Chrysler Buyout by Fiat No Closer, says MarchionneBy: Brian Powell - September 13, 2013
Since the automotive industry crisis of 2008-10, the auto industry here in the United States has remained fairly successful and competitive. Chrysler was one company in the United States that was able to revive itself and benefit from the bailout (even though others think Chrysler might have been better off not accepting bailout money). However, Chrysler has now found itself in a precarious position due to specific parameters that came along with accepting government money.
Instead of choosing to pay members of the United Auto Workers future healthcare payments, Chrysler decided to allow the workers shares in the company instead. In fact, the United Auto Workers, under their volunteer employee’s beneficiary association (VEBA), now own a 41.5% holding of Chrysler. Initially, this may not seem like much of an issue. Sergio Marchionne, chief executive of Chrysler and Fiat, now wants Fiat to buy-out the UAW shares, though, and merge the two companies.
At first glance, it seems as if the answer is obvious. Fiat would just have to pay for the 41.5% of VEBA shares at their current price and the deal should be done. But, there is a slight catch. When the documents outlining the deal between Chrysler and the UAW were created in 2009, a threshold amount was set to limit the profit the trust could obtain from a sale of its shares. This value was set at $4.25 billion initially, with the amount growing at a 9% compound annual interest rate. After 4 years, this amount has now translated to $5.999 billion.
So what’s the issue? Using the amount above would give one an estimate of $12 billion as to the worth of Chrysler itself, which is around $3 billion more than USA Bank values the company. Marchionne does not want Fiat to have to pay more than the company is worth, especially considering he owns both companies. If Fiat and VEBA cannot come to an agreement, the trust wants the option to sell a portion of its shares in an IPO. This would hurt Marchionne’s companies in a couple different ways. First, Marchionne will not be able to combine Chrysler and Fiat, a move which would certainly make both companies more competitive due to the increased capital and decreased expenditures. Secondly, if Marchionne wanted to buyout the trust’s shares in the future, the company will be worth more (not to mention that the compound interest will continue to add up), and thus he will have to give the UAW more money.
I hope that Marchionne and VEBA can come to a deal, if only so that I can see more of those tiny little Italian cars zooming around. Not only are they cute, tiny, and more environmentally conscious, they just add a certain European flair and culture to our banal highways.
Image via Wikimedia Commons