Crain News Service and wire reports
DETROIT (Sept. 24, 2013) — Chrysler Group L.L.C. was forced to file paperwork this week for an initial public offering by its second-biggest shareholder — the United Autoworkers (UAW) retiree healthcare trust fund — prompting majority shareholder Fiat S.p.A. to say it could scale back its commitment to the U.S. auto maker.
Italy's Fiat, which owns 58.5 percent of Chrysler, wants to take full control and buy out the rest of the stock owned by the UAW trust fund, but has balked at the more $5 billion being demanded.
In response, the UAW trust exercised a right enshrined in Chrysler's 2009 government-financed bankruptcy to go forward with an IPO, stepping up pressure on Sergio Marchionne, CEO of both auto makers, to reach a deal.
Bankers and analysts view the filing as a move by the UAW trust to extract a better offer from Fiat and many wager that an IPO will never take place.
Realigning the partnership would be a worst-case scenario for Mr. Marchionne, who is looking to use the sale process to get the market to weigh in on Chrysler's value and end the stalemate preventing a full merger.
The warning to the UAW retiree trust is ultimately meant to prevent the trust from selling shares on the market and instead force an agreement with the Italian auto maker on the price. Mr. Marchionne is offering at least $1 billion less than what the trust wants and banking on investors being uneager to pay a premium in an IPO opposed by Fiat.
If Fiat and the Trust reach a settlement, the IPO could be withdrawn.
"Mr. Marchionne is laying his cards on the table and very clearly explaining that a Chrysler IPO is not in Fiat's interest as the ownership of Chrysler is crucial," said Giuliano Noci, a marketing professor at Italy's Milan Polytechnic. "He doesn't hide his real intentions."
Fiat responded angrily to the Sept. 23 filing, which raises critical questions about when and even if Mr. Marchionne can merge the two companies to form the world's seventh-largest auto group. The Fiat-Chrysler alliance was one of the centerpieces of the Obama administration's 2009 restructuring of the U.S. auto industry.
"Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us," Chrysler said in its S-1 filing with the U.S. Securities and Exchange Commission. "This could include decisions on capital preservation and allocation, investments and locations of production facilities."
Chrysler added that Fiat is also reconsidering the terms on which the Italian auto maker will continue to share its technology, vehicle platforms, engineering expertise and other resources with Chrysler.
"Fiat is saying that Chrysler is worth less if we don't get that full integration," said Richard Hilgert, an analyst with investment research firm Morningstar. "It's a shot across the bow of the UAW."
The IPO poses challenges and risks for the company and the trust. Among the risks that Chrysler disclosed in its prospectus is the rupturing of its alliance with Fiat, which the U.S. auto maker said would have "a material adverse effect on our business prospects."
Potential investors may also be wary of participating in Chrysler's IPO because the natural buyer for the trust's shares, Fiat, is not expected to participate. If the sale of stock is completed, only a portion of the company's shares would trade.
Analysts say that could spark sharp swings in the company's share price, potentially lowering the company's market value and affecting the value of the trust's remaining shares.
No 'sustained profits'
The IPO, which for the purposes of calculating the regulator's registration fee was estimated at up to $100 million, will be underwritten by JPMorgan. Mr. Marchionne said in mid-September that if an IPO happens, it is likely to take place in the first quarter of 2014.
Chrysler did not say how many shares will be offered in the sale. The UAW trust fund intends to use cash proceeds from the sale to pay for medical benefits for blue-collar Chrysler retirees.
Under Mr. Marchionne, Chrysler has mounted an unlikely comeback that has pushed its valuation to around $10 billion, according to some analyst estimates. The U.S. auto maker is now propping up Fiat's bottom line, rather than the other way around.
Chrysler's success has complicated Mr. Marchionne's efforts to buy out the fund. The more than $5 billion price tag pushed for by adviser Brock Fiduciary represents the highest possible payout under the terms of the bankruptcy agreement.
Last week, Mr. Marchionne hired former U.S. auto task force leader Ron Bloom, chief architect of Chrysler's 2009 bankruptcy restructuring, to advise Fiat in its negotiations.
Mr. Bloom was instrumental in convincing the UAW to accept a stake in Chrysler as part of the bailout package. He also is advising Detroit retirees in the Detroit municipal bankruptcy.
Chrysler and Fiat currently are forced to manage their finances separately, even though they are run by the same executive team. A full merger would make it easier—but not automatic—to combine the cash pools of the two companies, giving Fiat more funds to expand its product lineup.
Chrysler had cash and cash equivalents of $12.2 billion as of June 30. Its net profit in the first half of the year fell 21 percent to $764 million from $966 million in the previous year.
Chrysler remains heavily reliant on North America, which accounted for 90 percent of vehicle sales in the first half of 2013. It added that its lineup of smaller, less expensive cars are not as competitive as its larger, more profitable vehicles.
"Despite our recent financial results, we have not yet reached a level of sustained profitability for our U.S. operations," Chrysler said in the S-1 filing.
An unusual history
The IPO filing reflects the unusual set of events that shaped the restructuring of the U.S. auto industry.
The UAW trust, a type known as a voluntary employee beneficiary association was created in 2007 as a way for General Motors Co., Ford and Chrysler to offload their obligation to pay retiree healthcare benefits.
The trust was initially supposed to be funded with cash. But as part of the 2009 financial crisis, it agreed to take stakes in GM and Chrysler in lieu of cash.
"The Chrysler IPO is a textbook example of the difficulties that can occur when debt is converted into an ownership stake, as it was during Chrysler's bankruptcy," said Jack Nerad, executive editorial director and market analyst of auto research firm Kelley Blue Book.
The IPO filing comes the same day GM bought back preferred shares held by the UAW trust for about $3.2 billion.
The trust is carved up into three separate accounts that pay for medical benefits for GM, Ford and Chrysler retirees. The trust is barred by law from using the assets of one account to defray costs of another.
Reuters, Bloomberg and David Phillips contributed to this report, which appeared on autonews.com the website of Automotive News, a Detroit-based sister publication of Tire Business.