April 15, 2009 at 12:37 pm

Fiat races to strike Chrysler deal

But Italian carmaker's lack of cash raises doubts

Chrysler President Jim Press checks out a Fiat 500 at the New York auto show last week. (Mark Lennihan / Associated Press)

Fiat SpA is offering Chrysler LLC billions of dollars worth of small-car and engine technology as part of a proposed alliance, but analysts, auto executives and, most importantly, members of the White House auto task force question whether the benefits will come in time to save the Auburn Hills automaker.

Savings from platform- and component-sharing are valued at as much as $10 billion but could take months, even years, to materialize, while Chrysler's cash needs are urgent.

Fiat is Chrysler's last hope to avoid bankruptcy, but the Italian automaker is constrained in its ability to help because it is also burning through cash, analysts say. Fiat's debt rating was downgraded to junk status recently by Standard & Poor's Ratings Services.

As the government's April 30 deadline for a decision on Chrysler approaches, top Fiat officials are making frequent trips to Detroit and Washington to hammer out a deal.

A person familiar with the task force's thinking said Tuesday that the task force is not convinced that an alliance with Fiat will ensure Chrysler's viability. But the source, who spoke on condition of anonymity, indicated the government did not see an alternative option for the smallest of Detroit's automakers.

Late last month, President Barack Obama gave Chrysler until April 30 to conclude a deal with Fiat. If the two car companies succeed in joining forces, the government will offer Chrysler up to $6 billion in additional loans. Officials in Washington are loath to see Chrysler fail at such a vulnerable time for the national economy.

The source said the task force was studying how Chrysler intended to use the loans to stay in business. Chrysler burned through $7 billion last year and analysts estimate it is going through as much as $1 billion a month in this steep downturn.

The risk of a Chrysler bankruptcy is rising as the company struggles to conclude government-mandated deals with bank lenders, bondholders and the United Auto Workers union to reduce its debt.

Chrysler has offered debtholders about 15 cents on the dollar, or about $1 billion, for its $6.8 billion in secured debt. Its banks are preparing a counter-offer, the source said.

While some bankers grumble that Fiat will get a stake, initially 20 percent, without putting in cash, a source said banks aren't calling on Fiat to inject money.

The banks appreciate that Fiat is the only carmaker brave enough to approach Chrysler, the source said, and they don't want to alienate the Turin-based automaker. Chrysler's owner, Cerberus Capital Management LP, said in December that it was willing to relinquish its holding as part of a Chrysler bailout. Its former owner, Daimler AG, has written down the value of its remaining 19.9 percent stake in Chrysler to zero.

From the outset, Fiat said it would not inject cash into Chrysler but offer the U.S. automaker access to its international dealer network and to its small-car platforms and engine technology. Fiat and Chrysler value that contribution at between $8 billion and $10 billion.

The task force has retained Boston Consulting Group to assess the value of Fiat's technology and expertise. Chrysler and Fiat are talking about sharing at least four platforms, two engines and two transmissions. Developing a new platform -- the underpinnings for one or more models -- can cost upwards of $1.5 billion, said Gaetan Toulemonde, a Paris-based auto analyst for Deutsche Bank.

But he questioned whether Chrysler would survive long enough to see the benefits. "The first model Chrysler will get will be in the next couple of years, and the issue of its survival is in the next six months."

A source familiar with the Chrysler-Fiat negotiations said that while it would take time to see all of the cost-savings from an alliance, some gains could be achieved fast. Some sharing of components and economies of scale can be achieved within months, said the source, but declined to elaborate.

Fiat also would help Chrysler by sharing its own turnaround experience. Under Chief Executive Sergio Marchionne, the Italian automaker returned to profit in 2005 after learning to pinch pennies and it has earned money every year since.

But like most automakers, Fiat burned through cash last year, and it has substantial debts coming due this year and next.

Standard & Poor's Ratings Services recently downgraded Fiat's debt to below investment grade. It has a negative outlook on the company.

"The downgrade reflects our opinion of Fiat's weak liquidity position considering 2009 and 2010 debt maturities," said S&P credit analyst Barbara Castellano. At the end of 2008, Fiat had close to $6 billion in debts coming due over the next year.

ctierney@detnews.com">ctierney@detnews.com (313) 222-1463. Staff Writer David Shepardson contributed.