Fiat-Chrysler Deal Hinges on Obtaining $3 Billion in US Loans

Color me suspicious (as if that would be news to readers). Fiat and Chrysler have been talking about a deal that by all appearance might get the US automaker off government life support. That is probably a good idea, because if push were to come to shove, Chrysler would be the number one candidate to be dismembered and liquidated. Presumably Cerberus saw the handwriting on the wall and decided it was going to try to salvage whatever it could from this garbage barge before moving on.

But now we learn, on the evening of Inauguration Day, and after the stock market has had taken a big dive, that the deal now hinges on the government stumping up an additional $3 billion.

Now of course, it may simply be, as the Wall Street Journal suggests, that this $3 billion is the same sum that the automaker said it needed all along, and the powers that be made getting that amount contingent on developing a long-term plan for viability by February 17. The part that is not mentioned here is when the Fiat deal was expected to close (it takes longer than one would imagine, trust me). If the timing was inevitably going to be, say, second half of March or later, then presumably Chrysler would have needed interim financial support from somewhere, and that “somewhere” would not be Fiat, but either Cerberus or Uncle Sam.

It seems rather odd that this issue is coming up now. Chrysler should have always expected that it would need to provide for its own financing prior to the closing of any deal with a third party. Was the press merely out of the loop on this one? Was Chrysler kidding itself? The Journal is depicting the loan request as a “Fiat demand” but if the closing was not expected to take place pronto, it looks entirely reasonable to me (ie, characterizing it as a “demand”, while technically accurate, puts the wrong coloration on the situation).

This may be inept rather than nefarious, but the timing makes it look like this is a late-in-game demand, when one would have every reason to think that the principals would have know about it all along. Given the disastrous job the Big Three have done in stage management (with the private jet flights Exhibit 1) it is entirely possible that this issue hitting the media now is poor communications planning, rather than a clumsy attempt to strong-arm the incoming Adminsitration.

From the Wall Street Journal:

Chrysler LLC has found an international partner in Fiat SpA but the auto maker isn’t out of the woods, mainly because the deal is contingent on Chrysler getting $3 billion in additional government loans, said people familiar with the pact.

On Tuesday, Chrysler and Italy’s Fiat confirmed they had reached an agreement on an alliance that would give Fiat a 35% stake in the American company. Fiat would not put any cash into Chrysler but would provide technology and vehicles that Chrysler could build and sell in the U.S.

But the deal becomes binding only if Chrysler gets $3 billion more in financial help from Washington, said the people familiar with the terms of the agreement.

A Fiat spokesman declined to comment on the matter. Chrysler spokeswoman Shawn Morgan wouldn’t comment on Fiat’s demand, but said Chrysler believes the $3 billion in loans are necessary for its viability….

If Fiat meets goals for improving Chrysler’s operations within 12 months of the agreement, Fiat would have the option of buying an additional 20% of Chrysler for about $25 million, said people familiar with the matter. Details of the goals weren’t clear.

The price is a small sum for a 20% stake in company the size of Chrysler. In 2007, private equity group Cerberus Capital Management LP was required to put $5 billion in cash into Chrysler’s auto operations as part of its acquisition of the company from Daimler AG. In 2007, Chrysler had revenue of about $60 billion.

For its part, Chrysler will be able to use Fiat’s engine technologies and develop new small cars for its Chrysler brand based on Fiat models, such as the Fiat 500 subcompact.

But that won’t give Chrysler much help now while it is struggling to keep going. It typically takes auto makers a year or more to re-engineer European vehicles to meet U.S. safety standards.

Chrysler could face tough questions about why taxpayers should put more money into the company when neither its majority owner, Cerberus, nor its new partner, Fiat, are doing the same.

Ahem, it is Cerberus in particular who ought to pony up dough, and as mentioned earlier, how much Fiat should be on the hook depends on the target closing date versus the cash flow timeline.

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7 comments

  1. Anonymous

    Eh. Auto news generally bores me. It’s like watching a half dozen senior citizens at a retirement home and speculating as to-

    1. Who will die next?
    2. Who might get a transplant?
    3. Who my chop out another organ?

    -Snore…tinged with horror. I’m sure this will be a reference analogous to something relating to Atari pong in 100 yrs hence.

    Stand back and let nature take its course.

  2. YK

    From the inaugural address: “We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished.”

    Judging from the state of the US auto industry, does the above statement fit Harry Frankfurt’s definition of bullshit?

  3. Anonymous

    Picking up on Mervyn King’s “oiling the wheels” to improve liquidity, there is another way to make fluids flow. That is to filter the fluid in order to improve the viscosity, i.e. remove the less viscous components so that the remaining fluid flows faster. Simply adding more “thin” fluid (QE) is far less effective. The so called “toxic assets” inhibiting the velocity of money flows are like grains of sand rather than just less viscous fluid and should be filtered out asap because the whole system (or some parts(Bear, AIG etc) will seize up. Only after removal of contaminents should fresh oil be added.

    As sand is of only negative value in such a system its removal should not reward those who put it in.

    Because adequate filtration has not been carried out, it is now necessary to permanently remove major components of the engine system, namely many of the pumps (aka banks). Failure to perform proper maintainance at the fluid level (aka clean filters) means mechanical repairs will now be required and maybe even full shutdown for a period.

    Expect runs on several currencies while our leaders try to decide how to do this.

    Joe the maintenance man.

  4. bg

    “Ahem, it is Cerberus in particular who ought to pony up dough, “

    I am sure the above statement is right (I personally don’t know the details.) But doesn’t Cerberus have an absolute right to cut its losses at there current commitment by letting Chrysler fail? Isn’t it in Cerberuses interests to minimize losses on an obviously bad deal?

    I don’t have a lot of sympathy for the situation they find themselves in, but I do believe in the rule of law, and an even hand.

  5. charlie

    FIAT is one of the great stories of our time. First, they snooker $2 billion out of GM in 2004. Then, the partner with Ford (and steal some management from VW) and come up with the New 500 — which is based off a Ford Kaa (and the GM money) Now, they want to use Chrysler to get an American factory and dealers, but they do a deal with Cerebus, not with Daimler, who would love to get rid of their stake. Ford must be delighted that the kaa-derived 500 is coming to the US, since it is one of those city cars that Ford won’t sell here. I believe Ford, given the benefits problem the Kaa wouldn’t make any money — but Fiat can make money selling it if the US government gives them cash.

    They’ve been in bed with every Euro-American car company, and they are still playing. Amazing deal ability.

  6. artichoke

    The US is just as capable and just as smart as before.

    But the competition got stronger.

    That’s why we are now losing. It’s a financial crisis but also real diminution in our competitive position. We won’t get back where we were.

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