Fiat SpA (F) Chief Executive Officer Sergio Marchionne filed for an initial public offering of Chrysler Group LLC to end a dispute stalling a merger of the two carmakers by letting investors set the U.S. company’s value.
A United Auto Workers retiree health-care trust, which owns the 41.5 percent of Chrysler not held by Fiat, is pushing to sell shares on the market after failing to reach agreement on the stake’s value with the Italian automaker.
Marchionne, who runs both automakers, is offering at least $1 billion less than what the trust wants for the holding and is banking on a valuation from outside investors closer to his financial assessment of Chrysler. The CEO reiterated in the filing his ultimate goal of buying the entire stake.
“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.”
Fiat shares gained as much as 6 cents, or 1 percent, to 6.25 euros and were little changed as of 10:01 a.m. in Milan trading. The stock has risen 63 percent this year, valuing the Turin-based automaker at 7.72 billion euros ($10.4 billion).
Marchionne, 61, has spent the past four years seeking to unify the companies and create a global player with the scale to compete with Toyota Motor Corp. (7203), General Motors Co. (GM) and Volkswagen AG. (VOW) 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.
The offering 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 late yesterday. Marchionne reiterated his opposition to an IPO in the filing, saying the move would delay the combination.
“They’re going to go through the motion of an IPO to come up with a market valuation on Chrysler,” said Richard Hilgert, an analyst with Morningstar Inc. (MORN) in Chicago. “Then the UAW VEBA is going to use this as a basis for negotiations with Fiat to determine what price Fiat should pay for the UAW’s stake.”
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, which would amount to about $6 billion at the end of this year.
If the IPO does go ahead, it would follow GM’s own $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 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.
“This is a way to try to determine what a potential fair value might be,” said Matthew McCormick, a Cincinnati-based fund manager at Bahl & Gaynor Inc. which doesn’t hold Fiat in the $9.6 billion of assets it oversees. “However there are a lot of moving parts before that fair value is determined.”
JPMorgan Chase & Co. is managing the IPO, yesterday’s filing shows. The health-care trust is selling all of the shares in the offering, and neither Auburn Hills, Michigan-based Chrysler nor Fiat will receive any proceeds. Chrysler will change its name to Chrysler Group Corp. before the IPO, according to the filing.
Marchionne plans to handle the presentation to investors himself, 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, now a Lazard Ltd. (LAZ) 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.’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 1.41 billion euros in 2012. Without Chrysler, Fiat would have posted a 1.04 billion-euro loss.
Fiat started accumulating Chrysler stock in June 2009 as part of the government and labor-union bailout of the U.S. carmaker, 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 meet performance milestones.
Source : bloomberg