By on January 2, 2014

marchionne

Fiat SpA said on Wednesday that it has signed an agreement to buy the remaining 41.5% stake in Chrysler that it does not own from the United Auto Worker’s retiree health-care trust, known as VEBA, for $3.65 billion in cash up front and another $700 million after the deal is completed. The agreement will allow Fiat and Chrysler CEO Sergio Marchionne to realize his dream of creating a global automotive group out of the two companies. The joint automaker would be the 7th largest in the world.

Fiat and the trust have been negotiating over the stock’s value for more than a year. Part of that sparring included the VEBA exercising its option to force an initial public offering of Chrysler stock to determine a true market value. An IPO would have made it more difficult for Marchionne to consolidate the two firms but now it’s a moot point, as is the lawsuit filed by Fiat to determine a share price.

According to the terms of the deal, Fiat will put up $1.75 billion and Chrysler $1.9 billion, both in cash, to buy out the trust, with the remaining $700 million to be paid out by Chrysler in equal annual payments over four years. The contracts will be signed and the deal closed on or before January 20, 2014. Because some of the cash is coming from Chrysler, Fiat will not have to make any capital increase through a rights issue.

Marchionne needs Chrysler’s cash and current profitability to prop up Fiat, suffering because their core market, Europe, is still in the doldrums, but he can’t spend Chrysler’s cash on Fiat’s operations without a formal merger. Chrysler booked $464 million in profits in the third quarter of 2013 on strong sales of the Ram pickup and Jeep Grand Cherokee in North America. That was the Auburn Hills based automaker’s ninth straight quarterly profit. Fiat’s share of Chrysler’s profits were $260 million and without them Fiat would have lost $340 million for the quarter.

Get the latest TTAC e-Newsletter!

57 Comments on “In $4.35 Billion Deal, Fiat Will Acquire Rest of Chrysler from UAW Retiree Health Care Trust...”


  • avatar
    Lie2me

    Jeepers, what happens next?

  • avatar
    RangerM

    If you like your American car company, you can keep your American car company.

    • 0 avatar
      highdesertcat

      DUHH! Is there anyone who didn’t see this coming?

      But I got to hand it to Sergio; buying the rest of Chrysler with Chrysler’s own money was a masterful stroke of genius!

      Maybe now everybody can get on board and agree that the company formerly known as Chrysler is truly a wholly-owned subsidiary of an Italian company called Fiat.

      Let’s hope this doesn’t devolve into another refrain of “Fix It Again Tony.” So far so good with our 2012 Overland Summit.

  • avatar
    Detroit-X

    All this to save Fiat. Maybe the world doesn’t need Fiat; the U.S. has already voted on that.

    So this values Chrysler at $10.6B, compared to GM at $56.8B, and Ford at $59.8B.

  • avatar
    Big Al from Oz

    Now, the challenge will be for Fiat to work with a large debt of just over $13 billion.

    Sergio already was controlling both companies prior to this buyout and Chrysler has seen a turn around under his stewardship.

    Chrysler is still a smaller player in the US market, but is gaining market share. Hopefully money for investing into new models and upgrading facilities will be available.

    From the sounds of it Sergio will want to use some of the idle Italian factories to make some Chrysler products like Jeep for export globally.

    With an upturn in global economic activity over the next couple of years Fiat will survive.

    I shows how much those UAW controlled VEBA shares were overvalued.

    • 0 avatar
      jz78817

      “Sergio already was controlling both companies prior to this buyout and Chrysler has seen a turn around under his stewardship.”

      not to sound like too much of a DeLorenzo acolyte, but the products which put Chrysler back on the map were in the pipeline before bankruptcy. I clearly remember LaSorda and “Minimum” Bob showing them off in 2008/9. Fiat just made sure they survived until they could reach the market.

      since then, the Dart has stumbled (though one can argue this was due to a fumbled product mix and Chrysler being off the radar of buyers in this segment thanks to the dismal Caliber) and the jury’s still out on the Cherokee.

      • 0 avatar
        Big Al from Oz

        @jz78817
        Don’t confuse product vs management. Sergio, leaned Chrysler quite a bit. Even the same people were managing Fiat’s and Chrysler’s finances.

        There have been many great products developed and yet the company goes broke.

        The only drawback I have seen with Sergio is the rolling out of new vehicles. As we are all aware maybe this could have been done better.

