Chrysler’s step to file for an IPO last week was an effort to shake one of its majority owners into doing what they did not want to do before. The Italian automaker, Fiat, owns 58 percent of Chrysler, whereas the rest of it is held by United Auto Workers retiree benefits trust (VEBA). The CEO of both Chrysler and Fiat SpA (BIT:F) (OTCMKTS:FIATY), Sergio Marchionne, wants to consolidate Fiat and Chrysler into one big company. This is of course not possible if VEBA does not sell its stake in Chrysler, which it is demanding a much higher price for than Chrysler is willing to pay.
Fiat and VEBA fail to negotiate a deal
VEBA’s holding may be worth $4.9 billion, according to an estimate based on the $600 million that Fiat SpA (BIT:F) once offered for 9.9 percent of Chrysler. Reports say that Fiat wants to pay far less than what VEBA demands. Since both parties have failed to reach an agreement over price, the IPO seems like an effort to break the standstill.
Now it gets tricky here: the IPO Chrysler just filed for is not in the interest of Fiat, simply because it would make it all the more difficult to merge the American car maker with itself if a string of new minority owners jump on board after VEBA sells its position on the market. In the IPO document that Chrysler filed with the SEC on September 23, the company noted that Fiat is “reconsidering the benefits and costs of further expanding its relationship with us.” So Fiat is also threatening a pullback, and Fiat’s clear lack of interest in the IPO can translate into weak demand for Chrysler’s shares once it debuts on the public market.
Shorts in Fiat could be pressured after a Fiat-Chrysler merger
Fiat SpA (BIT:F) is banking on the IPO to lower the price so that it can then negotiate a price of its own choice for VEBA’s position, however, VEBA is hoping the IPO will raise the price and thus Fiat will be induced to buy the shares at a premium. So, the IPO just seems like a bait or gamble either way. Since a couple of noted hedge funds like Jim Chanos’ Kynikos Associates and Marshall Wace are shorting Fiat, a successful merger of Chrysler and Fiat would value the Italian company much higher, which will put pressure on the shortsellers. However, it is almost certain that sooner or later Fiat will get its hands on Chrysler, although if the current game of chicken is followed it might take much longer than anticipated.
Merger cannot solve all of Fiat’s problems: Citi
In Citi’s analysis, a merger with Chrysler will not bring any added momentum to Fiat. Citi thinks that the company has the weakest balance sheet among all European automakers, and Fiat is still suffering from slower sales in European markets. Further pressure from Brazil and Latin American countries is also mounting as demand in those areas is weakening.
Analysts at UBS think that the possibility of Chrysler following through with the IPO is very little, Philippe Houchois notes, “Fiat will eventually pre-empt an IPO by offering to buy the shares at the indicative price. The probability of an actual listing is low in our view but cannot be excluded.”
UBS analysts also think that VEBA would like to get this done before this year’s end as in 2014, Fiat SpA (BIT:F) will be entitled to exercise options on another 3.3 percent of VEBA’s position in Chrysler. UBS rates Fiat at Neutral.
Shares of Fiat have gained 68 percent this year to date.