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

Tesla To Talk With Sinopec About Charging Network In China, Report Says
Elon Musk, Tesla’s Chief Executive, looks to be heading to China later this month to discuss with Sinopec the idea of constructing facilities to charge its growing fleet of electric cars, according to a report in the...
 
 
Prepaid Cards To Hit $200 Billion In Merchant Sales in 2012
Prepaid cards have entered the mainstream, says Madeline Aufseeser, a senior analyst at Aité Group, a financial technology consultancy, and merchants are promoting them enthusiastically. In 2014, retail purchases made...
 
 
Roads Versus Rail: The Big Battle Over Public Transportation
Roads Versus Rail: The Big Battle Over Public Transportation
EDITOR’S NOTE: Forbes has just published Curbing Cars: America’s Independence From The Auto Industry, an eBook investigating why a growing number of Americans are giving up their cars. Written by Forbes contributor and...
 
 
The Lyrical Portfolios Of Hip-Hop's Wealthiest Artists
The Lyrical Portfolios Of Hip-Hop's Wealthiest Artists
From Beats by Dre to Roc Nation Sports, the portfolios of the Forbes Five include a diverse range of investments. Birdman, Jay Z and Diddy have sought profits in liquor while every member retains some income through...
 
 
 

Latest from the Network

Mom 2 CEO Leads the Mom-Entrepreneur Movement June 11-13
Los Angeles, CA, April 16, 2014 --(PR.com)-- Take a break from the carpool, the laundry and the kids&#39; playdates&#8212;it&#39;s time to write up your business plan. The Mom2CEO conference will converge on the...
Read more on Business Balla
 
Mom 2 CEO Leads the Mom-Entrepreneur Movement June 11-13
Los Angeles, CA, April 16, 2014 --(PR.com)-- Take a break from the carpool, the laundry and the kids&#39; playdates&#8212;it&#39;s time to write up your business plan. The Mom2CEO conference will converge on the...
Read more on Ad Balla
 
Apple’s CarPlay to be Applied in 2015 Hyundai Sonata
The application of Apple’s CarPlay technology has moved one step ahead, as Hyundai declares to use the system for the 2015 Sonata models.Hyundai, one of Apple’s five CarPlay clients, is working hard to bring outstanding...
Read more on Apple Balla
 
Miley Cyrus is 'miserable'
Miley Cyrus is "miserable" in hospital. The 'Adore You' singer was rushed to an emergency room on Tuesday (04.15.14) after suffering a severe allergic reaction to antibiotics prescribed to her for a fever, and was...
Read more on Celebrity Balla
 
Tori Spelling admits her heart is broken
Tori Spelling admits Dean McDermott broke her heart. The former 'Beverly Hills 90210' star was "absolutely blindsided" when her husband checked into a rehab facility in January, after it emerged he cheated on her with...
Read more on Celebrity Balla
 
Coolcat Report Ranked No. 2 For 15 Years by Hulbert Financial Digest
Sanger, CA, April 16, 2014 --(PR.com)-- Hulbert Financial Digest, the leading independent watchdog for investment newsletters, is out with its annual numbers and ranks The Coolcat Explosive Small Cap Growth Stock...
Read more on Business Balla
 
Samsung Galaxy S5 Is Already Battling The iPhone 6
It’s less than a year after Samsung’s landmark Galaxy S4 Android superphone went on sale, and already the follow-up Galaxy S5 is in the wild and reportedly selling like… not hot cakes, exactly; more like… an iPhone.  ...
Read more on Apple Balla
 
Inside the Millennial Mind: The Do's & Don'ts of Marketing to this Powerful Generation
Everyone seems to be talking about Millennials today. It’s not just because they are the largest generation by population size – though that certainly doesn’t hurt. It’s because we’re all fascinated with them – news...
Read more on Business Balla
 
Kaplan: Why Treating Nonprofits Like Tech Startups Works
Robert S. Kaplan, co-chair of the Draper Richards Kaplan Foundation, the largest venture philanthropy firm in the U.S. will join me for a live discussion of the strategies and impact of their approach: treating...
Read more on Business Balla
 
Growth-Hacking Isn't Just For Startups
This month, BrightTALK and I launched a new thought leadership video interview series.  In the “Disruptive Innovator Interviews with Christine Crandell” channel, I interview C-suite executives to discover their sales...
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