All deal makers have a number they want to hit. In the case of Chrysler, the United Automobile Workers union has one number, and Sergio Marchionne, the chief executive of both Chrysler and Fiat, has another.
Alas, they are $6 billion apart.
Fiat and the union workers’ health care trust are fighting over that yawning gulf in a court in Delaware, arguing over buyout arrangements struck in the depths of the financial crisis when Chrysler was arguably worthless. It’s a lesson in how deals struck hastily in the heat of crisis can come back to haunt in unexpected ways.
In 2009, Steven Rattner and his team at the Treasury Department ably brokered what could only be described as a prayer. Chrysler would be thrown into bankruptcy. Afterward, Fiat would own 20 percent, the Treasury Department would get 10 percent, and the Canadian government, 2 percent. The remaining 68 percent of Chrysler was given to the union workers’ health care trust, formed to pay out Chrysler health care benefits to retirees. In addition to a majority ownership of Chrysler, the trust was also given a $4.59 billion note from Chrysler to eliminate the company’s obligation to provide any further health benefits to retirees.
The deal was viewed as a bargain for a federal government desperate to save the automaker. At the time, Chrysler was a loser that most thought could not be saved. There were no buyers other than Fiat. And so the government was happy to give Fiat control, even though the Italian company had only a 20 percent stake. For this, Fiat paid nothing, instead offering its expertise.
As for the health care trust, the Treasury Department used the bankruptcy process to jump it ahead in priority. In a normal bankruptcy, the trust would most likely have been left with nothing. Instead, the government arranged for the trust to receive more than it otherwise would and more than almost all of Chrysler’s creditors. The reason was to ensure employee peace. The government could do this because it was the only lender in town, putting up $8.5 billion of taxpayer money in the bankruptcy alone.
If it succeeded with Chrysler, Fiat wanted a clear path to acquire all of the company. So, Fiat negotiated an option to acquire 40 percent of the interests held by the health care trust and all of the interests held by the government. Starting in July 2012, the Italian company was allowed to purchase up to 20 percent of these covered interests every six months. Fiat also negotiated a series of arrangements that allowed it to increase its stake by making improvements to Chrysler.
These deals, which were cut in dark times, are coming back to bite.
Chrysler has since recovered and is now profitable. In the gloomy European market, Fiat is struggling.
To save Fiat, Mr. Marchionne wants to put the two automakers together. In 2011, Fiat took a step in this direction by purchasing the stakes held by the United States and Canadian governments for $640 million.
Now, it’s the turn of the U.A.W.’s health care trust, known as the voluntary employee beneficiary association, or VEBA. But with real money at stake this time, the parties are ready to fight Detroit-style.
Last fall, Fiat exercised its option to buy 3.3 percent of Chrysler from the trust. Fiat calculated the price from the option agreement, and came to $139.7 million, valuing all of Chrysler at about $4.2 billion.
VEBA protested, asserting that Fiat misread the agreement. According to the trust, Fiat’s calculations have a number of flaws, which means that this purchase should be at least $342 million and perhaps more, valuing Chrysler at more than $10 billion.
That means there is a $6 billion difference in value arising from each side’s interpretation of the agreement.
The parties are litigating this gap, and the future of Mr. Marchionne’s vision for Chrysler hangs in the balance. If the Delaware court rules for Fiat, Mr. Marchionne will continue to build his stake in Chrysler with an eye toward a buyout of the company.
If the court finds for VEBA, however, Mr. Marchionne may halt his pursuit, unable to find the billions to pay the trust. Still, at a minimum, it would mean billions more for Chrysler’s retirees.
There is some irony in the dispute, given that the goal of the options was to get a value of what Chrysler was worth and avoid disputes.
But there is a big hole in the language spelling out how the option price works. The health care trust is claiming that the value of Chrysler should be calculated without counting the $4.5 billion note issued to it by the company. Fiat disputes this because the note reduces the value of Chrysler by about $4.5 billion.
Why the lawyers didn’t specifically address this in the contract is a mystery. Whatever the reason, the lawyers used a term that talked about “debt for borrowed money,†and health care trust argues that the note wasn’t for money and so should be excluded.
Perhaps we should call it a $4.5 billion drafting error.
At a hearing before the Delaware judge a few weeks ago, VEBA also adopted another strategy â€" stall. The health care trust threw up all sorts of problems with the purchase price calculation, and also said a trial was needed.
The strategy is simple. The longer the delay, the more likely that Mr. Marchionne will cave and come to the negotiating table, paying more money.
As for those legal arguments and the dispute over the purchase price language, they highlight how small details can prove to be very important. Billions of dollars now turn on a single phrase and other items the lawyers didn’t define or include in the contract.
This is where the fate of Chrysler and the health care trust sit as they await guidance from the Delaware court.
VEBA is underfunded by billions of dollars. It needs the money. (Coincidentally, the 2009 arrangements capped the trust’s profits from Chrysler at about $4.5 billion, turning the rest over to the government. The government sold that right in 2011 to Fiat for $75 million. So, the maximum profit the trust can get from its Chrysler stake is $4.5 billion).
The union and the trust know that Fiat wants to deal, but things may not be so rosy in the future. Both Chrysler and Fiat face pressure to bring on new models from competitors. And remember, this deal affects only 40 percent of the health care trust’s share. The rest still needs to be bought out, and the trust doesn’t have to sell. The trust will use this additional leverage to aim for that $4.5 billion, because anything else goes back to Fiat.
It is ripe territory for a deal â€" if only a price can be agreed upon.
