Fiat to buy rest of Chrysler

The smallest U.S. auto company will now be fully owned by Italian firm Fiat, ending a dispute about ownership and clarifying the future for both firms.

The Wall Street Journal had this story by Christina Rogers:

Fiat  SpA said it would get full control of Chrysler Group LLC in a $4.35 billion deal, ending a standoff that had clouded the future of both companies.

The deal, which helps clear the way for consolidation of the two auto makers, assumes a value for Chrysler at just over $10 billion, within the $9 billion to $12 billion valuation that banks underwriting a proposed initial public offering had been considering.

The IPO now will be called off, a person familiar with the plans said.

Analysts said the agreement is largely a win for Sergio Marchionne, the chief executive of both companies. The total price being paid for the 41.5% in Chrysler that Fiat didn’t already own is lower than some analysts had predicted. And averting an IPO gives Mr. Marchionne the freedom he needs to further consolidate the companies’ engineering and manufacturing operations.

The agreement also will allow him to spend more time on reworking Fiat’s operations in Europe, where it has suffered from a long slump in sales.

Jaclyn Trop of the New York Times added this background about the dispute between the autoworkers union and the company:

The agreement, which is expected to close on Jan. 20, will allow the carmaker and the union to end months of negotiations over the value of the U.A.W.’s stake. Union leadership had been pressing to force a public stock offering to cash out its shares on the open market amid arbitration in a Delaware court over the value of the trust’s stake.

Mr. Marchionne, who became Fiat’s chief executive in 2004, has been clear about his ambitions to create a company with a global scale to challenge the world’s leading automakers: General Motors, Volkswagen and Toyota. Fiat has held the majority stake in Chrysler since 2009 and has made no secret about wanting to acquire the remaining stake.

Fiat will pay the trust $1.75 billion in cash, and Chrysler will make a $1.9 billion contribution. Chrysler also agreed to pay the trust $700 million over four annual installments once the sale closes.

U.A.W. officials did not comment on the deal on Wednesday.

The merger will help both companies operate with a single set of financial statements, said Jack R. Nerad, the executive editorial director at Kelley Blue Book. “Their ability to move capital around is going to be a big advantage for them,” Mr. Nerad said.

USA Today also pointed out in a piece by James R. Healey that the agreement came as a surprise since the company had just announced plans for a stock sale:

The agreement, announced Wednesday, heads off a public stock offering of Chrysler shares that Fiat and Chrysler didn’t want, but the UAW was forcing, in order to set a value on its stake.

It puts to an end months of cantankerous wrangling between the union and automakers about the value of the retirement trust’s shares. And it’s happened suddenly, in an unexpected way, as firm plans had been announced late last year for the IPO.

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UAW’s employee retirement trust — VEBA — owns the stake, and it and the automakers have been unable to agree on a price. The matter went to court, but the judge declined to set a price. As part of the buyout agreement, the retirement trust won’t pursue any further legal action.

Marchionne wants to own all of Chrysler so he can tap its cash to help support ailing Fiat, and to streamline operations of a merged company.

The Reuters story by Stephen Jewkes and Deepa Seetharaman pointed out that now it’s Fiat that needs Chrysler more than the other way around:

But it remains to be seen whether a merger will be enough to cut Fiat’s losses in Europe. Marchionne’s plan to shore up Fiat depends on the ability to share technology, cash and dealer networks with Chrysler, the No. 3 U.S. automaker.

“This is an increasingly American company now, because in Europe, and especially in Italy, the business conditions remain difficult,” said Andrea Giuricin, transport analyst at Milan’s Bicocca University. “Fiat has already lost many of its market positions in Europe and it won’t be easy to recover that.”

While Fiat is working to return to profitability and regain market share, Chrysler is working to conquer the American market and remain profitable in a tough environment. The combination seems to make sense on several fronts. Fiat gets access to cash and the American market, while Chrysler gains a simplified management structure and certainty about its future.