        But, Chrysler has learnt a lot about placing new product into the market more efficiently. The old ‘Detroit’ culture has changed the most within Chrysler than GM and Ford. This will bide well.

    • 0 avatar
      danio3834

      Chrysler is a smaller player in the US market only compared to giants like GM, Toyota and Ford. They sell more vehicles and have a greater market share in the US than all the other players aside from those 3.

      I would consider smaller players in the US to be companies like Subaru, Mazda, Mitsubishi, VW and BMW for example.

  • avatar
    threeer

    So when I come back from my assignment in Saudi Arabia in two years and finally buy the Wrangler I’ve always wanted, will it come with a complimentary copy of the Italian version of Rosetta Stone?? Another American icon now markedly less “American,” I suppose…

    • 0 avatar
      Vega

      You mean as ‘American’ as it used to be when it was owned by Daimler?

      • 0 avatar
        Spartan

        But…but…but wasn’t that a merger of equals?

      • 0 avatar
        Astigmatism

        The funny thing is, Chrysler was truly “American” when it was owned by Cerberus, when it was turning out utter cr#p.

        • 0 avatar
          whynot

          Granted most of that cr#p dated from the Daimler era. Cerberus was just woefully in over their heads and couldn’t afford to run or really do anything with Chrysler.

          • 0 avatar
            highdesertcat

            Actually, the crap predated the Daimler era. Remember the K-cars? The liaisons with VW?

            On second thought, no need to rehash all that.

          • 0 avatar
            28-Cars-Later

            From what I remember at the time Cerberus wanted Chrysler Financial, not Chrysler the automaker. However Daimler sold it all as one package wanting to rid itself of what it viewed as an albatross. Cerberus was given Chrysler Financial in the bailout agreement in exchange for its equity holdings in the automaker.

            “On March 30, 2009, Cerberus Capital Management announced that it would voluntarily give up its equity stake in the Chrysler as a condition of the US Treasury Department’s bailout deal, but would retain its stake in Chrysler’s financing arm, Chrysler Financial”

            This tidbit I wasn’t aware of:

            “In December 2010, Cerberus agreed to sell certain assets of Chrysler Financial to TD Bank Group for $6.3 billion in cash, retaining approximately $1 billion in Chrysler Financial assets.[47] This transaction, which closed in April 2011, allowed Cerberus to recover virtually all of its investment in Chrysler.”

            http://en.wikipedia.org/wiki/Cerberus_Capital_Management

          • 0 avatar
            raph

            Private equity firms shouldn’t be involved with anything automotive.

          • 0 avatar
            highdesertcat

            raph, I agree, but when the US government bails out these dead ducks, only the taxpayers lose.

            At least Chrysler is now a wholly-owned subsidiary of Fiat. And all’s well.

    • 0 avatar
      morbo

      At various points in history, Jeep has been owned by French (Renault/AMC), German (Daimler), and Italian (Fiat). Maybe we can get Toyota or Mitsubishi to buy Jeep next, and complete the whole WWII Axis set.

      (yes I know non-Vichy France was ‘technically’ not an Axis power, but they sure didn’t seem to put up much of a fight when German tanks rolled over the River Seins)

  • avatar
    colin42

    How does this amount compare to what UAW wanted for their 41%?

  • avatar
    Spartan

    Fiat must have had a few billion laying around. Maybe they used that $2B GM had to pay them back in 2005 to help pay for Chrysler. Yeah, remember that?

    • 0 avatar
      th009

      Fiat’s cupboard is pretty much empty, so it needs to raid Chrysler’s piggy bank to make this deal happen.

      $1.9B is paid by Chrysler now, and then Fiat will pay $1.75B + $175M on closing, when it gets access to Chrysler cash.

      • 0 avatar
        highdesertcat

        I was flabbergasted when I heard it on Bloomberg this morning over breakfast. Using Chrysler’s own money to buy the rest is absolute genius!

        I cannot recall if that has ever happened before in any takeover, merger or acquisition. If someone knows for sure, please share.

  • avatar
    Lorenzo

    Fiat is paying a total of $4.35 billion for 41.5% of Chrysler, vs. the analysts’ estimated $5.6 Billion. The difference in Chrysler’s estimated market value is $10.5 Billion vs. $13.5 billion. That’s a difference in the inferred cap rate of 6.2 vs the analysts’ 7.9, using the 2012 $1.7 billion net profit.

