a little bit faster than we were expected. The amount was in line with our expectation,” Morgan Stanley analyst Stuart Pearson said.

The call option marks the first time that Fiat is putting up cash for Chrysler.

Fiat’s initial 20 percent stake was in exchange for technology and management prowess __ but no cash. The deal with the U.S. Treasury also laid out three benchmarks for Chrysler to raise Fiat’s stake in 5-percent increments. It has exercised two this year — for making a fuel-efficient four-cylinder engine in the United States and boosting Chrysler’s sales outside North America. Approval of a new Dodge that gets 40 miles to the gallon will be the last of the three.

“To the extent the deal was designed to allow us to get 51 percent, that defines happiness for Fiat,” Marchionne told analysts Wednesday. “It was intentionally designed to allow Fiat control of Chrysler at some point in time.”

Fiat has the further option to increase its stake beyond 51 percent — including the possibility to acquire an additional 8 percent from the U.S. Treasury, Marchionne has said.

Marchionne’s next move would be a public offering of Chrysler — something he has indicated he’d like to do by the end of the year. But Marchionne also said the timing would depend on the cash needs of the U.S. automaker and the auto workers union trust fund, which pays health benefits for retirees and holds a 59 percent Chrysler stake, which is diluted each time Fiat raises its share.

Marchionne’s goal is to create an automaker capable of making 6 million cars a year — the scale he believes necessary to remain competitive — by 2014.