Doubts if US$4.4b takeover for Chrysler helps Fiat trim losses
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Chrysler helps Fiat trim losses
Fiat has struck a US$4.35 billion deal to gain full control of Chrysler Group LLC, but doubts remained over whether the Italian carmaker can use the merger to cut losses in Europe.
Investors welcomed the deal struck by Chief Executive Sergio Marchionne under which Fiat will buy the 41.46 percent of the No. 3 US automaker it does not already own, without raising funds from the stock market.
Marchionne, who has run both companies since Chrysler’s 2009 US government-funded bankruptcy restructuring, aims to merge the two into the world’s seventh-largest auto group.
However, analysts worried about how the deal will increase Fiat’s already heavy debt burden, despite a relatively low price negotiated by Marchionne after more than a year of talks.
The deal was announced late on Wednesday, which aims to combine the two automakers’ resources and rejuvenate Fiat’s product lineup.
“They paid less than the market had expected and there will be no capital increase to fund this,” a Milan-based trader said.
“While it’s still to be seen how this will bode for Fiat’s future, this is a good start to the year for a company that has had quite a tough ride recently, especially in Europe.”
Fiat will buy the stake in the profitable US group from a retiree healthcare trust affiliated to the United Auto Workers union. The trust will get US$3.65 billion in cash for the stake, US$1.9 billion of which will come from Chrysler and US$1.75 billion from Fiat.
After the deal closes, Chrysler has vowed to give the UAW trust another US$700 million over three years.
However, Citigroup analysts said Fiat’s debt would become the highest for any European motor manufacturer.
“Group net debt will rise to around 10 billion euros (US$13.8 billion) upon completion of this transaction ... leaving it the most indebted OEM (original equipment manufacturer) in Europe,” they said in a note. “We continue to have concerns about the sustainability of this heavy debt burden.”
It remains to be seen whether the merger will cut Fiat’s losses in Europe, where the company had promised to break even by 2016. Marchionne’s plan depends on Fiat’s ability to share technology, cash and dealer networks with Chrysler.
A full merger will make it easier, but not automatic, to combine the cash of both firms, giving Fiat more funds to grow its product lineup.
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