    Ford has a cap rate of 10.6, and GM’s cap rate is 11.5. Chrysler’s 2013 net will be announced soon, and judging by sales, it should be a bit higher, reducing the inferred cap rate even more. Did Sergio just pull off the heist of the century?

    • 0 avatar
      Pch101

      FIAT-Chrysler bought the stock at a fairly large discount to what would likely be current market value, so yes, it got a deal.

      I posted this comment a few months ago:
      _________

      In 2012, Chrysler produced net income of $1.67 billion. As of the first half of 2013, the company expects 2013 net income of $1.7-2.2 billion.

      Ford’s P/E ratio is currently a bit about 11. GM and Toyota are a bit under 13, and Nissan is around 9.5.

      If you apply a 9 P/E ratio (slightly worse than Nissan’s) to Chrysler’s most pessimistic net income projection ($1.7B), then you end up with a market cap of $15.3 billion. The VEBA currently owns 41.5% of Chrysler, which would place the value of its shares at around $6.3 billion.
      _________

      If Chrysler was going to come in with 2013 earnings under that projection, then that would have arguably depressed the stock value. But from here, it looks as Marchionne did better than I would have expected. The VEBA may have been worried about the possible downside risks and opted to just get it over with, even though it was entitled to more under its agreement.

      • 0 avatar
        BigOldChryslers

        This is exactly the kind of information I was hoping to find when I opened this article. Good analysis.

      • 0 avatar
        Big Al from Oz

        @Pch101
        It appear good ole Lou_BC picked the numbers on this one not you.

        Don’t talk yourself up to much ;)

        I also made comments on how ridiculous the UAW influenced initial VEBA price was. I couldn’t determine it’s value.

        Here the complete discussion.

        Lou_BC

        September 17th, 2013 at 1:08 am

        It would appear to be in both side’s best interest to come to a mutual agreement. It is highly unlikely that VEBA would get close to 5 billion on the open market and Fiat needs the stock to have access to Chrysler’s cash.

        Reply

        0

        avatar

        Pch101

        September 17th, 2013 at 2:56 am

        “It is highly unlikely that VEBA would get close to 5 billion on the open market.”

        I’d like to see the math that led you to that conclusion.

        In 2012, Chrysler produced net income of $1.67 billion. As of the first half of 2013, the company expects 2013 net income of $1.7-2.2 billion.

        Ford’s P/E ratio is currently a bit about 11. GM and Toyota are a bit under 13, and Nissan is around 9.5.

        If you apply a 9 P/E ratio (slightly worse than Nissan’s) to Chrysler’s most pessimistic net income projection ($1.7B), then you end up with a market cap of $15.3 billion. The VEBA currently owns 41.5% of Chrysler, which would place the value of its shares at around $6.3 billion.

        Unless the VEBA acquired shares in Peugeot by mistake, it has little reason to compromise.

      • 0 avatar

        Even with the cash infusion from selling their stake in Chrysler the VEBA is projected to still be billions of dollars short of anticipated health care costs for retirees. Perhaps they want to start investing that cash and get some kind of return on it to reduce that shortfall. How much revenue was the stock generating for the VEBA?

    • 0 avatar
      ect

      You can’t make a straight-up comparison between Chrysler and GM/Ford.

      The latter are widely-held public companies, with public company multiples. Chrysler is a private company with a single majority shareholders. The only market for Chrysler shares is the majority shareholder (Fiat).

      And the VEBA needs to diversify its asset base and seek higher income and capital gains, if it’s to have any hope of meeting its obligations.

      The price in the deal reflects all of these factors. It’s probably a reasonable deal for both sides, given the circumstance that each was in.

      • 0 avatar
        Pch101

        The best comps for valuing the business are other similar automakers, and those happen to be public companies.

        In any case, this business is headed for an IPO. Give it a few years, and you’ll find Chrysler stock trading again on a US exchange.

        Marchionne saw an opportunity to buy low and sell high. If he can continue to grow earnings, then the company will have earned a nice pop from this sale, which will further strengthen the balance sheet.

        Perhaps there was concern about the risk that the court shortchanged them on the valuation. There may have been concerns about future earnings (it doesn’t seem that Chrysler is on track to hit its 2013 earnings forecast), or the possible effect of the taper. Or they may just really need the money or are feeling the urge to diversify sooner than later. Whatever it was, the VEBA left money on the table with this one.

