In $4.35 Billion Deal, Fiat Will Acquire Rest of Chrysler From UAW Retiree Health Care Trust
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.
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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.
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.