EoW September 2011

Transat lant ic Cable

Richard Hilgert, who tracks the auto industry for the Chicago-based investment research company Morningstar, told Mr Kessler that his estimate of Chrysler’s total equity is close to $11 billion. That translates to $110 million for each one per cent of the company. In the context of the 2 nd June deal, Mr Hilgert would have priced Treasury’s stake at about $650 million. “For Fiat, this was a great deal,” Mr Hilgert told the Detroit Free Press . “For the government, they took what they took.” Fiat II: the human cost of a switch from one car nameplate to another. Even as officials of the US government and of Fiat SpA congratulated themselves on their acumen, there were broken hearts on the outskirts of Milan: or one, at least. As reported by Bloomberg News , Fiat, the Italian auto maker which controls Chrysler, had “ended Paolo Mazzali’s American dream.” Mr Mazzali, whose company owns three Chrysler showrooms near Milan, had spent ten years selling “American lifestyle” as embodied in Chrysler cars and minivans. Now, after a Fiat decision to convert Chrysler dealers to the Lancia marque, he must persuade his customers to buy Italian. “We used to sell an emotional American brand, as American as a Harley Davidson motorcycle,” Mr Mazzali told Bloomberg reporters Tommaso Ebhardt and Flavia Rotondi. “It’s like giving up a piece of your heart to pitch something new.” Sergio Marchionne, chief executive officer of Fiat and Chrysler, stopped all sales of the American brand in continental Europe on 31 st May, after four decades. The combination of Chrysler and Lancia is part of his plan to end losses in Europe and cut costs by $2.2 billion by 2014. Under Fiat, Chrysler’s sales dropped to about a quarter of their total before the company was offloaded by its German parent Daimler AG in 2007. (“Chrysler Brand Vanishes from Europe as Chief Marchionne Stems Losses,” 31 st May). “We couldn’t maintain the two brands everywhere so we had to decide,” Olivier Francois, the Fiat executive who heads the Lancia and Chrysler brands, said in an interview with Bloomberg . “Lancia has a higher awareness in Europe while, for the US and the rest of the world, Chrysler is a more global brand.” Fiat, from its headquarters in Turin, consolidated Chrysler Group results as of May, an indication to Bloomberg of the rapid integration of the two car makers since Michigan- based Chrysler emerged from bankruptcy in June 2009. Fiat, which was initially granted a 20% stake by the US government, aims to acquire 57% of the third-biggest US auto maker by the end of 2011. ❈ But, however far Fiat takes Chrysler, Paolo Mazzali will not be of the party. A good soldier, he has spent just under $3 million to prepare his shops for Lancia, a Turinese product with a mixed luxury/mass market character. Mr Mazzali told Bloomberg News , “We’re ready for the change.”

Automotive

Italian car maker Fiat and the US government both claim to have gotten the better of the deal for Chrysler

Our founder, John C Hogg, once shared with a journalist his rule for analysing business transactions in high places: “Find out how they did their sums.” It is pleasant to imagine Mr Hogg applying his method to the purchase, by Fiat SpA, of the US government’s remaining six per cent stake in Chrysler Group. On the same set of undisputed financial data, each of the parties to the deal is convinced of having struck a terrific bargain. The facts are these. Turin, Italy-based Fiat has had management control of Chrysler since 2009, when it agreed to acquire a 35% stake in the Detroit-based auto maker. The administration of President Barack Obama tapped Fiat chief executive Sergio Marchionne to take over the foundering company. On 2 nd June of this year, the US Treasury Department agreed to sell its Chrysler stake to Fiat for $500 million. Fiat will also pay an additional $75 million ($15 million of that to go to the Government of Canada) for rights to purchase Chrysler shares owned by a union trust of the United Automobile Workers. In the run-up to the sale, Chrysler had repaid loans totalling $7.6 billion to the US and Canadian governments. Aaron Kessler of the Detroit Free Press Washington staff noted that Treasury’s deal with Fiat means that the Italian firm paid the US about $83 million for each one per cent of Chrysler. Compare that with the cost to Fiat a week earlier, when it paid $1.268 billion to take over 16% of the company: or about $79 million for each one per cent of Chrysler. Mr Kessler wrote: “Here’s the catch. Because Fiat already owned 30% of Chrysler, the way new stock purchases work means shares get diluted – they’re not worth as much. So to take control of another 16% of the company, Fiat actually had to buy more than just 16%” of the total stock. (“Value of Fiat’s Payment for Chrysler Stake Analyzed,” 5 th June) To hit its 16% increase, what percentage of existing shares did Fiat in fact buy? According to two sources familiar with the deal, 24.6%. If Fiat paid $1.27 billion for 24.6% of the shares, the Italian company paid the equivalent of $52 million for each one per cent of Chrysler – not $79 million. That, said Mr Kessler, explains the government’s excitement: “Had Fiat used the same math it did a week before, Treasury’s six per cent stake would have rung in at $309 million. Instead, Fiat offered $500 million – a 60% premium.” ❈ So why is Fiat happy? For the best reason of all: it bought Treasury’s shares (ie shares held by American taxpayers) for less than what some analysts believe Chrysler is worth. On the day after the sale, both sides were claiming victory. Why?

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EuroWire – September 2011