Fiat SpA plans to spend $1.3B to increase its Chrysler stake

4/22/2011

DETROIT -- Fiat SpA will spend $1.3 billion to increase its ownership stake in Chrysler Group LLC, the first time the Italian company will invest cash in the Detroit automaker.

It's a sign that Fiat sees profits ahead for the once-troubled maker of Jeeps and minivans and wants a bigger cut now that Chrysler is rebounding from its 2009 bankruptcy.

Fiat already has acquired 30 percent of Chrysler in exchange for management expertise and technology. Fiat said Thursday that it has reached a deal to increase the stake to 46 percent through the cash investment.

Fiat expects to gain another 5 percent before year's end, coming from the United States government after the company meets previously agreed targets. That would give Fiat a 51 percent majority share, setting the stage for a Chrysler public stock offering and raising expectations of a full merger.

The increased stake means Fiat CEO Sergio Marchionne wants to run Chrysler without interference from other big owners. He also wants a shot at pulling more of the company's profits to Fiat's bottom line, said Michael Robinet, an analyst for the consulting firm IHS Automotive.

"The Fiat management likely wants to be in charge of their own domain, basically have the ability to fully control their business," Mr. Robinet said.

In addition to control and profits, the larger stake gives Fiat a larger scale across the globe. Larger automakers can save money by spreading vehicle development costs across more of the world. Mr. Marchionne's goal is to create a company capable of making 6 million cars a year -- the scale he believes necessary to remain competitive -- by 2014.

The U.S. government gave Fiat a 20 percent stake and management control of Chrysler when the company emerged from a government-funded bankruptcy two years ago. Since then, Fiat has gained another 10 percent by meeting certain goals, including making a fuel-efficient engine in the United States and boosting Chrysler's sales outside North America.

Mr. Marchionne also has revamped Chrysler's aging product lineup and made available Fiat's fuel-efficient small car and engine and transmission technology.

Mr. Marchionne said the $1.3 billion would go to Chrysler, not to its other owners. The U.S. government owns 8.6 percent of the company, a United Auto Workers health care trust fund owns 59 percent, and the Canadian government holds 2 percent. The governments got their stake after handing Chrysler $9.4 billion in bailout loans.

Before Fiat can increase its ownership, though, Chrysler must repay $6.6 billion in outstanding bailout loans to the governments. That could come this quarter through bank refinancing.

The company will report first-quarter earnings on May 2. It lost $652 million in 2010, but that represented a huge improvement over the staggering $8 billion loss the year before.

Mr. Marchionne said he expects a profit of $200 million to $500 million this year.