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Thursday, 24 April 2014

Time to shift gear

Memo to Fiat on Chrysler listing: Drop it!

Fiat’s Chief Executive Sergio Marchionne passes for a tough and canny negotiator. These skills have brought him control over 58.5 percent of Chrysler at a bargain basement price of less than $2 billion. However, in his attempt to buy the remaining 41.5 percent currently owned by VEBA, a healthcare trust affiliated with the United Auto Workers, Marchionne may over-egg the pudding.

Fiat and VEBA have been embroiled for more than a year in a spat about Chrysler’s appropriate valuation. The tussle, which already involves a court case, may lead to the listing of a 16.6 percent Chrysler stake in the coming months.

Fiat can avoid that outcome - and it should. A Chrysler IPO will mean time and money. The full integration of both carmakers would be delayed, postponing Fiat’s access to Chrysler’s pool of liquidity. The streamlining of the group, which is supposed to generate further cost synergies, would be delayed.

Furthermore, the longer the dispute drags on, the higher the price Fiat will have to pay. The American economy and its carmakers are in recovery. The market value of the country’s carmakers has soared in recent months. General Motors and Ford shares are up 53 percent and 68 percent, respectively, in the last year. By the same logic, Chrysler is getting more expensive by the day. In April, UBS estimated the value of VEBA’s stake at $3.85 billion. By June, the bank reckoned it was worth a billion dollars more. Since then, automakers’ shares have gained another 10 percent to 13 percent.

Listing Chrysler on the stock exchange would make these value gains more visible. It is even possible that investors - knowing that Fiat has few choices but eventually acquiring all outstanding Chrysler shares - might drive Chrysler’s share price above its fundamental value.

Fiat’s offers so far are valuing VEBA’s stake at around $2.5 billion. It could afford a more realistic price of $5 billion or more - which would still make its acquisition of Chrysler an overall bargain. Concerns about overleverage could be dealt with by raising fresh capital - either by issuing new shares or, possibly, by spinning off Ferrari. It’s time for Marchionne to pay up and move on.

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Context News

Chrysler has almost finished the preparatory work for an initial public offering, the chief executive of both the U.S. carmaker and its parent, Fiat, told the Financial Times on Sept. 16. According to CEO Sergio Marchionne, the American carmaker will be ready to file IPO documents this week.

Fiat currently owns 58.5 percent of Chrysler and wants to fully merge with its American peer. It has been negotiating for months with the U.S. VEBA healthcare trust, which owns the remaining 41.5 percent and is affiliated with the United Auto Workers union. Marchionne believes the trust’s asking price is too high.

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