Italian automaker Fiat SpA (FIATY) has been getting its financial ducks in a row lately as it prepares to acquire the remaining stake in Chrysler Group LLC — a move that could set the stage for an initial public offering by the end of this year.
Fiat, which already owns 58.5% of the Detroit automaker, is looking to purchase the remaining stake — a deal that reports say would fall in the $4 billion range.
To that end, Fiat has kicked off a massive three-part refinancing plan aimed at taking advantage of favorable current interest rates to lower the cost of existing Fiat and Chrysler loans. The loans that would be refinanced include $2.6 billion in Fiat loans and a $3 billion, six-year syndicated term loan Chrysler took out in May 2011.
All told, Fiat reportedly is in talks with a group of lenders to raise some $10 billion.
In further preparation for the Chrysler purchase, Fiat’s parent company Exor announced this week that it has sold its 15% stake in Swiss inspection company SGS to Belgium-based Groupe Bruxelles Lambert for a cool $2.6 billion.
It’s easy to understand why Fiat would want to make a move now to gain the rest of the company. When it comes to sales, Chrysler clearly is on a roll: U.S. sales last month jumped by a whopping 11% and the automaker posted its best May numbers since 2007. Hot new models — particularly in the company’s iconic Dodge brand — have been a growth engine for Chrysler, particularly given persistent weakness in European vehicle markets.
But before the Italian company can take full control of Chrysler, the United Auto Workers union’s healthcare trust fund (a voluntary employees’ beneficiary association, or VEBA) needs to sell its stake in the automaker. The 2009 deal that allowed Fiat to acquire the then-bankrupt Chrysler also gave the Italian automaker the right to acquire up to 16.6% of the company from VEBA under a complex valuation formula.
That’s a matter that ultimately will be resolved by the courts: VEBA balked at Fiat’s $139.7 million offer for the first 3.3% of Chrysler, arguing that the share is worth at least $342 million. In April, a Delaware judge agreed to weigh in on the valuation formula; he is expected to rule on the matter by the end of June. Even so, the healthcare trust would not be required to sell its entire remaining stake in the company. The union reportedly has asked Chrysler to move forward with an IPO for some of the remaining shares.
So what does all this mean for investors? A couple of opportunities come to mind.
First, CEO Sergio Marchionne has made it clear that he plans to acquire the rest of Chrysler, even if he has to pick it up in the public market. If Fiat and VEBA can’t cut a deal acceptable to both sides — the prospects of which will look clearer in the next couple of weeks — an IPO could present an attractive opportunity.
Remember, while General Motors (GM) has been lackluster overall since coming public again, it did have a strong IPO in November 2010 and gained another 8% by New Year’s Day. Meanwhile, Chrysler’s solid performance, popular models and consistent sales gains should fuel a lot of interest from institutional and retail investors. Generally speaking, U.S. auto sales are continuing to drive the economic recovery — automakers believe they will sell more than 15 million vehicles in 2013.
Don’t rule out Fiat shares themselves, though — the stock has soared 96% since its 52-week low last November, and while it’s more highly valued than Ford (F) and GM, I think it’s justified given FIATY’s potential as a growth play.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.