Hope for two struggling automakers – Fiat to acquire 35% of Chrysler

Published January 21, 2009 by Zane Merva

Italian automaker Fiat S.p.A. and American automaker Chrysler, LLC will partner. Announced late yesterday- the deal includes a 35% stake in Chrysler for Fiat and financial security for both companies.

the deal

Fiat would gain US manufacturing ability and would most likely sell some of its smaller cars as Chrysler models in the US
Fiat gains an initial 35% stake in Chrysler, but without cash investment
That stake could optionally be raised to 55% in the future
All ownership is transferred from Cerberus Capital, not from the 19.9% stake still owned by Daimler AG.
The “alliance” does not guarantee any capital funding from Fiat to Chrysler
Chrysler gains fuel efficient models, platforms, and powertrains offered by Fiat in return for the share
The UAW is said to support the acquisition

official press release

Fiat Group, Chrysler and Cerberus Announce Plans for a Global Strategic Alliance

Fiat S.p.A., Chrysler LLC (Chrysler) and Cerberus Capital Management L.P., the private investment majority owner of Chrysler LLC, announced today they have signed a non-binding term sheet to establish a global strategic alliance.

The alliance, to be a key element of Chrysler’s viability plan, would provide Chrysler with access to competitive, fuel-efficient vehicle platforms, powertrain, and components to be produced at Chrysler manufacturing sites. Fiat would also provide distribution capabilities in key growth markets, as well as substantial cost savings opportunities. In addition, Fiat would provide management services supporting Chrysler’s submission of a viability plan to the U.S. Treasury as required. Fiat has been very successful in executing its own restructuring over the past several years. The alliance would also allow Fiat Group and Chrysler to take advantage of each other’s distribution networks and to optimize fully their respective manufacturing footprint and global supplier base.

The proposed alliance would be consistent with the terms and conditions of the U.S. Treasury financing to Chrysler. Per the U.S. Treasury loan agreement, each constituent will be asked to contribute to Chrysler’s restructuring effort including: lenders, employees, the UAW, dealers, suppliers and Chrysler Financial. Such steps would greatly contribute to Chrysler’s long term viability plan. Completion of the alliance is subject to due diligence and regulatory approvals, including the U.S. Treasury.

As a consideration for Fiat Group’s contribution to the alliance of strategic assets, to include: product and platform sharing, including city and compact segment vehicles, to expand Chrysler’s current product portfolio; technology sharing, including fuel efficient and environmentally friendly powertrain technologies; and access to additional markets, including distribution for Chrysler vehicles in markets outside of North America, Fiat would receive an initial 35 percent equity interest in Chrysler. The alliance does not contemplate that Fiat would make a cash investment in Chrysler or commit to funding Chrysler in the future.

“This initiative represents a key milestone in the rapidly changing landscape of the automotive sector and confirms Fiat and Chrysler commitment and determination to continue to play a significant role in this global process. The agreement will offer both companies opportunities to gain access to most relevant automotive markets with innovative and environmentally friendly product offering, a field in which Fiat is a recognized world leader while benefitting from additional cost synergies. The deal follows a number of targeted alliances and partnerships signed by the Fiat Group with leading carmakers and automotive suppliers over the last five years aimed at supporting the growth and volume aspirations of the partners involved,” the CEO of Fiat Group, Sergio Marchionne said.

“A Chrysler/Fiat partnership is a great fit as it creates the potential for a powerful, new global competitor, offering Chrysler a number of strategic benefits, including access to products that compliment our current portfolio; a distribution network outside North America; and cost savings in design, engineering, manufacturing, purchasing and sales and marketing,” said Bob Nardelli, Chairman and CEO of Chrysler LLC. “This transaction will enable Chrysler to offer a broader competitive line-up of vehicles for our dealers and customers that meet emissions and fuel efficiency standards, while adhering to conditions of the Government Loan. The partnership would also provide a return on investment for the American taxpayer by securing the long-term viability of Chrysler brands in the marketplace, sustaining future product and technology development for our country and building renewed consumer confidence, while preserving American jobs.”

“This is great news for the UAW Chrysler team and we look forward to supporting and working with them to ensure Chrysler’s long term viability,” said Ron Gettelfinger, President United Auto Workers (UAW).

“We’re on board with this important strategic initiative as it will help preserve the long-term viability of our great company, its brands and of course UAW-Chrysler jobs,” said General Holiefield, Vice President, United Auto Workers (UAW).

Merger facts
Italy’s Fiat, which needs a partner to survive the auto crisis, has agreed to take a 35 percent stake in Chrysler LLC. Here are some key statistics about the two groups:
FIAT
• Key car brands are Fiat, Lancia and Alfa Romeo.
• Also owns luxury sports car makers Ferrari and Maserati.
• Has a market capitalization of about $7.5 billion.
• Trading profit for the entire group including Iveco trucks and CNH tractors was 802 million euros ($1.04 billion) in the third quarter on sales of 14.3 billion euros, up from 13.9 billion a year earlier.
• Main markets are Europe and Brazil. Nearly all of the profit for Fiat Auto comes from Brazil.
• Founded in 1899 and steered from 1902 by Giovanni Agnelli whose grandson Gianni, chairman from 1966, was a legend of Italy’s corporate scene, known as much for his society lifestyle as his business acumen.
• Has struck a series of alliances with other manufacturers, including India’s Tata and China’s Chery.
• In 2000, in the midst of a debt crisis, Fiat struck a deal with General Motors in which the U.S. car maker took a stake. The agreement was dissolved in 2005.
• Current CEO Sergio Marchionne took over in 2004 and put in place a plan to turn the car maker around which was successful, but the company has suffered like others in the current global crisis.
CHRYSLER
• Founded in 1925.
• Best-known models include Dodge, Plymouth and Jeep.
• Bought by Germany’s Daimler in 1998 in a $36 billion deal.
• Daimler sold 80.1 percent of Chrysler in 2007 to Cerberus Capital Management LP for $7.4 billion.
• Daimler retains a 19.9 percent stake which it said on Tuesday it still wanted to sell. It has been in talks with Cerberus about the stake.
• In October, Chrysler held merger talks with GM.
• Chrysler has taken $4 billion from the U.S. government as a loan to help it cope with the current global crisis and has also received $1.5 billion for its finance arm.