It could turn out to be a lot more costly for Fiat to acquire a chunk of Chrysler stock now held by the United Auto Workers Union’s health care trust – possibly more than the Italian maker can afford as it struggles to fix its debt-ridden European operations.
Fiat has been steadily expanding its stake in Chrysler in the wake of the U.S. maker’s 2011 bankruptcy and now owns nearly two-thirds of Chrysler stock – or will if it can complete the acquisition of a 3.3% stake it wants to purchase from the UAW. But the union is arguing that the stock is worth $342 million, not the more modest $139.7 million that Fiat has proposed.
Both sides have taken the case to court and will wait to see which figure is deemed accurate. But the decision could have a bigger, long-term impact as Fiat eventually wants to buy the entire 41.5% stake the UAW received after Chrysler’s bankruptcy.
Those shares are held by the union’s health care trust, known as a Voluntary Employee Benefit Association, or VEBA, which was set up in the years leading up to Chrysler’s Chapter 11 filing to help get health care costs off the maker’s books. In lieu of the billions of dollars Chrysler owed the VEBA the trust got the stock in the company as it emerged from bankruptcy.
But the expectation has been that the UAW would ultimately monetize its holdings by selling off its stake to Fiat in chunks every six months.
Fiat has been steadily expanding its stake, starting out with 20% of Chrysler when it took control of the maker in mid-2009, then adding more in 5% increments as it met a series of government mandates, including the introduction of a new model that could deliver over 40 mpg. Fiat gained even more stock when it paid off the government’s bailout loans.
Eventually, CEO Sergio Marchionne has indicated his goal of acquiring the entire UAW stake, but the union refused to complete the planned sales of 3.3% of its stake in July, accusing Fiat of offering a payout that was “substantially below market value.” The union wants a figure nearly three times as large.
“Sale of the called shares at the price calculated by Fiat would constitute a transaction prohibited by applicable federal law,” according to the health care trust.
Part of the problem is what Fiat insists was a “clerical error” in setting out the rules by which the sale price is determined.
Now, both sides want a judge to decide who is right.
For both, the decision could be crucial. The union wants to maximize the funding of its retiree trust to ensure it remains viable in an era when health care costs continue rising rapidly.
Fiat, meanwhile, is under increasing financial pressure due to the problems it faces in the crumbling European automotive market. Marchionne recently announced a major spending program to try to right the home operations.
“It is clear that, given Fiat’s capital requirements and the availability of liquidity today … it is highly unlikely that we will be able to finance the take out of the minority stake in Chrysler — unless something extraordinary happens and we find liquidity through other means,” Marchionne acknowledged when announcing his new plan for Fiat.
But experts say there are alternatives that could raise the necessary cash, including a long-anticipated stock offering for Fiat’s Ferrari brand.
On the positive side, after a slow start Fiat has been gaining momentum in the U.S. market and will introduce a critical new offering, the 500L crossover, at the upcoming LA Auto Show.
Tags: Sergio Marchionne, auto news, car news, chrysler news, chrysler stock, fiat chrysler stock, fiat news, paul a. eisenstein, paul eisenstein, thedetroitbureau, uaw chrysler, uaw fiat go to court over chrysler stock, veba chrysler stock