Chrysler files for IPO

Chrysler Group filed for an initial public offering on Monday after its majority owner and employee union couldn’t reach a valuation. Fiat would like to own the company outright, but needs to placate the union in order to do so.

Here’s the Wall Street Journal story.

Chrysler Group LLC Monday filed for an initial public offering, a move forced by the failure of the auto maker’s Italian majority owner and its main union to agree on the company’s value.

Fiat SpA, which owns 58.5% of Chrysler, doesn’t want a share sale and is eager to own the company outright. But the United Auto Workers union health trust, holder of a 41.5% stake in the No. 3 Detroit auto maker, has demanded that its shares be offered to the public after negotiations to sell them to Fiat stalled.

In its Monday filing, Chrysler warned that if Fiat can’t get control, the Italian auto maker could turn its back on Chrysler, unwinding a deal that was a centerpiece of the Obama administration’s 2009 auto industry rescue.

Analysts and others familiar with the situation say Fiat will likely now redouble efforts to reach a private deal with the UAW.

An IPO would follow General Motors Co.’s record-breaking offering in November 2010, which at $23.1 billion was the world’s largest at the time. Analysts estimate Chrysler could be worth between $10 billion and $11 billion, depending upon market conditions.

The UAW health-care trust holds its minority stake in Chrysler as part of the auto maker’s 2009 government-led bankruptcy restructuring. The filing doesn’t state a price for the shares, or how many will be offered. J.P. Morgan is the sole underwriter listed.

The New York Times added these details about the union’s financial obligations to employees and why they’re pushing for the IPO.

The Detroit automakers have large financial responsibilities to their retirees. On Monday, General Motors said it would raise money in the bond market to buy preferred stock in the company owned by its retiree health care trust at a cost of $3.2 billion. Chrysler’s offering arises from an unusual conflict of interests, made possible by the remarkable turnaround at Chrysler since the federal government shepherded it through bankruptcy four years ago.

The United Automobile Workers health care trust has the legal right to cash in a large part of its 41.5 percent stake in Chrysler, which is a legacy of a deal brokered in 2009 by the Obama administration’s auto task force. At the time, the deal was seen as a last effort to save the faltering automaker, while preserving peace with the U.A.W.

Now, with profits flowing again and the trust in need of cash, it has formally requested that Chrysler register for a public offering covering about 16 percent of the company’s overall shares. The offering is another sign of how Chrysler — like General Motors — has recovered since the bailout. In the case of G.M., the Treasury Department is continuing to sell its ownership position, and now owns less than 8 percent of the company’s stock.

The Chrysler offering, however, is not supported by Sergio Marchionne, the chief executive of Fiat and Chrysler and the architect of the American company’s revival.

Reuters pointed out that Chrysler has come a long way since its government bailout, but still has some ways to go to reach sustainable profitability.

Marchionne and the UAW trust, a voluntary employee beneficiary association, or VEBA, have been at odds over the value of Chrysler. Their inability to agree on a price for the VEBA stake led to Monday’s IPO filing.

Chrysler has risen from a nearly dead company in 2009 to one that is stronger than its parent in Italy.

Still, Chrysler said in its filing: “Despite our recent financial results, we have not yet reached a level of sustained profitability for our U.S. operations.”

Chrysler, based in suburban Detroit, had cash and cash equivalents of $12.2 billion as of June 30. Its net profit in the first half of the year fell 21 percent to $764 million from $966 million in the previous year.

Marchionne had wanted to avoid the IPO because the sale could delay his plans for a full merger of the two companies. A full merger would make it easier – but not automatic – to combine the cash pools of the two companies, giving Fiat more funds to expand its product lineup.

Currently, Chrysler and Fiat are forced to manage their finances separately, even though they are run by the same executive team.

USA Today made an excellent point about valuing the trust’s shares.

But how to value the trust’s share? As Brent Snavely reported last week in the Detroit Free Press, the trust thinks its stake is worth $5 billion. A JP Morgan analyst puts the value at $3 billion, a figure likely closer to what Marchionne is willing to embrace. Asked last week about the trust’s higher valuation, Marchionne was quoted by the LaPresse new agency, via AP, as saying, “Let them buy a lottery ticket” to make up the difference.

Of course, it’s hard not be sympathetic to the trust. The more money they get for their share of Chrysler, the more that will be available to make good on retiree’s health care coverage.

But it sounds like Marchionne would rather stake his companies’ future on IPO shares — with the market setting the price — and not on lottery tickets.

It’s definitely an unconventional way to go public. Let’s hope that the market will give the trust closer to the value it needs in order to pay its obligations. And that Chrysler’s management can get onboard with the plan.