Fiat Is in Hot Pursuit of Chrysler
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Italian automaker Fiat (NASDAQOTH: FIATY.PK) is in the process of purchasing a 41.5% stake in Chrysler, which is currently owned by the United Auto Workers’ retiree health-care trust. The company is in discussions with several banks to acquire the necessary funding and to refinance the two companies’ debt. According to Bloomberg, Fiat may be asking for as much as $10 billion in financing to both buy Chrysler shares and restructure the automakers’ debt.
Fiat considering a move to the U.S.
Back in 2009 when Chrysler emerged from bankruptcy after receiving TARP funds from the U.S. government, Fiat “purchased” a 35% interest in the company. Fiat didn’t actually provide cash for its ownership stake, though; instead it exchanged technology that was needed by Chrysler to create smaller, more fuel-efficient cars. These new models were aimed to compete with similar offerings from Toyota (NYSE: TM), General Motors (NYSE: GM), and other large automakers.
Currently, Fiat owns 58.5% of Chrysler and plans on acquiring the remaining stake by the end of the summer. The current partnership has brought benefits to the two companies in the form of greater economies of scale, the ability to increase the volume of certain vehicles and improve returns on investment. It also brings the ability to sell a full range of models that utilizes Fiat’s expertise in the small-car segment and Chrysler’s knowledge in the mid- and full-size segments. For example, Chrysler’s new Dodge Dart has an architecture based on Fiat’s Alfa Romeo Giulietta model.
By purchasing the 41.5% stake, Fiat can proceed with its plan to merge the two automakers so that they can compete on a global scale with their larger competitors. According to Businessweek, one option under consideration is the creation of a new U.S. company with new shares of the merged entity issued to current stockholders. This is a strong possibility as Fiat is also considering moving its headquarters to the U.S.
Six million cars is the magic number
Chrysler's first-quarter of 2013 saw net revenues of $15.4 billion, a drop of 6% from a year ago due to several new product launches. The company expects to have worldwide shipments of 2.6 to 2.7 million vehicles in 2013. The Fiat brand reached 100,000 units sold in May, an important milestone for the company since its reintroduction into North America in 2011.
Fiat CEO Sergio Marchionne has stated that the company will need to sell 6 million vehicles to stay in business; in 2012, Fiat and Chrysler combined sold 4.2 million cars. This is compared to 9.2 million sold by GM and 9.75 million sold by Toyota.
Analyzing the competition
Toyota has seen its consolidated net revenues rise by 19% in fiscal year 2013 and the net income attributable to Toyota rise by 239% over the previous year. The company's financial summary for fiscal year 2013 that ended in March noted a strong demand for products with green technology across all markets, hinting that small, fuel-efficient cars are on the mind of many consumers.
The North American market is an important one for Toyota, having the second highest net revenue totals after Japan and comprising 31% of total consolidated sales. For 2014, the company expects 29% of its vehicle sales to come from the North American market. Analyst estimates from the Thomson Financial Network predict company growth of 44% over the next five years.
General Motors' expected five-year growth rate is similar to the industry average of 16%. The company’s May 2013 unit sales were up 3% compared to a year ago and were at their highest level since September 2008. GM notes strong sales in its mini, small, and compact car lines, which increased 27% in May and were led by models such as the Chevrolet Sonic and Cruze. The Cruze had its best May sales ever and the Sonic sold more units in May than it has in any month so far. Net losses were reported for the first-quarter of 2013 in GM North America, reflecting the continued slow growth in the U.S. economy.
Fiat’s purchase of additional Chrysler shares to complete its ownership of the automaker can benefit both companies. Fiat and Chrysler can restructure their debt to obtain better terms and a combined company should be able to compete more effectively with rivals Toyota and GM, especially in the small car segment.
If Fiat creates a newly merged company and issues shares to the company’s current stockholders, investors could benefit from exchanging shares for a business with greater growth potential and long-term viability. It remains to be seen whether the combined company can meet its goal of 6 million units sales, however. Investors should watch for ongoing events surrounding the buyout and the final terms of the deal to evaluate the future impact on both companies.
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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!