In a move to circumvent an initial public offering of the remaining stake of Chrysler Group (FIATY.PK) that was not formerly held by Fiat SpA, the Italian automaker has announced a $4.35 billion dollar deal to purchase the outstanding 41.46 percent of Chrysler from a retiree health care trust that is bonded to the United Auto Workers union.
Fiat shares leapt at the news, though there are fears that Fiat’s full control of Chrysler will only add to what is already a fairly substantial debt burden despite the relatively low price that Fiat CEO Sergio Marchionne was able to score, Reuters reports. ”They paid less than the market had expected and there will be no capital increase to fund this, so no wonder the stock is flying,” the news service quoted a Milan-based trader as saying.
Under the terms of the deal, the trust will receive $3.65 billion in cash for its portion, with $1.9 billion being shelled out by Chrysler and $1.75 billion from Fiat. Upon completion of the deal, Chrysler will further commit itself to giving the trust an additional $700 million over three years. That all sounds well and good, though Citigroup analysts noted that Fiat’s debt would swell to form the highest of any European motor manufacturer, Reuters reports.
“Group net debt will rise to around 10 billion euros ($13.8 billion) upon completion of this transaction … leaving it the most indebted OEM (original equipment manufacturer) in Europe,” Citigroup’s note reads, per Reuters. “We continue to have concerns about the sustainability of this heavy debt burden.”
Others, however, are feeling more confident that Fiat’s purchase of the remaining Chrysler shares will help boost the brand’s prospects in Europe, where Fiat has been having an especially difficult time. ”While it’s still to be seen how this will bode for Fiat’s future, this is a good start to the year for a company that has had quite a tough ride recently, especially in Europe,” the Milan trader told Reuters.
That strategy has to kick in pretty soon, as Fiat has promised that it would break even on its European assets by 2016. Reuters notes that as of right now, the finances of each company are managed separately. After the merger, though, it will be easier — though not automatic — for the two companies to combine cash pools.
Chrysler will be serving as the profit engine for Fiat for the time being, and the Italian automaker plans to open up production of Jeeps and a new line of Alpha Romeos in Italy to help perk up the country’s sagging economy. But once boiled down, both companies will need some hefty investments made to regain market share, though it’s not clear where that money will be spent.
“The bad news is that [Marchionne has] spent no money for the past two years at Fiat because he was waiting for this to happen,” a London-based analyst at a major investment bank told Reuters. ”He’s not getting any exposure to European recovery. The U.S. asset is not as good as its peers and needs money spent on it. Marchionne has shown he can get the job done but I’m still buying a dream.”