Chrysler Group LLC, the U.S. automaker operated by Fiat SpA, may repay its U.S. and Canadian government loans before 2013, allowing the Italian automaker to take a 51 percent stake, the companies’ top executive said.
“It’s one of the options that we’re looking at,” said Sergio Marchionne, who is chief executive officer of both Chrysler and Fiat. “It’s not required to go public.”
Fiat, which holds 20 percent of Chrysler, has said it will increase that stake to 35 percent next year by achieving milestones outlined in the Auburn Hills, Michigan-based automaker’s restructuring last year. Marchionne has said he will probably take Chrysler public during the second half of 2011.
The CEO has also said he wants to improve Chrysler’s capital structure before the IPO and that it may include refinancing the automaker’s U.S. and Canadian government loans, which have effective interest rates as high as 20 percent. Interest payments have kept the company from posting a net profit, he has said.
Repaying those loans would allow Fiat to exercise an option to buy an additional 16 percent of Chrysler’s equity and raise its position to a 51 percent majority. Fiat may save as much as $2 billion by doing so before holding an initial public offering of Chrysler stock, Barclays Capital said last week in a note, whose lead author was Kristina Church, an industry analyst.
Fiat can’t raise its position beyond 35 percent until 2013, the Turin, Italy-based company has said.
It may be possible for Fiat to take advantage of the 16 percent option before 2013 if it pays off the government loans first, Church said. Fiat executives have been travelling Europe on a roadshow for the spinoff of its heavy truck and tractor business, Fiat Industrial SpA.
‘We’ll See’
Asked if Fiat wants to use the 16 percent option in advance of a Chrysler IPO, Marchionne said: “We’ll see.”
The reduction of Chrysler’s interest cost and creating a stable capital base is more important than increasing Fiat’s ownership stake, Marchionne said.
“My option is not going to die tomorrow,” he said.
Prices for the Chrysler stake are based on multiples of earnings before interest, taxes, depreciation and amortization, or Ebitda.
“Fiat has the option to acquire another 16 percent of Chrysler for a multiple, if it is pre-IPO, that does not exceed Fiat’s own multiple -- which after the spin-out and a potential sale of Ferrari is likely to be well below that of U.S.” peers such as Ford Motor Co., Church said.
Her report goes on to say that if Fiat were “to wait until after an IPO to exercise its 16 percent option, it would likely pay a higher multiple than its own multiple.”
Can Delay IPO
Fiat has leverage to encourage such a scenario through its ability to delay the Chrysler IPO until after January 2013, Church said.
“If any of the non-Fiat stakeholders want to see an IPO prior to 2013, Fiat could require them to consent to a refinancing and repayment of the government loans to allow Fiat to exercise its option,” Church said.
Chrysler’s majority shareholder is the United Auto Workers union trust for retiree health care.
Marchionne is juggling the spinoff of Fiat Industrial to focus on carmaking and the Chrysler turnaround after the U.S. automaker’s bankruptcy reorganization last year.
Fiat may sell its auto-parts division Magneti Marelli SpA and a stake in Ferrari SpA before consolidating with Chrysler, analysts, including Eric Hauser of Credit Suisse, have said Marchionne told them.
Marchionne spoke to reporters today at a Chrysler assembly plant in Sterling Heights, Michigan, celebrating the production of the new Chrysler 200 and refreshed Dodge Avenger midsize sedans. Chrysler invested $850 million into the plant for a new paint shop, machinery and other equipment, a decision that reversed a previous one to close the factory.
A second shift is slated to begin in the first quarter next year.
The plant will get new midsize cars in 2013, Marchionne said. The company hadn’t specified the vehicle type before.
