Jan. 20 (Bloomberg) -- Chrysler LLC, rescued last month with $4 billion in federal loans, is trading a 35 percent stake to Italy’s Fiat SpA as the two companies work to create viable carmaking operations.
Cerberus Capital Management LP’s Chrysler, the third- largest U.S. automaker, would get access to Fiat’s small-car lineup and global sales network to wean itself from dependence on trucks and the North American market, while Fiat would expand a U.S. foothold now limited to its luxury brands.
An alliance won’t relieve Chrysler of the need for the U.S. emergency funds. Chrysler still must stem last year’s 30 percent U.S. sales slide, chop capacity and trim dealerships, said Kim Rodriguez, who is based in Southfield, Michigan, and leads Grant Thornton LLP’s automotive-restructuring practice.
“This certainly gives Chrysler a boost, but it doesn’t solve the problem,” Rodriguez said today in an interview. “The answer here is that they had to do something in order to move to the next stage of government support to get cash.”
Hammered by slumping demand in the worst U.S. auto market since 1992, Chrysler had said it would be out of operating funds by mid-month without the federal aid. The Treasury can call the loans unless the Auburn Hills, Michigan-based automaker meets a March 31 deadline to show it can slash debt by two-thirds and revamp operations to survive.
Chrysler and Fiat said the alliance is consistent with the terms of the Treasury Department bailout. The automakers said they signed a non-binding agreement that doesn’t involve any cash from Turin, Italy-based Fiat.
U.S. Approval Needed
The deal requires U.S. government approval. A Treasury spokeswoman, Brookly McLaughlin, couldn’t be immediately reached for comment as President-elect Barack Obama’s administration was poised to take office today. Italian Finance Minister Giulio Tremonti called the accord “good news.”
Chrysler, the U.S. automaker most reliant on its home market and on trucks and sport-utility vehicles, would be able to tap Fiat’s lineup of small, fuel-efficient cars and a distribution network in Russia, China and South America.
Fiat would be able to share products such as trucks, SUVs and electric vehicles, a step toward Chief Executive Officer Sergio Marchionne’s goal of expanding an auto operation that he said on Dec. 6 was too small to survive without a partner. Italy’s biggest automaker also would return to the U.S. with main brands including Alfa Romeo that haven’t been sold in the country since 1995.
Small-Car Technology
“We’ll have to see how much Fiat will need to invest, but this would allow them to enter the U.S. market as a protagonist in a forthcoming recovery with its expertise in small cars,” said Davide Manenti, chief of research at Nuovi Investimenti Sim SpA in Biella, Italy. “That’s a great opportunity.”
Fiat fell 7 cents to 4.41 euros at 5:15 p.m. in Milan trading. The stock declined 2.4 percent this year before today.
The partnership with Fiat should be complete by April and is a step toward keeping Chrysler in business, CEO Robert Nardelli said in a letter to employees. Chrysler has said it burned through at least $6.5 billion in the second half.
The alliance “offers new opportunities to compete in the U.S. market and the global marketplace,” Ron Gettelfinger, president of the United Auto Workers union, said in a statement today. Cutting labor costs is among the requirements of the U.S. aid, and Chrysler and the UAW will have to negotiate those changes.
Dealerships, Factories
Chrysler still has more dealerships and factories than it needs, with Fiat likely to take up about 10 percent of that production capacity at best, Grant Thornton’s Rodriguez said. The two companies are an excellent fit, because they have virtually no overlap in products or geographic reach, she said.
For Fiat, Chrysler is not “the final solution,” said Paolo Mosole, an analyst in Milan with Intermonte, in a note to investors today. Mosole said PSA Peugeot Citroen, based in Paris, is another likely partner.
Vice Chairman John Elkann told reporters in Milan that Fiat might raise the stake in Chrysler at a later date and could still make deals with other carmakers.
CEO Marchionne ended four years of losses in 2005 after adding models and scaling back spending by sharing components among cars and through partnerships with competitors. The biggest slump in Italy’s car market since 1993 is forcing him to consider cutting financial goals for the first time since returning the company to profit.
Fiat pulled Alfa from the U.S. 14 years ago and hasn’t sold its namesake brand there since 1983, restricting the company’s offerings to luxury models from Ferrari and Maserati.
Daimler AG, which sold 80.1 percent of Chrysler to Cerberus in 2007, welcomes “every initiative that enables Chrysler to stabilize its business,” spokesman Thomas Froehlich said today before the announcement. Stuttgart, Germany-based Daimler still aims to unload the rest of the Chrysler stake, he said.
Cerberus acquired Chrysler for a $7.4 billion investment, about a fifth of what Daimler paid in 1998.
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