Investors Love Fiat-Chrysler Now, But Long-Term Viability Questioned

Jan 2 2014, 8:36am CST | by

Investors Love Fiat-Chrysler Now, But Long-Term Viability Questioned
Photo Credit: Forbes Auto

Stock markets jumped for joy following news Fiat will soon control all of its U.S. affiliate Chrysler, but experts doubted that the combined companies would ever be able to effectively challenge global leaders like Toyota, General Motors and Volkswagen.

They also wondered if the money spent might have been put to better use to salvage Fiat’s stalled new model programme in Europe, or invest in its luxury pretender Alfa Romeo, starved of new cars for years, and poised to relaunch in the U.S.

Buying out the union was expensive, but will give the company a freer hand in taking big decisions to restructure itself.

Others worried about the huge debts that Fiat has now built up, and that in the future the Italian company might be forced to sell its high-profile Ferrari and Maserati sports car subsidiaries.

Fiat agreed a $4.35 billion deal to buy the 41.6 per cent stake it didn’t already own held by the United Auto Workers healthcare trust. The deal is expected to be completed by January 20. The trust will receive $3.65 billion for its shares and $700 million in four instalments.

Fiat-Chrysler CEO Sergio Marchionne, driving on the merger of the two companies, has been an ardent supporter of the need for scale to compete in world markets.  Fiat took an initial stake in Chrysler when it was bankrupt for free, built this up by fulfilling the terms of an agreement with the U.S. government, then bought small stakes bringing it to its current level before buying the rest from the trust.

On the Milan stock exchange Thursday morning, Fiat shares jumped up to 16 per cent on the news. Investors had been nervous wondering if the deal might stall because of the tough union stance in extracting the maximum value, and also because of fears it might be financed by selling more shares. In the event, it appears the union won a deal on the high side but within expectations, and was financed in part by mobilizing funds from Chrysler.

Professor Ferdinand Dudenhoeffer of the Centre for Automotive Research (CAR) at the University of Duisberg-Essen in Germany said Fiat had three options. It could reduce its debt, invest in Fiat’s starved new product program, or buy out the union.

“Marchionne decided to buy them out. He doesn’t trust this shareholder. He wants to restructure and doing that, trade unions are not the best partner. He wants to find as many economies of scale as possible and having trade unions as a partner would be a handicap. He’ll be going all-out to do that in the next 12 months,” Dudenhoeffer said.

Philip Watkins, auto analyst with Citi Research said that after this deal, Fiat debt will hit about 10 billion euros ($13.7 billion), making it most indebted mass car maker in Europe.

“Although credit market conditions are benign, we continue to have concerns about the sustainability of this heavy debt burden,” Watkins said.

Watkins said investors though will like the deal for four reasons –

  • Ending of uncertainty.
  • The price slightly less than press reports suggested.
  • Innovative financing structure that minimizes the call on Fiat ex-Chrysler’s liquidity.
  • Fiat’s comment that it doesn’t plan a share issue.

Bernstein Research analyst Max Warburton said the speed of deal, and the fact the Fiat managed to wrap up a complete agreement, was surprising.

“The most surprising aspect of all is the source of funding – over 50 per cent of the upfront cash will come from Chrysler itself,” Warburton said.

CAR’s Dudenhoeffer doesn’t expect Fiat to sell Ferrari or Maserati, because of their strong profitability.

Will the combination of Fiat and Chrysler allow it compete effectively on the world stage with the current leaders?

“I don’t believe in the next five years it will be. They have to compete with strong contenders like Nissan-Renault, Kia-Hyundai, General Motors, Ford, Toyota, and Volkswagen. They have much more strength than Fiat-Chrysler. I don’t believe Fiat-Chrysler will become one of the major, important car manufacturers. All Marchionne can do is to find a sustainable long-term solution as a medium-sized company,” Dudenhoeffer said.

Source: Forbes Auto

 
 

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