Sergio Marchionne could not have wished for a better start to 2014. On the first day of the new year, the boss of both Fiat and Chrysler managed to strike a deal allowing the Italian company to become the sole owner of Detroit’s third-largest automaker. And the $4.3 billion two-part pact he has made with Chrysler’s union trust fund puts him on top.
Firstly, the price is a reasonable one. Fiat is paying $3.65 billion for the almost 41.5 percent of Chrysler given to the trust as part of the 2009 U.S. government-sponsored bankruptcy. That values the Detroit automaker at just under $9 billion. That’s less than the $10.3 billion the fund had argued the company was worth.
But the two sides have also built in a face-saver for the trust. Chrysler has agreed to give an additional $700 million in cash to the trust over the next three years. That effectively increases the trust’s take from the sale to $4.35 billion, which is pretty much the minimum it always had as a target.
That implies Chrysler is worth around 5.4 times estimated earnings for 2013. With Ford Motor trading at just over nine times earnings, and with a far better pre-tax margin, that looks relatively fair. But it also shows how much progress - and concomitant value creation - Mr. Marchionne and Fiat’s owners the Agnelli family, still have to shoot for.
On top of that, Mr. Marchionne has put Fiat on the hook for only $1.75 billion of the purchase price - a handy trick as the Turin-based company, like its European mass-market rivals, needs all the resources it can marshal to combat a weak market. The other $1.9 billion will come as a special distribution from Chrysler’s so-called dividend basket. This contains half of the automaker’s earnings since the start of 2012 and Fiat is allowed to use the trust’s share of the cash to fund any equity purchases.
The agreement resolves a dispute over price between the two automakers and the trust that had been festering for almost 18 months. It involved court cases, and the fund had even resolved to fulfill a threat to take part of its Chrysler stake public - a messy proposition that would have left both sides unhappy. Mr. Marchionne can start his year without any of those distractions.
Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
