April 24, 2009 at 1:00 am

Neil Winton: European Perspective

Win-win for Fiat-Chrysler if hurdles can be jumped

As the April 30 deadline approaches for Chrysler LLC and Fiat SpA to seal a deal, investors and experts in Europe reckon that if the details can be worked out, it looks like one of those rare chances where everybody wins.

But that's the case only if Fiat doesn't change its mind and go for a deal with GM Europe's Opel-Vauxhall unit, analysts said.

With Fiat, Chrysler gets to survive and acquire the small cars it needs. Fiat will be able to return to the American market at minimal cost with a ready-made dealer network. All with no cash changing hands.

But whoever said "the devil is in the details" knew of what they spoke.

For Fiat at least, there is still the option of walking away with little cost, apart from CEO Sergio Marchionne's carbon footprint, as his corporate jet zooms back and forth across the Atlantic. There also is the speculation that Fiat might buy a stake in Opel-Vauxhall. Word Thursday out of Germany said this was a possibility, although Marchionne said in a conference call about the company's earnings that his focus was on the Chrysler deal. He didn't rule out a deal with Opel.

Max Warburton, senior analyst with Bernstein Research in London, said he thinks Fiat is making a serious strategic error pursuing Chrysler. The synergies with Opel-Vauxhall are much more compelling, he said in a report.

For Chrysler, it is a matter of life and death, and the hurdles look huge.

The banks holding debt of $6.9 billion must agree on a deal. How much will they agree to write off? Will this include an equity stake in Chrysler?

Will the United Auto Workers and their Canadian colleagues agree to concessions that will allow Fiat-Chrysler to compete with lower-cost competitors like Honda and Toyota in the U.S.? If this agreement includes an equity stake in Chrysler, will this put Fiat off the deal? How big a stake will the U.S. government take and for how long?

Significant stake for UAW

The UAW could take a significant stake in a bailed-out Chrysler -- maybe larger than Fiat's initial 20 percent, with the U.S. government also a significant stakeholder. Fiat's original plan was to take a 35 percent stake in Chrysler, later moving to more than 50 percent. But the U.S. government wants the initial stake limited to 20 percent, increasing to 35 percent in blocks of 5 percentage points as Fiat brings agreed small car technology to Chrysler. The U.S. government's stake would include the 15 percent that would be gradually ceded to Fiat.

Despite all these potential pitfalls, Professor Ferdinand Dudenhoeffer of the Center for Automotive Research at the University of Duisberg-Essen in Germany sees this as good news for Fiat.

"I think Marchionne's plan is excellent. He takes absolutely no risks and spends no money and gets it all -- the U.S. market and the Chrysler stake. He gets Chrysler's dealer network, and a very cheap launch of Fiat and Alfa Romeo in the States," Dudenhoeffer said.

Fiat Auto owns the sporty Alfa Romeo brand, as well as small car maker Lancia, and upmarket luxury sports car manufacturers Ferrari and Maserati. Fiat withdrew from the U.S. market in 1984. Alfa Romeo pulled out in 1995. The Fiat Group includes Iveco trucks and Case New Holland, the agricultural equipment maker.

Fiat announced its financial results Thursday for 2009's first quarter. Fiat Auto lost a slightly better than expected 30 million euros ($39 million) in the period. Investor expectations were for a 110 million euro ($143 million) loss. Given that all the big European car manufacturers except Germany's Volkswagen are deeply in the red, Fiat Auto's performance isn't particularly worrying. If the results had been worse than expected, that might have jeopardized the talks with Chrysler.

Dudenhoeffer said there is a chance the UAW will reject a deal, but that won't damage Fiat, or stop it eventually moving in for Chrysler.

"If the UAW will not give any reductions, Marchionne will let Chrysler file Chapter 11. In that case, he can come back if Chrysler survives. If not, nothing will be lost for Marchionne. There is nothing to lose, but all to win," Dudenhoeffer said.

Gregor Claussen, an analyst with Commerzbank in Frankfurt, Germany, says the deal will be good for Fiat, and Chrysler too.

"From a strategic point of view, this transaction makes sense for Fiat and for Chrysler too," Claussen said.

Chrysler also would get access to Western European and Brazilian markets. But Claussen doubts if this will come free to Fiat.

"Fiat will sooner or later start building its own cars in the U.S. and this will lead to investments. Fiat will likely take over one plant, maybe more, from Chrysler and the reconstruction of a plant can easily cost several hundreds of millions of dollars. This would further weigh on Fiat's weak financial position. The company reported six billion euros ($7.8 billion) net debt at the end of 2008 and losses in 2009 and 2010 should not be ruled out," Claussen said.

Fiat hasn't said which of its models might be produced in the U.S. and Canada, but speculation has centered on the Alfa Romeo MiTo and 500 models as the main contenders. Fiat-Chrysler also might make a small Jeep based on a new Fiat Panda.

Claussen said he thinks a deal with the UAW is needed to make Chrysler competitive, and Fiat would back off if there was no possibility of cutting costs to Honda/Toyota levels.

The need for extra investment in the U.S. if the deal goes through and Fiat's weak balance sheet have prompted fears it may seek to raise more funds from shareholders.

Go to Berlin, not Washington

Bernstein Research's Warburton said Fiat would be much better off doing a deal with Opel, which would be a bit of a rerun of the deal sealed in 2000, which cost GM $2 billion to pull out of six years later.

"A deal with Opel would have massive platform and engine synergies, would give Fiat much needed technology and platforms to allow it to stay competitive in Europe and would provide complimentary geographic exposure and distribution in Europe," Warburton said.

GM has said it wants to spin off its European operations, which include Opel, Vauxhall of Britain and Saab of Sweden.

"Mr. Marchionne, reroute the corporate jet from Washington to Berlin," Warburton said in a report

"We remain very cynical about the Chrysler transaction. We see the chances of a turnaround as very slim, the management costs as large and the rewards as limited. We struggle to see how the brands and operations of Chrysler can be turned around with any confidence, struggle to identify any large synergies and believe Fiat could find much easier and lower risk ways to get U.S. distribution and production. A deal with Opel would be more compelling in almost all respects, in our view," Warburton said.

Time is right

But John Wormald, analyst with British automotive consultancy Autopolis, says the time is right for a Fiat-Chrysler deal.

"There is a clear need for American car manufacturers to get small cars fast. Chrysler had no access to that with no European arm, and Daimler was not the right one to bring them that. This deal could bring them modern European platforms, which could be a lifeline to Chrysler, and the U.S. administration has been pushing them into the arms of Fiat," Wormald said.

Daimler still owns 19.9 percent of Chrysler, after selling 80.1 percent in August 2007 to Cerberus Capital Management LP for $7.4 billion.

"For Fiat, it is clearly difficult to re-enter the U.S. market and this should give them an open door to walk through, if Fiat gets Chrysler free of debt and the unions on board, but would the UAW allow it? Does it have a choice?" Wormald said.

The University of Duisberg-Essen's Dudenhoeffer thinks the deal will go through.

"For Chrysler there is absolutely no choice and no time. It must get money from (President Barack) Obama and I think, he will provide the money," Dudenhoeffer said. "Chrysler must get cost reduction from the UAW -- and it will get them. And Fiat will take the profits if Chrysler recovers. An excellent strategy -- well done."

Neil Winton is based in Sussex, England. E-mail him at neil.winton@btinternet.com">neil.winton@btinternet.com.

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