With Fiat and the United Auto Workers Union unable to come to a compromise on the price of Chrysler stock, it’s going to be up to a judge to decide – a verdict that could be worth $100s of millions.
But the move could end an impasse that has prevented the Italian maker from moving ahead with its long-term goal of buying up more of its U.S. alliance partner. The court’s eventual ruling could also determine what happens if an when Chrysler stages a long-discussed initial public stock offering, or IPO.
Fiat is apparently reviewing financing options with banks to strengthen its balance sheet in preparation to buy out the minority stake in Chrysler Group LLC now held by the UAW’s Voluntary Employee Benefit Trust or VEBA.
Sergio Marchionne, Fiat and Chrysler chief executive officer, has held talks with banks to help pay for at least some of the 41.5% now controlled by the trust, which is responsible for the medical bills of Chrysler retirees. A final deal may take months, however, because Fiat and the trust disagree over the value of the shares.
Marchionne is studying various options including a bridge loan to complete the deal, two people quoted by the Bloomberg news service said. The Italian carmaker ultimately may pay around $3 billion to buy the remaining stake, according to an estimate from Goldman Sachs Group Inc.
“The market is going to determine the value of the VEBA’s interest. It’s not going to be me,” Marchionne said last week.
On Jan. 30, when Fiat reported year-end earnings, Marchionne said the company has begun preparations for Chrysler’s public stock offering – something he has repeatedly postponed.
“It is my objective, regardless of how we get there, for Fiat and Chrysler to effectively end up being one combined corporate entity,” he said.
Meanwhile, one estimate of the ultimate value of the Chrysler stock held by the trust could be delivered at the end of March by a master appointed by the Delaware Court of Chancery. He is expected to deliver a report that could establish the value of the shares now owned by the VEBA. The report could become the starting point for final negotiations to sell that stock to Chrysler or hold an IPO.
Fiat owns 58.5% of Chrysler and has already offered to purchase a portion of the trust’s shares. The trust wants Fiat to pay $342.9 million for the 3.3% stake it holds in the Detroit auto maker, but that is more than double what Fiat has offered.
The trust also said in court filings that Fiat’s initial $139.7 million offer was substantially below fair market value and noted Fiat paid a higher price for Chrysler shares that it purchased from the U.S. Treasury. The figures used by both side in the court documents place the value somewhere between a base of $1.8 billion and $4.3 billion on the high side.
Fiat offered $155 million for 54,154 shares last July, then offered $198 million for an additional 3.3% stake earlier this year. The UAW trust claims the shares are worth more than twice as much.
“An IPO may be the most effective way to find a price for the rest of Chrysler,” Warburton wrote. He attended a meeting last week in New York with CEO Marchionne and other analysts and investors.
Some analysts have questioned whether Fiat, which is struggling in Europe, has the financial strength to buy all of the UAW’s stake in Chrysler. But Marchionne has said Fiat’s cash reserve of $14.7 billion is enough to support the maker’s restructuring plan in Europe as well as a merger with Chrysler.
Chrysler shares haven’t traded publicly since 1998 when the company was purchased by Daimler-Benz for nearly $39 billion. The so-called DaimlerChrysler merger of equals collapsed in 2007 with the German partner paying the equity giant Cerberus Capital to take Chrysler off its hands.
That move quickly collapsed, however, and the U.S. automaker plunged into bankruptcy in 2009, surviving only with the assistance of a government bailout. Fiat agreed to take control of Chrysler as part of the bailout, initially assuming a 20% stake in the U.S. company but quickly stepping its holdings as it met a series of challenges set out by the Obama Administration.
Under the terms of the U.S. government’s 2009 rescue, Fiat has the right to buy up as much as an additional 16.6% of Chrysler’s shares from the UAW trust through 2016 and Fiat initially sued the trust last summer to force the sale.
If the Delaware judge’s ruling favor’s Fiat’s position, the UAW trust could push for an initial public offering because it needs cash to pay for the medical care of retired UAW workers, the Warburton report said.