Tuesday, January 20, 2009

Fiat Nears Stake in Chrysler That Could Lead to Takeover

By STACY MEICHTRY in Rome and JOHN STOLL in Detroit In an attempt to revive two of the world's storied auto makers, Italy's Fiat SpA and Chrysler LLC are poised to announce a partnership as soon as today in which Fiat could take control of the U.S. company's operations, people familiar with the matter said. Under terms of a pact that is being hammered out, Fiat is likely to take a 35% stake in Chrysler by the middle of this year. It would have the option of increasing that to as much as 55%, these people said. Fiat, the stronger of the two, wouldn't immediately put cash into Chrysler. Instead it would obtain its stake mainly in exchange for covering the cost of retooling a Chrysler plant to produce one or more Fiat models to be sold in the U.S., these people said. Fiat would also provide engine and transmission technology to help Chrysler introduce new, fuel-efficient small cars, they said. The deal is the latest maneuver by Fiat's chief, Sergio Marchionne, who has pulled the Italian company back from the brink collapse since taking over in 2004. The partnership would provide each company with economies of scale and geographical reach at a time when both are struggling to compete with larger and more global rivals like Toyota Motor Corp., Volkswagen AG and the alliance of Renault SA and Nissan Motor Co. Chrysler last year sold two million cars and trucks world-wide, with almost all of its sales in North America. Fiat sold 2.5 million vehicles and is heavily dependent on Europe -- particularly its home market in Italy. While Fiat has a wider global reach than Chrysler, the two auto makers are smaller players compared to their global rivals. Toyota and General Motors, for instance, each have sold more than nine million vehicles annually. Chrysler spokeswoman Lori McTavish said, "In today's economic environment, talks are going on between companies in all industries -- ours is no different." Fiat Vice Chairman John Elkann on Tuesday confirmed the talks with Chrysler. "It's not a mystery that we are talking to Chrysler," he said, without adding further details. The pact with Fiat could give Chrysler a stronger case as it seeks more loans from the U.S. government. Chrysler nearly ran out of money late last year, before the Treasury Department provided $4 billion in emergency loans, and has suffered a steep drop in sales in the past three months. The auto maker needs to show it can remain a viable business by March to keep those loans and to qualify for the $3 billion in additional government aid it says it needs. Last week, a vocal critic of Chrysler, Sen. Bob Corker (R., Tenn.) said the company needs to "merge or go away." A Chrysler official declined to comment on Sen. Corker's remark. Kimberly Rodriquez, an automotive consultant at Detroit-based advisory firm Grant Thornton, said Chrysler has little choice but to find an alliance. "Without further funding, they don't survive with the level of sales and cash they have right now," she said in a telephone interview. Working with Fiat could complicate a separate partnership Chrysler arranged last year with Nissan. Chrysler is supposed to start making pickup trucks in a few years that Nissan would sell in the U.S., and Nissan has agreed to make compact cars for Chrysler -- vehicles that potentially could compete with any small cars Fiat provides to Chrysler. Chrysler and Nissan have discussed joining in a broader alliance, and top executives of the two companies spoke as recently as last week, a person familiar with the matter said. But Carlos Ghosn, chief executive of Nissan and Renault, is wary of any deal that would require Nissan to put money into Chrysler, a person familiar with Mr. Ghosn's thinking said. A Nissan spokesman said the company intends to maintain its supply relationship with Chrysler "in the same spirit we do with the many other automakers we have similar arrangements with." More Fiat CEO Builds Record Of Bold Strategic MovesThe tentative terms Fiat and Chrysler have worked out would call for Chrysler's owners, Cerberus Capital Management LP and Daimler AG, to retain stakes in the U.S. car maker, people familiar with the discussions said. Cerberus will see its 80.1% stake diluted. It is unclear whether Daimler will want to keep its entire 19.9% stake. A Daimler spokesman said he couldn't immediately comment on the matter. News of the partnership was previously reported by Automotive News, a trade publication. The potential alliance will need the blessing of Fiat's founding family, the Agnellis. The family, which holds a 30% controlling stake in Fiat, has said in the past that to stay competitive, Fiat needed to link up with a larger rival. Fiat's board is likely to discuss the potential deal with Chrysler when it meets Thursday to approve third-quarter results, one person familiar with the matter said. The Fiat deal would effectively end an attempt by Cerberus to resurrect the troubled U.S. auto maker that began in 2007. Chrysler merged with Daimler in 1998 to form DaimlerChrysler AG, but the marriage ended in part amid concerns that the U.S. arm was a drag on earnings. Cerberus snapped up Chrysler with the promise it could speed product development and other decisions thanks to its status as a private company. To come up with cash to fund its ambitions, Cerberus had Chrysler mortgage almost all of its plants and other assets to raise $12 billion in loans from a group of banks led by J.P. Morgan, Goldman Sachs and Citigroup. Associated Press In this Jan. 6, 2008 file photo, the Chrysler company logo shines off of a minivan in Aurora, Colo. Then, in the spring of 2008, gasoline prices soared to $4 a gallon and sales of Chrysler's most profitable trucks and SUVs plunged. Scrambling to save cash, Chrysler slowed development of new vehicles. At the North American International Auto Show, which opened last week in Detroit, Chrysler didn't show a single vehicle that will be launched in 2009. Chrysler's troubles worsened last fall when the meltdown on Wall Street hit. In the second half of 2008, the company used up $10 billion in cash, forcing it to seek help from the U.S. government. As part of the deal with Fiat, Chrysler is supposed to restructure the $9 billion in debt it still has on its books, people familiar with the matter said. While the private-equity firm and its investors likely will lose billions on the Chrysler deal, Cerberus would possibly face an even bigger hit if forced to put Chrysler in Chapter 11 bankruptcy protection or continue running the auto maker amid the deep slump in the U.S. auto industry. It is Cerberus's latest investment to be crushed by the auto-industry slowdown. In 2006, Cerberus paid billions for a controlling stake in GMAC LLC, the finance arm for GM. But Cerberus eventually had to agree to unload much of its stake in order to receive a bailout for the troubled lender late last year. Fiat is also facing challenges. Analysts have long doubted whether it has the scale to survive as an independent manufacturer of small cars. Small vehicles have relatively thin profit margins. Fiat has for months been exploring ways to gain a foothold in North America, hunting for a partner that could manufacture its Fiat 500 mini model and re-launch its high-end Alfa Romeo brand in the U.S. Most analysts say Chrysler has little hope of surviving as a standalone company. Amid a rash of mergers in recent decades, and the rise of well-funded newcomers in China and India, the auto industry is dominated by multinational players that can quickly move production and engineering from region to region. —Jeff Bennett, Jeff McCracken, Alessandro Mocenni and Giada Zampano contributed to this article. Write to Stacy Meichtry at stacy.meichtry@wsj.com and John Stoll at john.stoll@wsj.com

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