“In 3-4 years we will break even in Italy and Europe”. Words from Sergio Marchionne who, in front of Prime Minister Mario Monti, reiterates his promise to bring 17 new models and 7 product updates into production in the Italian plants between now and 2016. It is an Italian turning point “not for the faint of heart” which entails , just for Melfi, investments of more than one billion justified, among other things, by the arrival of the Jeep.
But, beyond the numbers, it is the confirmation that the approach towards the Bel Paese has changed "where Fiat - repeated the CEO of Lingotto in recent years - has not earned a lira for decades". On the contrary, today Marchionne is keen to repeat that "the bet we are making on Italy is not a risky strategy" because "we can and must make Italy a base for the production of vehicles for the whole world". One wonders, at this point, what this change of course means with respect to the Chrysler game.
That is, whether, in financial terms, Fiat is able to simultaneously support the double challenge: the acceleration of investments in Europe and complete the purchase of 41% of Chrysler.
What is certain is that Marchionne certainly does not intend to loosen his grip on Chrysler just now that the Turin-Detroit alliance is beginning to bear the most substantial fruits (see the 500 boom, the programs for Alfa, the Jeep expansion plans in Europe and China). The new effort in Italy, if anything, derives from the CEO's desire to tighten as much as possible (and as quickly as possible) the ties between Italy and Detroit, both in terms of production integration and the commercial range on offer. But, above all, it is a matter of responding to the concerns of American stakeholders: does it make sense, they ask Detroit to entrust Chrysler's cash to a company that burns cash at the speed with which Fiat is burning cash in Europe?
Isn't that the risk of sacrificing the treasure, fruit of the sacrifices of US metalworkers, to settle the accounts of a hopeless company? Marchionne knows that facts are needed to answer the question, not just words. Only the reversal of the trend in Europe can fully convince US public opinion. Of course, Marchionne enjoys a very high reputation in the USA, but there is no shortage of enemies. And then, it is one thing to magnify the qualities of the CEO of the turnaround manager, quite another to hand over the cash to a corporation that is losing ground on the domestic market.
Investments in Italy, therefore, are the key to closing the American game. Fiat, which today owns 58,5% of Chrysler, needs to rise to 100% of the American company if it wants to draw on its cash flow (about 1 billion euros a year in the coming years) and meet the double challenge. In fact, the covenants (the constraints) on the debt prevent Chrysler from distributing liquidity to the parent company. Instead Fiat, which in the disastrous European car market is "burning cash", badly needs that liquidity: in 2012 the operating loss in Europe will be 700 million euros. In short, the operation has to be done. But at what price?
By chance, just a few hours before the meeting in Melfi, the news arrived from Wall Street that General Motors had purchased 200 million shares of the house from the US government, or 5,5% of the capital, with a premium of 7,8 .2008% compared to stock market prices. In this way, Government Motors (as the company saved by Washington in 300 was maliciously defined) has once again become completely private, even if there are still 2014 million shares that the government intends to sell by 12. But the operation had a cost for the taxpayer: at these prices, in fact, the Treasury is losing about XNUMX billion dollars. On the contrary, it should be emphasized that Italian Chrysler did not cost a single dollar: in fact, Washington invested in shares in GM, while for Chrysler, a company that seemed doomed, it limited itself to lending money "at a usurer's rate". Marchionne complained that it is no coincidence that he paid off the debt as soon as possible.
The value of the 41,5% stake held today by the Veba fund of the car union will be decided in recent weeks by the Delaware judge called to settle the dispute between Fiat which claims the letter of the 2009 agreements and the representatives of the blue-collar workers who ask a price closer to the values of the competitors, which makes the reference to the transaction between GM and Washington very important. Chrysler's valuation, based on GM's multiples, is 10,7 billion euros at the Enterprise Value level. Excluding the debt, the value of the equity is around 5,5 billion, so the 41,5% controlled by Veba should be worth around 2,5 billion euro. There is an agreement between Fiat and Veba whereby Fiat can purchase 3,3% of Chrysler every six months at a price determined according to the average multiples of the auto sector. But when Marchionne went to exercise the option this summer, Veba contested the price.
Fiat intends to pay for Chrysler shares based on a 100% valuation of the company at $4,4 billion. According to Veba, however, 100% of Chrysler is worth 10,4 billion dollars, therefore Fiat would have to pay 4,36 billion dollars (3,3 billion euros) for 41,5%. The match will therefore be decided within days in the Delaware court. And it will be decisive for Fiat's next moves. In particular, it will be understood whether the company will be able to finance the double commitment with cash on hand or whether it will be necessary to sell some shares. Or if you have to knock on the door of the financial market, Of course, as demonstrated by the reaction of Piazza Affari to the rumor (denial) of an increase, it is not the case, at least for now, to take that route. But there is no shortage of alternatives (sale of subsidiaries or investee companies, for example). In short, not only is it possible to accelerate simultaneously on the Italian and Detroit circuits. But, probably, it's the only way not to go astray. And Marchionne knows it.
