naked capitalism

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.