Italian carmaker Fiat SpA (BIT:F) (OTCMKTS:FIATY) said on Monday it has exercised an option to buy 3.3 percent more of its U.S. unit Chrysler, bringing it a step nearer to its goal of creating the world’s seventh-largest automaker by sales. Fiat moved to tighten its control of Chrysler as Chief Executive Officer Sergio Marchionne looks to complete a four-year effort to merge the Italian and American automakers.
Disputes on Valuation Methods
Fiat, which loses money in Europe, has said it wants full control of profitable Chrysler, which would give it access to some of Chrysler’s cash flow for investments in new models.
Fiat SpA (BIT:F) (OTCMKTS:FIATY) stock has surged 46 percent this year, valuing the company at 6.94 billion euros ($8.91 billion).
Based on “a market multiple” applied to Chrysler’s earnings before interest, taxes, depreciation and amortization, Fiat calculated that it has to pay $254.7 million for the latest stake in Chrysler.
The price is still below what the trust is seeking for shares in the option that was exercised in July 2012. The trust, which disputes Fiat’s valuation methods, has said the first 3.3 percent tranche should be worth as much as $342 million. Fiat says it’s worth $139.7 million. Ownership of the stock gained through the three options exercised so far would raise Fiat’s holding to 68.5 percent.
The step-by-step purchases are intended to lead to full control of Chrysler that would enable Marchionne to merge the companies to compete with global industry leaders.
Court Decision on Price Still Pending
Tommaso Ebhardt of Bloomberg noted that Fiat SpA (BIT:F) (OTCMKTS:FIATY) asked Delaware Chancery Court Judge Donald Parsons last year for a ruling in the valuation dispute. Marchionne has estimated the process would be completed by the end of September. The judge may call for a trial, which would potentially push back a final decision for as long as a year, U.S. law professors said in June.
Fiat gained control of Chrysler in 2009 after the third-largest U.S. automaker went bankrupt during the credit crunch. The maker of Chrysler, Dodge and Jeep vehicles has recovered and become Fiat’s most reliable profit generator as the Italian company struggles to end losses in Europe that totaled 704 million euros ($903 million) in 2012 amid a collapse in the region’s car market.
Fiat SpA (BIT:F) (OTCMKTS:FIATY)’s net income, including minority holdings, totaled 1.41 billion euros that year. Without Chrysler, Fiat’s losses would have exceeded 1 billion euros.
Marchionne said last month that Fiat was in talks with the trust about buying the stake and is seeking to complete a deal before a potential Chrysler initial public offering requested by the labor group is held. The talks are “fundamentally” about price, he said.
Investors hailed Monday’s announcement with Fiat SpA (BIT:F) (OTCMKTS:FIATY)’s share price rising 2.6 percent to 5.525 euros, while the benchmark index was up 1.37 percent.