If the U.S. auto industry crisis was beginning to look complicated, the latest news from Chrysler is sure to make it a head spinner. The deal announced this week not only gives Italy's Fiat S.p.A. a flexible stake in Chrysler, but turns the ultimate control of the automaker into the financial equivalent of a five lane roundabout.
Chrysler is nominally controlled by Cerberus Capital Management, which acquired an 80.1% stake in the company from Daimler AG in August, 2007. Fiat will get 35% of Chrysler under terms of the yet-to be finalized deal. The terms also grant Fiat the option of raising its stake to 55%. (See three Fiats you might like owning.)
Cerberus is already slated for dilution under the terms of the government bridge loan, agreed to in December. The bridge loan gives the U.S Treasury warrants to purchase 5% to 15% of the Chrysler shares now in the hands of Cerberus. Fiat will eat further into the Cerberus stake, and it also has the option of tapping into Daimler AG's remaining stake in Chrysler as a way to build its stake to 55%, according to Rebecca Lindland of the consulting firm of Global Insight.
As Fiat cruises into the ownership roundabout, Daimler is clearly looking for the exit. The German automaker owns a 19.9% stake in Chrysler but wrote down the value of the shares to zero last autumn (how's that for pessimism). Negotiations begun by Cerberus back in September to purchase Daimler's stake broke down. However, Daimler could transfer the Chrysler shares to Fiat for non-cash consideration such as patents or technology. (See pictures of the remains of Detroit.)
Next, come the executives. Chrysler CEO Robert Nardelli and his key lieutenants, Vice chairman Jim Press who came from Toyota in 2007 and vice chairman Tom LaSorda, are also thought to have stakes in Chrysler via their employment agreements with Cerberus. Since Chrysler is a private company, the details of executive stock ownership are not public.
One possible scenario under the many current agreements could have the Treasury exercising its warrants for non-voting shares, Fiat raising its stake to 55%, Daimler holding onto its share, and Cerberus and the executives holding the rest. Or, nobody could choose to exercise their rights, and Cerberus would remain the majority owner. (See the 50 worst cars of all time.)
At present, Chrysler officials believe Fiat is indeed serious about the deal. Fiat executives came through Chrysler's design studios in Auburn Hills in mid-December to look at Chrysler's latest designs and future products, says Chrysler vice president Ralph Gilles, who believes they left with a better understanding of where the company is headed from a design perspective and of Chrysler's potential. "We're very flexible," he added.
The agreement doesn't require Fiat to sink any cash into the Chrysler. Nevertheless, the Italian industrial group would get the initial 35% stake along with access to Chrysler's assembly plants and its distribution network, which stretches across North America. The companies have long been considered a good "fit" because Chrysler's footprint in North America complements Fiat's strength in Europe and South America. (See the best cars from the 2009 Detroit Auto Show.)
Chrysler, in turn, will gain access to Fiat's latest products and technology, including Fiat's nifty little city car, the Fiat 500. The deal raised morale at Chrysler's headquarters and technical centers in Auburn Hills, which had been hit hard by layoffs since September. "I think everyone felt a lot better," said one senior Chrysler official.
The deal comes in the nick of time since rumblings about Chrysler's imminent collapse have been circulating among analysts and suppliers for weeks. In addition, there were doubts that Chrysler would be able to put together a credible viability plan by the end of March as required under the terms of the federal bridge loan. Without the next installment of the bridge loan, which will be distributed next month, there is a very good chance Chrysler could run out of cash.
With Fiat now in Chrysler's picture, though, there's more optimism than dread. Notes Sean McAlinden, vice president of research at the Center For Automotive Research in Ann Arbor: "The thing you have to remember about Chrysler is that it seems to have more lives than a cat."