Fiat Takes 35% Stake In Chrysler

Today’s big Auto Industry news is the announcement that Fiat is taking a 35% stake in Chrysler:

From the WSJ:

Fiat SpA, planning to take a 35% stake in Chrysler LLC, faces a race against time to get their joint operation working well enough to satisfy the U.S. government, investors and customers.

The companies on Tuesday announced a non-binding agreement that could lead to technology sharing and the manufacture in the U.S. of Fiat’s small cars. Such an arrangement would allow Chrysler to add low-emission, fuel efficient models to its fleet by using Fiat technology. It would also give Fiat access to Chrysler’s U.S. dealership network, giving the Italian maker better access to American customers.

Under the terms of the deal, Fiat is also likely to gain three of the seats on Chrysler’s seven-seat board, two people familiar with the matter added.

If Fiat meets certain goal for improving Chrysler’s operations within 12 months of the agreement, Fiat would also have the option buying an additional 20% of Chrysler for about $25 million, people familiar with the matter said.

Details of the conditions are not yet clear.

The price is a small sum for a 20% stake in company the size of Chrysler. In 2007, private equity group Cerberus Capital Management LP was required to put $5 billion in cash into Chrysler’s auto operations as part of its acquisition of the company from Daimler AG.

If Tuesday’s agreement leads to a legally binding deal, however, both Fiat and Chrysler will quickly find themselves under pressure to demonstrate that the alliance can make the ailing US automaker viable…

….Whatever the commercial objectives, the two companies will struggle amid the global financial and economic crisis. This has already dragged down car sales as potential car buyers struggle to gain access to credit to finance new purchases. In Europe, car sales in 2008 reached their lowest level since 1993, according to the European Automobile Manufacturers’ Association.

Even in more hospitable economic climates alliances on this scale can take years to get off the ground, and sometimes never work. Fiat and General Motors Co. took stakes in each other in the past as part of a broad strategic alliance in 2000. It quickly soured and GM eventually had to pay Fiat $2 billion to end it…

…Tuesday’s non-binding agreement calls for Fiat to let Chrysler use its engine, fuel efficiency and powertrain technologies to make Chrysler brand cars. It also calls for the sale of Fiat models in Chrysler’s U.S. dealerships.

However, it could take a few years for Fiat to adapt its small car designs to meet crash-test safety standards in the U.S., say some analysts. Kevin Rich, sales manager of a Chrysler dealership in Winona, Minnesota, said his sales staff could faces challenges in convincing customers that Chrysler models made with foreign technology are up to US standards. Still, he said, Chrysler doesn’t have time to develop the new technology on its own, he said. “Chrysler desperately needs attractive fuel efficient cars that have some curb appeal to a large market,” he said.”

From a Chrysler perspective this looks like a desperate attempt to show the U.S. Government that it’s doing “something” to return the company to profitability, as part of an effort to get additional financial assistance. What else do you call a tie-up that will probably take years to bear fruit, and could potentially sell a 20% stake in the company for next to nothing? This is also probably a sign of Chrysler looking to effectively outsource the development of passenger cars to other companies, whilst they either focus on trucks or become an veritable reseller of other manufacturer’s vehicles.

From a Fiat perspective this seems like a fairly low risk proposition, because even if Chrysler fails before they’re able to prepare any of their existing cars for the U.S. market, the investments made will be ones they’d have to make anyway in order to expand into the U.S. Therefore no matter what happens to Chrysler they’re still going to be better positioned to enter the U.S. market then they are now, plus having part ownership in Chrysler might allow them to take over certain manufacturing facilities in the U.S. if Chrysler does indeed fail. If instead Chrysler survives and is able to return to profitability in the future, Fiat will have gained a controlling interest in a profitable auto manufacturer for next to nothing.

After all it’s important to note the following from a statement issued by both companies:

From the FT:

“The alliance does not contemplate that Fiat would make a cash investment in Chrysler or commit to funding Chrysler in the future,” the companies said in a joint statement .

In other words, Fiat’s contribution is in the form of technology and management resources, as opposed to putting real skin in the game.

All that being said this move seems largely symbolic to me as it won’t matter much if Chrysler isn’t able to survive past the fall let alone 2010, so at this juncture it’s best to wait and see if Chrysler is able to survive in general before handicapping the outcome of this tie-up.

You can read more here (WSJ), and here (FT).

Sources:

The WSJ: “Fiat to Take Stake in Chrysler” — Stacy Meichtry, John Stoll, January 20, 2009

The Financial Times: “Fiat to take 35% stake in Chrysler” — Vincent Boland, Julie MacIntosh, January 20, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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