PREVIEW:Fiat Faces Nervous Week Ahead Of Chrysler Deadline
April 23 2009 - 1:10AM
Dow Jones News
Fiat SpA (F.MI) has enough wayward offspring to support without
Chief Executive Sergio Marchionne trying to persuade investors
Thursday that he can add Chrysler LLC to the brood by an April 30
deadline set by the U.S. government.
The Italian group is already bailing out its CNH Global NV (CNH)
farm equipment business, while the Iveco trucks and core Fiat Auto
units are wading through a global slump in demand, although the
latter's lineup of smaller and environmentally-friendly models has
seen it fare better than most rivals.
Marchionne, who will present Fiat's first-quarter results
Thursday, has just eight days to nail a revised pact with Chrysler
and its Cerberus Capital Management parent amid brinksmanship by
labor, creditors and the Obama administration that could yet push
the third-largest U.S. auto maker into bankruptcy and possible
liquidation.
The Italian company has long sought access to the U.S. market,
despite a disastrous flirtation with General Motors Co. (GM)
earlier in the decade. Access to the U.S. would move it towards the
scale that Marchionne believes will consolidate the global auto
industry into five or six groups. But Fiat's $9.6 billion debt and
a credit rating teetering on the edge of junk status limit its
flexibility to persuade the U.S. auto task force that it can rescue
Chrysler.
The Fiat-Chrysler "framework" deal announced earlier in April,
just days after the task force rejected the plan first outlined in
January, remains sketchy at best. Both companies have been guilty
of flip-flopping on how it might be structured, as well as the size
and scope of Fiat's financial commitment.
Marchionne, who once insisted he wasn't aiming to run Chrysler,
could end up doing just that. Chrysler also had to reverse a
statement that Fiat would take on part of its liabilities, a
near-impossible situation given Fiat's own balance sheet
pressures.
Fiat has yet to clarify the financial cost of taking an initial
20% stake in Chrysler, though Dow Jones Newswires revealed this
month that retooling two U.S. plants to produce its 500 car and an
Alfa Romeo model could reach $1 billion, according to an industry
expert.
Chrysler and its stakeholders have been doing themselves no
favors, with employee representatives and creditors both engaged in
brinksmanship that could drive Fiat away, never mind the auto task
force.
Marchionne was in the U.S. last week. Since then, Chrysler's
labor talks have stalled in Canada, while a group of large
creditors rejected a request from the U.S. Treasury to accept what
would be, for them, more onerous terms.
The grip held on Fiat by the controlling Agnelli family means
that Marchionne is unlikely to face too rough a ride at Thursday's
board meeting, unless the ticking clock that is Chrysler becomes
viewed more as a time bomb for the balance sheet than a
once-in-a-generation opportunity to crack the U.S. market and stay
on the global stage.
Chrysler needs Fiat for its survival; the Italians have a
choice, with speculation about a Franco-Italian alliance involving
Renault S.A. (RNO.FR) or PSA Peugeot Citroen (UG.FR) continuing to
swirl.
In the quest to be part of the global elite, the proposal to
take an initial 20% stake in Chrysler for no cash remains a neat
one. But only so long as Fiat can make payment in kind - with
small-car technology and management expertise, as well as
reciprocal distribution - rather than cash. Remaking Chrysler
plants to produce Fiats and Alfa Romeos will require cash, as will
repaying the $10 billion government loan - including $6 billion it
hopes to be approved by next week. Moreover, it will not be able to
boost its stake in Chrysler until the loans have been repaid.
Marchionne has made a variety of statements over the past week
about the health of the Chrysler talks. He threatened to walk away
from the deal if the Canadian Auto Workers' union kept fighting
demands to reduce employee benefits. Later that day he said the
merger could still be accomplished.
Investors will be looking for more certainty from Marchionne in
the first-quarter report and conference call, after having pushed
Fiat's shares almost 45% higher since the start of the year, a
performance that trails only Ford Motor Co. and Nissan Motor among
the global auto elite.
Fiat's stock enjoys a premium to the sector, helped in part by
the ability of its CNH subsidiary - which also reports Thursday -
to access the capital markets once more. Just as well, since Fiat
is chasing repayment of inter-company loans to help its own balance
sheet.
The auto segment's performance during March in Brazil and
particularly western Europe, where sales rose 13.8% in April versus
an 8% sector decline, have also helped buff Fiat's shine.
Analysts still remain skeptical about the group's full-year
targets - a rarity in the sector - for an operating profit in
excess of EUR1 billion.
Marchionne has nine months to prove them wrong, but he doesn't
even have nine days to make Chrysler a reality.
-By Jeff Bennett; Dow Jones Newswires;
jeff.bennett@dowjones.com; 248-204-5542