Heading for which exit?

30 Oct 2013 By Antony Currie

Chrysler’s valuation needs to hit $18 billion to justify an initial public offering. That’s the point where the union trust fund that owns 41.5 percent of the Detroit automaker would reap more than it could get from controlling shareholder Fiat. But it’s also way more than either owner has ever considered to be a reasonable price.

The two have been at loggerheads over price for more than a year, ever since Fiat’s offer for an additional 3.3 percent stake valued the company at $4.2 billion – $6 billion when higher offers for two more 3.3 percent slugs are included. The trust fund pegged the value at $10.3 billion.

The gap spawned a still-unresolved lawsuit and a later attempt by Fiat and Chrysler Chief Executive Sergio Marchionne to strike a deal for the trust fund’s entire stake. A 2009 agreement divvying the company up after its bankruptcy set the maximum amount the Italian automaker would pay at $4.25 billion, plus compound interest of 9 percent starting in 2010.

The tally, including interest, now stands at $6 billion, effectively valuing Chrysler at $14.5 billion. The cost to Fiat would be $750 million less, though, as it could keep the union’s share of undistributed dividends, according to Bernstein research. Marchionne says he won’t pay that much, quipping last month the union should “buy a lottery ticket” instead.

He may be bluffing. But the problem for the trust fund, assuming it’s set on getting $6 billion for its holdings, is that going ahead with an IPO makes its task harder. That’s because the three slugs accounting for the 9.9 percent the two are already haggling over remain subject to a court battle going Fiat’s way.

Stripping out those slugs means the fund still needs to get $5.4 billion for 31.5 percent of the company. That requires a $17.2 billion company valuation, on top of which the fund would have to give up as much as $900 million in dividends over the next two years due to its lower holdings.

It’s not impossible. Marchionne reckons Chrysler’s pre-tax margin could hit 8 percent in 2015, close to what GM makes now. That could mean a $4 billion profit, assuming revenue increases 5 percent. Pop that on a multiple of five times earnings, a discount to where GM currently trades, and the union may be in luck.

It’s a gamble, though, and not just because of earnings. The 2009 agreement also implies Fiat might be able to claw back anything the union gets for its shares above the maximum amount – though the IPO might nullify that, according to Bernstein.

That means the stock offering could end up being a lot of work for nothing. The negotiating table may be more palatable.


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