Italian automaker Fiat is closing in on its goal of taking a majority stake and full control of Chrysler LLC by the end of the year, announcing a deal Thursday to buy another 16 percent share sooner than expected for $1.3 billion.
Fiat SpA will exercise an equity call option, bringing its stake to 46 percent, once Chrysler has repaid loans to the U.S. and Canadian governments, which Fiat said would happen in the second quarter of 2011.
Fiat expects to gain another 5 percent, for a majority 51 percent share, by the end of the year upon condition of approval of a 40 miles-per-gallon car for the United States.
"This is a fundamental step toward the completion of the momentous integration of Fiat and Chrysler, initiated less than two years ago, that will result in the creation of a global automaker," Fiat and Chrysler CEO Sergio Marchionne said in a statement.
Fiat has had operational control of Chrysler since taking a 20 percent stake in June 2009 in exchange for small car and more fuel-efficient engine technology, along with management know-how. But further integration is expected as Fiat's stake increases and Chrysler launches a public offering, which could come as early as this year.
Marchionne said the company had exercised the call option sooner than expected "to bring about, in the shortest possible time, the birth of a single group capable of fully leveraging the joint development of the respective international activities."
Marchionne told analysts Wednesday that integration was under way, with significant synergies on the purchasing level where the carmaking units Fiat SpA and Chrysler LCC combine forces with the newly formed Fiat Industrial, or farm, construction and truck units.
Analysts had expected Fiat to exercise the call option before Chrysler launches an IPO in order to get a better price.
"The timing was a little bit faster than we were expected. The amount was in line with our expectation," Morgan Stanley analyst Stuart Pearson said.
Investors welcomed Thursday's deal and pushed Fiat shares up 3.35 percent at 6.80 euros ($9.87).
However, union leaders in Italy expressed concern that the moves were a sign that Fiat, which is based in the northern industrial city of Turin, is moving closer to the United States, and away from its native Italy.
"It's a confirmation of a repositioning of Fiat's orientation," the head of Italy's powerful CGIL union confederation Susanna Camusso was quoted as saying by the news agency ANSA. "Nearly all of Fiat's attention is focused on the Chrysler project, in part due to the commitments it made to the U.S. government and in part thinking that this will be the future of this group."
Marchionne has been struggling to get Italian unions to accept more flexible work rules in exchange for investments to increase production in Italy, where it is the country's biggest employer. It won deals at two plants, including the flagship Mirafiori plant in Turin, where it will build Alfa Romeo and Jeeps. It is facing a showdown over a planned investment in another smaller plant near Turin.
The call option marks the first time that Fiat is putting up cash for Chrysler.
Fiat's initial 20 percent stake was in exchange for technology and management prowess — but no cash. The deal with the U.S. Treasury also laid out three benchmarks for Chrysler to raise Fiat's stake in 5-percent increments. It has exercised two this year — for making a fuel-efficient four-cylinder engine in the United States and boosting Chrysler's sales outside North America. Approval of a new Dodge that gets 40 miles to the gallon will be the last of the three.
"To the extent the deal was designed to allow us to get 51 percent, that defines happiness for Fiat," Marchionne told analysts on Tuesday. "It was intentionally designed to allow Fiat control of Chrysler at some point in time."
Fiat has the further option to increase its stake beyond 51 percent — including the possibility to acquire an additional 8 percent from the U.S. Treasury, Marchionne has said.
Marchionne's next logical financial move would be a public offering of Chrysler — something he has indicated he'd like to do by the end of the year. But Marchionne also said the timing would depend on the cash needs of the U.S. automaker and the auto workers union trust fund, which pays health benefits for retirees and holds a large Chrysler stake, which is diluted each time Fiat raises its share.
Marchionne's goal is to create an automaker capable of making 6 million cars a year — the scale he believes necessary to remain competitive — by 2014.
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