November 18, 2017

High & Low Finance: Chrysler’s Owners Are Racing for the Cliff

You call him Chrysler’s chief executive.

There has never been a proposed I.P.O. like Chrysler’s.

How is it different?

First, the preliminary prospectus filed by the company this week has only one underwriter listed, JPMorgan Chase. A typical offering by a large company will have at least a few underwriters. Every investment bank wants some of the profits, and the company wants maximum distribution. When General Motors, out of bankruptcy and newly profitable, went public in 2010, 10 underwriters were listed on the first prospectus, including all the big ones. Many more were added before the offering took place.

Here, it is quite likely that the rest of Wall Street stayed away because they feared alienating the very company whose stock was being sold.

Second, the G.M. prospectus, as with every other I.P.O. prospectus I have ever seen, tried to put its best foot forward. Within the bounds of securities laws, the prospectus writers did their best to attract investors. Chrysler’s, within the same bounds, is clearly aimed at alienating investors.

As such, it may become something of a collector’s item. A game of chicken between Chrysler’s two owners — Fiat, the Italian automaker, and a trust that provides benefits to Chrysler’s retirees — has burst into the open.

Each thinks the other is being unfair and is using threats to force concessions. If no one backs down, it is quite possible the company could be destroyed — something that would be disastrous to both. Each seems to be confident that the other will give in eventually.

But games of chicken can get out of hand.

The 2009 bankruptcies and bailouts of Chrysler and G.M. were messy. Some creditors were outraged, contending that they deserved more and that unionized workers deserved less. In both companies, the Treasury and trusts for workers’ benefits wound up owning big stakes.

At Chrysler, which was woefully mismanaged by its two previous owners — Germany’s Daimler and Cerberus, the American private equity firm — the Obama administration concluded that the company’s best hope for survival was to find an automaker with a high-quality management team that could be a valuable partner for a company that had been left with no presence outside North America. Fiat was interested and seemed ideal. It had no United States presence and had technology Chrysler could use. Chrysler had technology Fiat could use. Sergio Marchionne, Fiat’s chief executive, became Chrysler’s chief executive as well.

Most of Chrysler’s stock was owned by a retiree trust, a voluntary employee benefits association, or VEBA. The United States and Canadian governments had stakes as well — thanks to their bailout — and Fiat had a stake.

The combination seems to be working well, benefiting both companies. Chrysler is doing better than the parent these days, and in the end it may turn out that Chrysler will have rescued Fiat as much as or more than Fiat rescued it.

That Chrysler seems to be outperforming Fiat now may, however, say more about geography than competitiveness. The American car market is surging, while the Western European market is in a deep recession. In Italy, Fiat’s home market, new-car registrations are running at the lowest level in more than 30 years.

No one doubts that the two companies need each other, or that Fiat wants to buy the rest of Chrysler. And that is where the game of chicken is being played.

Under agreements that appear to have been poorly drafted, Fiat has a right to buy a substantial part of the VEBA’s interest every six months. The price is determined by a complicated formula that is supposed to represent what a market price for the stock would be if it were public.

It looks as if that formula may not be doing a very good job. When Fiat tried to make the first purchase last summer, it calculated the price as being about a third less than what it had voluntarily paid the Treasury a year earlier in a negotiated deal. The VEBA said the formula, under its interpretation, called for a much higher price. They went to court in Delaware to hash it out.

A ruling this summer gave Fiat a victory on important parts of the case but left others for a future trial. One detail still to be determined is whether the formula allows Fiat to use extraordinary losses to reduce the price it has to pay while ignoring similar gains that would raise the price. That seems to hinge on the meaning of a word (“charge”) that went undefined in the original document.

There are more such purchases scheduled to happen. For the VEBA, avoiding the formula might be very helpful. And the agreement provides that the formula vanishes with an I.P.O. After that, the market price would be used.

That is one reason that the VEBA may have had for exercising its right to sell some of its stock in an I.P.O.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/09/27/business/chryslers-owners-race-for-the-cliff.html?partner=rss&emc=rss

Chrysler Posts a Loss, but Sales Improve

The company, which is majority owned by the Italian automaker Fiat, reported a loss for the quarter of $370 million, mostly because of a $551 million one-time charge to repay loans from the United States and Canadian governments.

Without the charge, Chrysler said it would have posted net income of $181 million. A year ago, the company lost $172 million. In the first quarter, it made $116 million.

The automaker also reported a 30 percent increase in revenue to $13.7 billion, compared to $10.5 billion in the same period a year earlier.

The stronger demand for its cars and trucks was an indication that its comeback from bankruptcy in 2009 was accelerating, said Sergio Marchionne, Chrysler’s chief executive.

“We recognize the distance we have to travel,” Mr. Marchionne said in a conference call with analysts and reporters. “The focus now is on rebuilding a great car company.”

Chrysler, the smallest of the three Detroit car companies, said that new products including the Jeep Grand Cherokee helped it increase its share of the American market to 10.6 percent, up from 9.4 percent in the second quarter of last year. Chrysler’s global sales increased 19 percent over all from the year-earlier period.