        • 0 avatar
          ect

          Chrysler shares are not comparable to GM shares or Ford shares. In the market (leaving aside a few high-profile tech deals), public company shares attract a significantly higher multiple than private company shares – something I’ve had to explain to a number of private company owners, in the course of negotiating a price for their business.

          At the moment, Marketwatch tells me that Ford shares are trading at a p/e around 11, and GM at nearly 16. I’ve been doing M&A for over 30 years, and can tell you that private companies rarely get a multiple above 6-7. And it’s often in the 4-5 range for manufacturing businesses. There are good reasons for this, but they can’t be explained in a short post.

          In Chrysler itself, Fiat’s shares are worth more than the VEBA’s shares, because they deliver control of the company. If Fiat wanted to sell their shares in Chrysler, they would get a much higher price than they had to pay the VEBA.

          The brutal reality for the VEBA is that there is no market for a minority interest in a private company, except for the majority shareholder. One cannot say that the VEBA left money on the table, without knowing how high Fiat might have been prepared to go.

          All we can know for sure, at this point, is that both parties agreed a price.

          I don’t believe that Chrysler is headed for an IPO. That just wouldn’t make sense. Fiat will fully combine its business and Chrysler’s, of course, but Fiat is already a public company. It might seek a US listing at some point, but that is not an IPO.

          • 0 avatar
            Pch101

            The VEBA could have issued its own public offering of the shares (which would have been awful for FIAT.)

            This is not a minor concern looking to go public, but a multibillion dollar multinational firm that is not just a boutique player in the auto industry. Accordingly, we can use industry comps to assess it, and the average industry PE is currently in the mid-teens. Chrysler probably doesn’t merit an above-average multiple, for a variety of reasons, but it’s not comparable to a smaller firm in another industry, either.

          • 0 avatar
            ect

            Again, you can’t equate (i) a minority stake in a private company with a majority shareholder to (ii) shares in a publicly-traded company, even if it is in the same industry.

            We can bet that the VEBA was advised by major-league investment bankers, lawyers and accountants, who looked 4 ways from Sunday at very sophisticated valuation models.

            The fact is, if the VEBA believed that their they’d get a higher price in a Chrysler IPO than what Fiat was offering, they had the right to insist on the IPO. That they did not, but took Fiat’s money instead, confirms that they didn’t think they could do better in an IPO. Which confirms that their shares in Chrysler were not at nearly the same value as publicly-traded Ford or GM shares.

          • 0 avatar
            Pch101

            “That they did not, but took Fiat’s money instead, confirms that they didn’t think they could do better in an IPO.”

            No, it reflects the risks of what could happen if (a) the court blows it on the valuation, (b) the market shifts against them during the interim and/or (c) the CEO decides to compromise earnings in order to push down the valuation.

            The VEBA can’t control any of those factors, but it can control its litigation costs. (A bird in the hand, etc.)

            And again, even though Chrysler maintained its earnings outlook through Q3, the actual earnings YTD seem to be falling short of the guidance, which could make the VEBA nervous. (Knock a couple of hundred miliion off of the earnings forecast, and there easily goes $1-2 billion in value.) Combine that with the possible negative effects of the taper, and those could be motivations to sell out now.

  • avatar
    mjz

    Hey TTAC Staff, first line under Sergio’s smiling mug should say “buy the remaining” not “by the remaining”. Please correct, there are young impressionable minds that read this blog. Lol.

  • avatar
    mjz

    Me thinks that with the merger finally completed, Sergio will finally implement the long awaited Alfa Romeo resuscitation plan. If the new Alfa’s are anywhere near as nice as the new Maserati Ghibli (which I will buy or “by” per TTAC speak, when I hit the lotto), then it will be worth the wait.

  • avatar
    vaffangool

    The more things change…

    Remember that $2 billion General Motors forked over in 2005 to get out of Fiat’s put option? That was on top of the $2.4 billion GM had paid for 20% of Fiat in 2000 because Rick Waggoner didn’t want them partnering up with–wait for it–DaimlerChrysler.

    Sergio Marchionne may be a shit automaker, but he is a goddamn wizard at corporate finance. Over 40% of the price of control over the ~$1.5 billion Chrysler generates per year is being put up by Chrysler itself.

    Ten years ago it was thought that Gianni Agnelli’s death would finally allow Fiat to make “a progressive exit from the auto business”. Instead, Marchionne repeatedly gets American automakers to subsidise Fiat Auto’s 30% overcapacity and 58,000 employees.

