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

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Best Of FORBES: Amazon-HBO Deal And Should Amgen Break Itself Up?
FORBES hosted a Twitter Chat on Wednesday with author and contributor Micheline Maynard. She answered reader’s questions on the American auto industry. Read the recap here and check out her new e-book, Curbing Cars: ...
 
 
German Prosecutors Reveal F1's Bernie Ecclestone Was Blackmailed
German prosecutors have made the startling revelation that they believe Formula One’s chief executive Bernie Ecclestone was blackmailed by former banker Gerhard Gribkowsky. The revelation is surprising because it...
 
 
'Project CARS' Looks Insanely Realistic
Racing games are not typically my thing. It’s always fun to see the latest and greatest cars, and there’s no denying the rush one can get from just driving really, really fast. But I’m more of a Grand Theft Auto type; I...
 
 
Everything Is Connected: What 'The Internet Of Things' Means Now
It’s true, and has been for some time, that the Internet is connecting more people at a faster rate than ever before. Mobile devices have enabled more people to be online all the time. We seemingly love the Internet....
 
 
 

Latest from the Network

Zynga founder Pincus leaving operations role
NEW YORK (AP) — Online game maker Zynga's founder Mark Pincus is stepping down as chief product officer, less than a year after he was replaced as the company's CEO, as the company's sales slide. Zynga...
Read more on Business Balla
 
Courteney Cox sparks engagement rumors
Courteney Cox has sparked rumors she is engaged to Johnny McDaid. The former 'Friends' actress, who started dating the Snow Patrol frontman in September, was spotted wearing a huge diamond ring on her engagement finger...
Read more on Celebrity Balla
 
Reports On The Death Of The iPad Are Greatly Exaggerated
Apple’s second quarter results were announced today by CEO Tim Cook (Mark Rogowsky has more coverage here on Forbes). As part of the earnings call, Cook talked about the sales and acceptance of the iPad. Sales are lower...
Read more on Apple Balla
 
Prefabulous World: Energy-Efficient And Sustainable Homes Around The Globe
Recently, I interviewed Sheri Koones, author of the new book titled Prefabulous World: Energy-Efficient and Sustainable Homes Around the Globe, which features sophisticated examples of eco-friendly home design in...
Read more on Business Balla
 
Note to Airlines: Start Talking to Your Customers
When it comes to air travel, there’s certainly no shortage of bad customer stories. A report released last week by the U.S. PIRG Education Fund pored through five years of airline passenger complaints to the Department...
Read more on Business Balla
 
Apple Splits Stock 7-For-1, Will Splash $130B In Cash On Investors
Talk about burying the lede. Apple announced a 7-for-1 stock split Wednesday, but not until the last sentence of a press release heralding an upsized capital return program to $130 billion and alongside the company’s...
Read more on Business Balla
 
John Baker's Desire2Learn Is Leading Education Transformation
A Series of Forbes Insights Profiles of Thought Leaders Changing the Business Landscape:  John Baker, Founder and CEO, Desire2Learn… Desire2Learn (D2L) is transforming education through technology.  The Waterloo,...
Read more on Business Balla
 
Fitness For Duty: Exercise Can Make You A Better Leader
Okay. Even with a few late snows, spring is officially here. Birds are chirping. Trees and flowers are blossoming, The weather’s warming up. We’re running out of excuses for not beginning some sort of regimen to trim...
Read more on Business Balla
 
One League's Strategy To Keep Youth Sports Fun: Let Kids Play In Costumes
The Arkansas United Soccer Club has come upon, I think, what is a great idea for any youth sports organization preaching that it wants kids to have fun: putting on games in which its players dress in costume, rather...
Read more on Business Balla
 
New Research Reveals How Africa Tweets
Twitter activity in Africa during the last quarter of 2013 peaked on the day of Nelson Mandela’s death, according to How Africa Tweets, a new study analyzing Twitter activity on the continent. In an interview with Allan...
Read more on Business Balla
 
 
Auto Balla Sexy Balla Sport Balla TV Balla Politics Balla Movie Balla Apple Balla Business Balla Ad Balla Celebrity Balla