“There is no doubt that Chrysler group has taken a huge step forward this quarter,” said Mr. Marchionne, who is also chief executive of Fiat, which owns 53 percent of the Detroit automaker.

Mr. Marchionne said that Chrysler’s resurgence should gain momentum now that it had retired its government loans. The company has paid back its entire $7.6 billion in government loans.

“Refinancing our debt and repaying our government loans six years early reinforces our conviction that we are on the right path to rebuilding this company and restoring it to its rightful place in the global automotive landscape,” Mr. Marchionne said.

Chrysler is on track, Mr. Marchionne said, to achieve full-year revenue of $55 billion and earnings of $200 million to $500 million, excluding charges.

The earnings were the first reported by the company since Fiat took a majority ownership stake last week by purchasing stock previously held by the American and Canadian governments.

Chrysler and Fiat will consolidate their financial results and further meld their management teams.

Mr. Marchionne is expected to appoint senior executives soon to oversee engineering, purchasing and other areas for both automakers, as well as regional chiefs for the combined companies.

He declined to comment on specific appointments or whether he would continue to serve as chief executive as Chrysler. But the new structure, he said, would be intended to take advantage of the scale and resources of both companies.

“What is important for us is that we start acting as a team that manages the business on a global scale,” he said.

Industry analysts said it was too soon to assess the prospects for an integrated Fiat-Chrysler organization. “But Chrysler has been making a remarkable recovery over the last several months and is proving to be an important and valuable asset for Fiat,” said Michelle Krebs, a senior analyst at the automotive-research Web site, Edmunds.com.

Article source: http://feeds.nytimes.com/click.phdo?i=08eb2242694b2bb00c10cbaae69d9a6e

DealBook: Fiat to Raise Its Chrysler Stake to 46%

A Fiat dealership in Milan.Luca Bruno/Associated PressA Fiat dealership in Milan. Fiat seeks “effective legal control” of Chrysler.

7:01 p.m. | Updated

Fiat, the Italian automaker, said on Thursday that it would raise its stake in the Chrysler Group to 46 percent and acquire a majority stake in the company this year.

Fiat increased its stake to 30 percent this month. It said it would pay $12.3 billion to acquire an additional 16 percent once Chrysler paid off the roughly $7 billion it owes the American and Canadian governments.

Fiat, based in Turin, Italy, and Chrysler, based in Auburn Hills, Mich., are working with their banks to refinance the debt before the end of June. Fiat will then exercise a $1.3 billion equity call option for the 16 percent stake, with the money adding to Chrysler’s capital. Fiat will draw on its cash reserves of more than 14 billion euros ($20.4 billion) to buy the stake.

Sergio Marchionne, the chief executive of both companies, said in a conference call with analysts that Fiat expected to obtain an additional 5 percent of Chrysler this year, raising its total to 51 percent and giving it “effective legal control.”

Fiat has had management control of Chrysler since a 2009 deal with the Obama administration gave Fiat a 20 percent stake in the American company in exchange for technology and financial aid.

In the meantime, Mr. Marchionne said, raising Fiat’s stake to 46 percent will allow the two companies to consolidate their results for accounting purposes and “provide a much-needed base for a fuller operational integration of these businesses.”

Asked if he was talking about a full merger, Mr. Marchionne said, “I’ve always said from a governance stance that it doesn’t make sense to have two separate companies.” He cautioned that he could not predict “how we might get there,” emphasizing that integration at the business level was more important than legal integration.

Mr. Marchionne has been saying for some time that he hoped to hold an initial public offering of Chrysler shares as early as this year, but he has been more cautious recently. Speaking on that subject in the conference call, he said, “I think a lot of it depends on market conditions and the performance of Chrysler.”

He noted that any stock offering would be subject to discussions with Chrysler’s Voluntary Employee Benefit Association, which received a majority of the nearly worthless stock in Chrysler at the time of the government rescue in exchange for the money it was owed by the company.

As part of the 2009 deal with the Obama administration, the Italian company agreed to a series of performance goals that, once met, would allow it to increase its holdings. On Jan. 10, Fiat increased its stake to 25 percent, after meeting the first target, laying the groundwork for American production of an engine based on Fiat’s FIRE family (for fully integrated robotized engine).

On April 12, Fiat said it had met the second target, producing Chrysler sales of at least $1.5 billion outside of North America, and raised its stake to 30 percent. It said it expected to meet the last of the three targets — sales in the United States of a Fiat platform car that gets 40 miles per gallon — by the end of the year.

Shares of Fiat, which trade in Milan, were up 4.6 percent in afternoon trading.

On Wednesday, Fiat said first-quarter revenue rose 7.1 percent, to 7 billion euros ($10.2 billion), from the period a year earlier. It shipped 518,600 passenger cars and light commercial vehicles in the quarter, down 2.6 percent from the period a year earlier. Net profit rose 24 percent, to 37 million euros.

It will break out Chrysler earnings next month.

Article source: http://feeds.nytimes.com/click.phdo?i=4942b97da0d05b43ebb00e0cf44118ba