Fiat And Chrysler: Alone At Last

Fiat split its auto business from the rest of its industrial operations today, creating two new companies: Fiat and Fiat Industrial. Fiat CEO Sergio Marchionne announced the move as a way for Fiat to unlock its share value and concentrate on its core business, telling the AP [via Newser]

This is a very important moment for Fiat, because it represents at the same time a point of arrival and a point of departure. Faced with the great transformations in place in the market, we could no longer continue to hold together sectors that had no economic or industrial characteristic in common.

But with Fiat Industrial taking care of the truck-and-tractor side of the business independently, Fiat SpA is focusing on the task at hand: Chrysler. With a 35 percent stake in the bailed-out American automaker in the bag, Fiat is aiming for a controlling stake when Chrysler’s IPO hits the markets later this year. And though the spin-off of FIat’s non-automotive business opens the door for a full merger of Fiat and Chrysler, Marchionne denies that a full merger will take place, saying only that

I don’t know whether it is likely, but it is possible that we’ll go over the 50 percent mark if Chrysler decides to go to the markets in 2011. It will be advantageous if that happens.

But don’t mind Sergio’s equivocation. Fiat will almost certainly snap up the remainder of a controlling stake by the end of this year. Here’s why…

After Fiat starts selling the Cinquecento in the US, it will have fulfilled its obligations to the US government to build an efficient engine in the US (which it ships to Mexico to be installed in the Cinquecento), and sell a 40 MPG+ vehicle in the US. Along with other “vague financial and developmental goals, hashed out with the U.S. government” these conditions will give Fiat its 35 percent stake, and once the government’s loans are paid back Fiat has an option to by the final 16 percent needed for a controlling stake before any Chrysler IPO. And the benefit to that, according to a UBS analysis [via the BusinessWeek], is that

Fiat may pay $900 million to $1.7 billion for the stake before a Chrysler IPO while the same stake could be worth between $1.9 billion and $4.4 billion after the listing… a pre-IPO transaction could save Fiat between EUR1 (billion) and EUR2.7 (billion) compared to a post IPO deal,

Considering that Fiat got its 35 percent stake for no money down, that adds up to a screaming deal. Especially if you buy the claim that a revamped Chrysler could double Fiat’s share value. On the other hand, Fiat’s Chrysler stake currently carries a book value of zero, and as a Credit Suisse analysis puts it

Despite much excitement surrounding Marchionne’s statements about raising Fiat stake in Chrysler to 51 percent ahead of an IPO in the second half of 2011, we remain skeptical about its ability to address the contractual hurdles detailed in the LLC agreement and achieve this event ahead of an IPO

Davide Manenti, a fund manager at Nuovi Investimenti Sim adds:

There’s been more volatility in Fiat and that’s where we should see more price movement over the coming weeks. It’s linked to greater uncertainty from the Chrysler issue and the car market outlook in Europe and the U.S

But, despite all the speculation surrounding Fiat’s potential Chrysler acquisition, Marchionne insists that it’s not considering divesting any of its assets in order to fund any expansion or alliance. Though Ferrari may well be spun off in the future, as may Fiat’s parts business Magneti Marelli, Fiat insists that it has the money to deal with all potential opportunities in the short term. But then, Sergio Marchionne has become so good at getting something for nothing, it would be downright surprising to see Fiat raising cash to fund an acquisition.