Fiat and Chrysler boss Sergio Marchionne is a famously tough negotiator. When he made the deal with the White House to take over the failing Chrysler Corp. in 2009, he left with everything he wanted, short of the President’s limo. When a company, never mind an economy, is on the brink you’ve got a lot of negotiating leverage.
Now that Chrysler is thriving under his leadership, he’s trying to make another deal— to buy a block of company shares owned by a health trust run by the United Auto Workers. But they aren’t blinking. That’s why Chrysler Group LLC was forced to file for an IPO, which would allow the UAW to unload its shares. The union controls 41.5% of Chrysler’s shares through its health trust, known as a VEBA for voluntary employees’ beneficiary association. The VEBA accepted equity instead of cash as part of the deal to save the then-struggling Chrysler, which was facing billions of dollars in future retiree health care obligations. Fiat already controls 58.5% of the shares, and wants to buy the rest.
Marchionne’s grand strategy is to combine Fiat and Chrysler into a fully integrated, full-line automotive company that can compete with giants like Volkswagen and Toyota. But the two entities can’t agree on a price—the UAW is thinking along the lines of $5 billion, while Chrysler is offering less—so it looks like the market may have to do it for them.
For the autoworkers, it’s time to monetize their bet on Chrysler because the VEBA has now inherited the obligations for retiree health care. It also makes sense that the VEBA, as a fiduciary, divest its Chrysler stock for a more balanced portfolio. That’s also what prompted the UAW to make a deal with General Motors to sell the preferred GM shares held by another VEBA back to the company for $3.2 billion. The union cashes out while GM has the opportunity to shore up its balance sheet.
In Chrysler’s case, while each side has a vested interest in a deal, Marchionne is essentially threatening to take his bat and ball and go home if he can’t get it done closer to his terms. Although he’s been steadily integrating the two companies, Chrysler’s filing statement contains a warning from Fiat that the Italian company could pull back from its operating alliance, which integrates the two companies’ business plan through 2014. Fiat’s strength is in small car platforms and engines, such as the Fiat 500 that’s now sold in the U.S. The new Dodge Dart is also Italian—it’s a version of Alfa Romeo’s Giulietta. That’s the perfect counterpoint to Chrysler’s strength in Ram trucks, Jeeps, large sedans like the Chrysler 300 and minivans. Chrysler has also imported Fiat’s advanced manufacturing systems.
Separating Chrysler and Fiat would not be easy at this point, nor desirable. Some of Fiat’s best operators are now working for Chrysler. When Marchionne formed a global Fiat Chrysler management team of about 25 top executives, he blended the best of the two companies. Chrysler’s Saad Chehab, for instance, is head of the Lancia and Chrysler brands. Fiat’s Francois Olivier is Chrysler’s chief marketing officer as well the head of Fiat brand. When Fiat’s Pietro Gorlier moved Michigan to run Chrysler’s Mopar business he said at the time: “We burned the ships.”
Fiat may need Chrysler more than it admits. The European auto business is horrible, suffering from huge manufacturing overcapacity. Meanwhile, Chrysler is running flat out and minting money—it had $66 billion in revenues last year, earned $1.6 billion and has $12 billion in cash. Based on those numbers, analysts have ticked Chrysler’s worth at $10 to $11 billion, according to published reports. That would suggest the value of the VEBA’s shares is around $4.15 billion to $4.57 billion.
In Marchionne’s view, Chrysler without Fiat—or himself at the helm—is worth a lot less, so he wants to pay a lot less for the VEBA’s shares. But even if he has no intention of playing his nuclear card, any kind of tail risk would conceivably hurt the IPO’s price, as would even more conventional uncertainty about how the deal ultimately plays out. That’s Marchionne’s leverage. He’s basically warning the UAW that they can get paid now, and avoid the price risks of the IPO, or get paid later, and take their chances.