Fiat's Buyout Strategy
Officials from Fiat, majority owner of Chrysler, plan to take Chrysler public as soon as this year.
Fiat's CEO Sergio Marchionne is interested in obtaining full ownership of Chrysler, and he’s not going to stop until he gets it.
In 2009, Chrysler was at risk of bankruptcy when Italian carmaker Fiat (OTC: FIADF) moved in to save the company by purchasing a 58.5% stake. The other 41.5% of the company was bought by union health care trust fund VEBA. Chrysler wanted to ensure it had the funding to cover health care costs for its hourly retirees, and that was the way to do it.
But as the years went by, Chrysler started to see some improvements in its auto sales, particularly now. Chrysler just saw a 12% jump last month with sales of 165,552 vehicles in the United States. According to Reid Bigland, Chrysler’s sales chief in the U.S., August was the strongest month the company has seen in 60 months.
No wonder Marchionne wants to go all in with Chrysler! It’s booming, and there doesn’t seem to be a slow down on the horizon.
The only problem is that VEBA doesn’t want to sell to Marchionne for the price he's offering. The trust fund has mentioned it’s not interested in keeping the asset forever, but it also doesn’t want to let it go unless it’s for a good price.
According to Reuters, VEBA wants $5 billion, but UBS analysts say the company's worth less than that at $4 billion, while court documents report its worth at $4.2 billion. So if Marchionne were to pay what VEBA wants, he would be paying more than the entire company's worth – and he already owns more than half.
Marchionne told the Financial Times:
We need to go through this process of determining value. [The trust] have been very clear that they are not long-term holders of assets. They want to monetize, so we need to find a way for them to exist in a way that…does not create what I consider to be exceptionally high or abnormally expectations of value. The market will tell us. Let the market talk.
There you have it. As much as Marchionne doesn’t want an IPO because it will just delay the process of buying the rest of the company, he has no other choice.
Chrysler will file documents by end of this month to enter into the stock market, Marchionne told the Financial Times. By listing the company on the stock market, the real value will be determined so Marchionne can eventually take over all of the company’s shares.
But the process has not even started yet, so it’s likely the listing won’t happen until the right before the year ends or in the first quarter of 2014.
It’s likely Marchionne will end up owning all of the company. When that happens, he will be able to compete much better with the auto industry.
One of the criticisms of Chrysler is that it has a limited model line. It only has three basic models: the 200, the 300, and the Town & Country. This means it has no premium model, and it doesn’t have one under $20,000. It also doesn’t include an energy efficient model such as a hybrid.
If Marchionne can take over Chrysler entirely, he would be able to bring all of the models people want into the United States. And that is what could allow the company to compete with some of the biggest leaders, such as Toyota (NYSE: TM), Volkswagen (OTC: VLKAY), and General Motors (NYSE: GM).
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Should You Invest in Chrysler?
One of the best ways to determine if you should seek out Chrysler once it goes public is to look at the history of other carmakers.
In 2010, for example, General Motors went public. It came into the market strong, and it gained 8% by New Year’s Day. If Chrysler comes in with just as much strength or more, there will be great interest from many investors, particularly institutional and retail ones.
It’s also important to consider that U.S. auto sales are doing well right now. It’s one of the biggest fuels for the economy at the moment. In 2013, automakers are expecting to sell as many as 15 million vehicles. It’s highly unlikely this auto sale success is going to end as soon as 2014.
The last factor that could make Chrysler a good investment option is Fiat’s success. Its stock rose 96% since last November. If Marchionne is able to buy VEBA’s share, it could mean big returns for investors.
You still have time though. This process takes some time, and as it’s been mentioned, the listing won't make its debut until the end of the year or the first part of next year. Sleep on it, and really consider the potential this could have for your portfolio.
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