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Fiat threatens pullback from Chrysler commitments

By Tommaso Ebhardt and Lee Spears
Bloomberg News

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Fiat SpA, the Italy-based majority owner of American automaker Chrysler Group LLC, threatened to pull back from future commitments if a health-care trust succeeds in selling its Chrysler stake in an initial public offering of stock.

“Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us,” Chrysler said in the filing for the share sale. “This could include decisions on capital preservation and allocation, investments and locations of production facilities.”

Realigning the partnership would be a worst-case scenario for Fiat CEO Sergio Marchionne, who runs both automakers and is looking to use the sale process to get the market to weigh in on Chrysler’s value and end a stalemate preventing a full merger.

The warning to the United Auto Workers retiree trust (also known as a VEBA, or Voluntary Employee Beneficiary Association) is ultimately meant to prevent the trust from selling shares on the market and instead force an agreement with the Italian automaker on the price. The VEBA owns the 41.5 percent of Chrysler not held by Fiat.

Marchionne is offering at least $1 billion less than what the trust wants and banking on investors being uninterested in paying a premium in an IPO opposed by Fiat.

“Marchionne is laying his cards on the table and very clearly explaining that a Chrysler IPO is not in Fiat’s interest as the ownership of Chrysler is crucial,” said Giuliano Noci, a marketing professor at Milan Polytechnic, in a telephone interview. “He doesn’t hide his real intentions.”

Fiat shares have risen 63 percent this year, valuing the Turin, Italy-based automaker at $10.4 billion.

Marchionne, 61, has spent the past four years seeking to unify the companies and create a global player with the scale to compete with Toyota, General Motors and Volkswagen. Buying the trust’s stake would give Fiat access to Chrysler’s $12 billion in cash to help fund an economic turnaround in Europe, where Fiat is losing money and market share.

Fiat said Tuesday in a statement there “can be no assurance” a listing will take place and that the number of shares to be offered and price range have not yet been determined. The proposed sale by the trust is for $100 million in stock, an amount used to calculate fees that may change, according to a regulatory filing that took place Monday.

“It’s a game of chicken,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business and Michigan Law School. “If the IPO prices too low, the VEBA loses. If it prices higher than Marchionne wants to pay, he is cornered, and will end up paying a premium.”

The trust received the holding as part of Chrysler’s government-backed bankruptcy in 2009. Fiat has the right to buy the entire stake for $4.25 billion, plus 9 percent annual interest calculated from January 2010, which would amount to about $6 billion at the end of this year.

If the IPO does go ahead, it would follow GM’s own $18 billion offering in November 2010 and the revitalization of Detroit’s auto industry after the government-led bailouts. U.S. auto sales totaled 1.5 million in August, the most in one month since May 2007.

Fiat has already exercised options to buy 10 percent of Chrysler from the VEBA and has rights to buy an additional 6.6 percent next year. Fiat has yet to take possession of the holding as the two sides fight in court over the price. The VEBA, which has the right to request an IPO for the remaining 24.9 percent, asked in January to register a 16.6 percent stake.


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