    So, is the General going to be a partial step-parent to Chrysler after all this? Interesting, but probably not. Fiat unloaded its 6% mutual interest stake in General Motors for cash, while GM’s 20% of Fiat–already chopped in half by a 2003 restructuring–was written down to $220 million by the end of 2004.

  • avatar
    mjz

    Sergio wants to kick the equally egomaniacal a$$ of Dr. Ferdinand Piech, especially after the latter had the audacity to suggest that the Alfa Romeo brand would be far better off under the VW brand umbrella. You gotta think that pissed off Sergio big time. Chryslers’s cash stash will create a world class line of Alfas that Sergio is going to rub Piech’s nose in. This should be fun.

  • avatar
    jim brewer

    It sounds like an early 1980′s style leveraged buyout. Chrysler sells at 5X pe ratio in a recessionary economy. Whatever Fiat borrows money at, its a heck of a lot less than 20%. So the deal is strongly cash flow positive from day one and seems poised to improve as the economy improves.

  • avatar

    Daimler got rid of Chrysler because of UAW’s militant position during negotiations. Unlike Americans Germans do have a patience for stupidity. There was feeling that UAW will sink Chrysler or whatever left of Chrysler and it will affect the future of iconic Mercedes brand. Nobody wants liability. Dr Z warned UAW and LaSorda to wake up and in the end they got what they deserved. It is easy to depict Germans like a dark force but in the end they are simply effective, common sense, pragmatic and disciplined nation.

    • 0 avatar
      28-Cars-Later

      “Dr Z warned UAW and LaSorda to wake up and in the end they got what they deserved.”

      They deserved liquidation, unemployment, and prosecution. What they got is quite the opposite.

      • 0 avatar

        That’s America. People selfish, confrontational and not very cooperative for common good. And politicians think only about reelection for the next term. May be it was different before 2000 but since 2000 I am here I did not see any common sense in Government decisions to be it Republicans or Democrats. Both spend enormous amount of money with no real reason.

        • 0 avatar
          highdesertcat

          Now that Fiat owns them outright, the UAW has been further marginalized.

          What I believe is that we will see more radical decisions flow from the Fiat BoD and the UAW will just have to suck it up and deal with it, or lose their jobs as production is moved elsewhere. And it will be moved elsewhere, like Brazil, as an example.

          Fiat is on the move. The question is, will Fiat revert back to the “Fix It Again, Tony” syndrome synonymous with the Fiat-experience of the past?

          Things were really, really bad when Fiat was here before. Fiat 128, anyone?

    • 0 avatar
      jz78817

      you are so full of horsecrap your eyes are greenish-brown. Daimler got rid of Chrysler because Daimler had no plan for how Chrysler was going to fit within Führer Schrempp’s Reich, and royally screwed Chrysler up in the process until it was unsalvageable. It was those Nazis Wolfgang Bernhard and Dieter Zetsche who delivered an edict that 40% of the cost had to be taken out of the interiors of Chrysler vehicles, regardless of outcome. Cite:

      http://www.businessweek.com/stories/2008-03-02/hes-baaaaaaaack-dot-peter-arnell-shakes-his-stuff-at-chrysler-dot

      It was (German) Joachim Eberhardt who commanded Chrysler factories to keep cranking out trucks with no buyers, and threatening dealers to take them or else.

      “There was feeling that UAW will sink Chrysler or whatever left of Chrysler and it will affect the future of iconic Mercedes brand. ”

      The UAW didn’t sink Chrysler, Daimler did. And you hint at why they did it. They did it because they wanted to protect their precious Mercedes-Benz at all costs. Well, as far as I’m concerned, Mercedes-Benz can go to hell, and Daimler AG can go to hell too. After what Daimler did to destroy Chrysler (and spent much effort to whitewash it,) I will never, EVER, even so much as *touch* a German car.

      Ze Germans destroyed Chrysler. No ifs, ands, or buts. any attempt to say otherwise is bunk. I don’t know how the FIAT mash-up is going to work out, but from the little I’ve seen, the Italians aren’t squatting down and taking massive dumps on Auburn Hills like the StuttgartReich did.

      • 0 avatar
        highdesertcat

        This is exactly why I enjoy reading ttac — two diametrically opposed views of the same situation where each faction holds fast to their own assessment.

        Fascinating!


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Authors

  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Matthias Gasnier, Australia
  • J & J Sutherland, Canada
  • Tycho de Feyter, China
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Faisal Ali Khan, India