January 21, 2009 at 1:17 am

Chrysler, Fiat team up: Italian firm takes initial 35% stake

A global alliance with Fiat SpA of Italy brightens Chrysler LLC's prospects for long-term viability even as it raises the possibility that the Auburn Hills automaker could end up with its third new majority owner since 1998.

Under the terms of the noncash deal, Fiat would take a 35 percent stake in Chrysler and provide access to its fuel-efficient small car platforms and engines.

Fiat Auto and Chrysler would be able to tap into each other's distribution and supplier networks and take advantage of different geographic strengths for greater global reach.

"This is a vote of confidence," said Jim Hall, an analyst with 2953 Analytics in Birmingham.

The preliminary deal comes as Chrysler is paying its bills with a $4 billion federal loan and seeking another $3 billion in aid. The loan terms require Chrysler to submit a restructuring plan by Feb. 17 that shows how it will become profitable again and to demonstrate progress against the plan by March 31. The partnership with Fiat, which must be approved by the government, would be part of that plan.

"While Fiat will not provide a cash equity injection, its willingness to dance with Chrysler may provide Washington just enough cover to lend Chrysler additional funds," JPMorgan analyst Himanshu Patel wrote in a research note Tuesday.

Although the proposed alliance addresses Congress' concern that Chrysler is neither big enough nor global enough to survive on its own, it could be at least 18 months before the expected benefits kick in and the deal does little to allay the short-term challenges posed by continuing weakness in U.S. car and truck sales.

"It is assuming Chrysler survives over the next year or so in some form," said Joseph Phillippi, an analyst with AutoTrends Consulting Inc. in Short Hills, N.J.

The agreement is nonbinding, which means the terms are unenforceable in court. A final deal is expected to be completed by April, Chrysler Chairman and CEO Robert Nardelli said in a letter to stakeholders Tuesday.

A tie-up has been in the works since late last year. It could lead to yet another majority owner for Chrysler, which was absorbed into DaimlerChrysler in 1998 and sold to Cerberus Capital Management LP in August 2007.

Fiat spokesman Gualberto Ranieri described the holding in Chrysler as "an initial stake, and there's an option to increase."

Sources close to Chrysler said Fiat could take its stake to 55 percent, but not for many years.

As a major shareholder, however, Fiat would have "influence on management," Chrysler spokeswoman Shawn Morgan said.

Lifeline for Chrysler

Whether or not Fiat becomes the majority stakeholder, the move can be seen as a lifeline for Chrysler and a dilution of Cerberus' ownership, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

"The government will view this positively," Cole said. "One of the concerns all along with Chrysler is it did not have global scale and it needed that for long-term survivability."

The deal shows Chrysler is serious about restructuring by increasing its global footprint and adding smaller vehicles, according to an analysts' report from IHS Global Insight of Troy. Without doing so, "Chrysler might have had difficulty passing through the government checkpoints scheduled for Feb. 17 and March 31 in accordance with the bridge-loan funds," the report said.

In seeking federal aid, Nardelli told Congress that partnerships were key to sustained viability and lawmakers supported that strategy during hearings late last year. On Tuesday, Nardelli said the Fiat alliance adheres to the federal loan conditions.

Cole, who was briefed Tuesday by Chrysler President Jim Press, said the government was aware of the deal.

"This was not totally in the dark," Cole said.

Deal 'in the best interests'

The Fiat stake would come from the 80.1 percent of Chrysler held by Cerberus. The private equity fund would continue to see its ownership ratchet down because it has also offered equity in return for concessions from the United Auto Workers union and bondholders, all of which are conditions attached to the federal bailout.

The deal "is in the best interests of all Chrysler stakeholders," Cerberus spokesman Peter Duda said Tuesday.

Daimler AG, which still owns 19.9 percent of Chrysler, remains interested in selling its stake, said Daimler spokesman Han Tjan.

Fiat is not investing cash or committing to fund Chrysler in the future, but the move is seen as a vote of confidence in the Auburn Hills automaker. However, there remain concerns about the timeline.

Product cycles and the time needed to retool a U.S. plant mean it could be a year or 18 months before the effects of the deal are felt at the retail level, said Hall, of 2953 Analytics.

It could be five years before all-new products emerge from the alliance and for the companies to realize the full cost savings, which some have projected at $3 billion to $4 billion, said Phillippi. He is unconvinced Chrysler can survive that long if auto sales don't pick up. U.S. car and truck sales fell 18 percent last year, with Chrysler sales down 30 percent, the most of any major automaker.

"I don't see (Chrysler) as any more viable today than three days ago because of the perilous state of the U.S. auto industry," he said.

But the move could give Chrysler "a positive bounce if consumer confidence in its long-term viability improves," according to IHS Global Insight.

Fiat comes back to U.S.

The alliance would help Fiat enter the U.S. market again, which it has been planning for and postponing for seven years as it attempts to re-establish the Alfa Romeo brand here.

Some analysts have said the luxury nameplate could tap into Chrysler's full-size rear-drive sedan platform as well as its SUVs. Chrysler is preparing to launch a new platform for the next-generation Jeep Grand Cherokee in the retooled and flexible Jefferson North assembly plant in Detroit.

Building Dodge-badged Fiats at a Chrysler facility also would absorb some of Chrysler's excess capacity, Phillippi said.

Adding smaller vehicles also will help Chrysler meet new fuel-efficiency standards, according to IHS Global Insight.

The tie-up with Fiat should not affect Chrysler's partnerships with Nissan Motor Co. to exchange full-size pickups and small cars because Fiat is not interested in the pickups, and the cars from Nissan are still larger than what Fiat would provide, Hall said.

Nor should there be any concerns with Chrysler's continued supply of minivans for Volkswagen AG.

Nardelli told stakeholders "the alliance would help sustain Chrysler's product development, manufacturing and sales operations here in the U.S."

Cole and Hall expect Alfa Romeo to have its own dealer network, but Cole expects smaller Fiat products such as the 500 will be manufactured at Chrysler plants and sold as Dodges via the Chrysler dealer network.

"It looks like it gives them both some scale, and they're off and running," Cole said.

The alliance "poses minimal risk for both sides," JPMorgan's Patel said. "Fiat may be able to bring its small car platforms and powertrains to North America at little cost."

And it fills Chrysler's need for small-car technology, said Timothy Leuliette, CEO and president of Dura Automotive Systems. Entry into Fiat strongholds such as Europe and Brazil will help Chrysler sell more Jeeps and minivans, Leuliette said.

The Fiat board is to meet Thursday to approve fourth-quarter results, at which time members are expected to talk to investors about the Chrysler deal.

Robert Snell contributed to this report. You can reach Alisa Priddle at (313) 222-2504 or apriddle@detnews.com">apriddle@detnews.com.

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