Fiat has renewed its majority ownership to nearly 54% in Chrysler after buying back 6% from the US Treasury and Canadian Government for $710 million. Fiat aims to up its stake to 59% by the end of 2011, and hopes the final merger will be sealed mid next year, when it has an option to buy the remaining shares.
Fiat lost 10% ownership to the US and Canadian governments following the Chrysler bankruptcy bailout plan in the summer of 2009. The bailout debt was $12.5 billion, of which Fiat has already paid $11.2 billion back to the US Treasury, six months ahead of schedule.
Tax payers lost the remaining $1.3 billion when the US Treasury handed over the last 6% shares to Fiat despite the original acquisition agreement in 2009, which stated that Fiat could not gain majority control of Chrysler until all US Treasury loans had been paid.
Nearly $3 billion has also been repaid to the Canadian government.
Negotiations With Chrysler, VEBA
For the merger to be finalized, Fiat must first complete negotiations with the owners of the remaining 41.5% of Chrysler's shares, held by the United Auto Workers union’s Voluntary Employee Beneficiary Association, or VEBA. Currently, Chrysler Group LLC and the United Auto Workers are working to reach a deal on a labor contract without the use of arbitration. Both sides would rather work things out one-on-one as opposed to resorting to the use of an industry outsider, which could lead to an unfavorable conclusion for both parties.
Chrysler's labor costs are among the lowest in Detroit and are on-par with Japanese car manufacturers at roughly $50-51 per hour. Chrysler's worker wage preference would include $2 to $3 an hour tied to the company's performance.
To achieve this, Chrysler must cut costs. When UAW purchased Chrysler's shares, the company's labor costs were at $76 an hour. VEBA is considered to be one of the contributing factors in the reduction of labor costs: Chrysler's active UAW members pay only 7-8% of their overall healthcare costs, while the average American worker pays around 31%. VEBA is able to accomplish this partly because of the shift of retiree healthcare costs from the company's balance sheet.
Fiat Debt Weighing Heavy
Will Fiat be able to afford the remaining shares so that it can gain total ownership? Despite progress made by Chrysler and the UAW, Fiat's debt is beginning to hurt their stock. On July 26th stock fell by 4% to €7.20. On the 27th, it fell even further, closing at €6.90.
Worries loom over Fiat's estimated net debt of between €5 and €5.5 billion by the end of this year. Analyst forecasts show a full-year net debt of €4.8 billion, with a second quarter debt reaching €3.4 billion. An anonymous London analyst has publicly stated, “The big confusion would be around the net debt figure. We'd like to know why there will be a €2 billion net outflow in the second half.”
Key Statistics – Automotive Manufacturing in the US (source: Supplier Relations)
- The automotive industry's revenue was roughly $11.6 billion last year, with gross profit exceeding 18%.
- Imports from 26 countries were valued at $0.6 billion.
- An estimated $180 million worth of merchandise was exported to 104 countries.
- The total domestic demand, which is calculated by adding import value to shipment value and subtracting the export value, was $12 billion last year.