Fiat rethinks alliance with Chrysler after IPO filing

Warning meant to stop trust from selling shares

9/24/2013

NEW YORK — Fiat SpA, the majority owner of Chrysler Group LLC, threatened to pull back from future commitments to the American carmaker if a health-care trust succeeds in selling its stake in an initial public offering.

“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 Sergio Marchionne, who runs both automakers and is looking to use the sale process to get investors to weigh in on Chrysler’s value and end the stalemate preventing a full merger.

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. Mr. Marchionne is offering at least $1 billion less than what the trust wants and banking on investors being uneager to pay a premium in an IPO opposed by Fiat.

“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,” Giuliano Noci, a marketing professor at Milan Polytechnic, said by phone. “He doesn’t hide his real intentions.”

The trust received the holding as part of Chrysler’s government-backed bankruptcy in 2009. Although Fiat has the right to buy the stake for about $6 billion, Mr. Marchionne has said that he’s seeking to pay much less.

“It’s kind of like the gunfight at the O.K. Corral,” James Press, a former Chrysler vice chairman, said on Bloomberg Television. Cerberus Capital Management LP valued Chrysler at about $8 billion when it bought the company from Daimler AG in 2007, he said. “They’re in the right ballpark, it’s just about negotiating. You’ve got a shrewd buyer and a shrewd seller.”

Mr. Marchionne, 61, has spent the past four years working to unify the companies and create a global player with the scale to compete with Toyota Motor Corp., General Motors Co., and Volkswagen AG. 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 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 may change, according to a regulatory filing Tuesday.

“It’s a game of chicken,” said Erik Gordon, a professor at the University of Michigan’s Ross school of business and its 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.”

Fiat has already exercised options to buy 10 percent of Chrysler from the VEBA 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 fight in court over the price.