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Tuesday January 20, 2009

Chrysler Opts for Fiat

Italian group to take holding in technology-for-shares swap. Option on majority interest

MILAN – In a sense, the first “Obama effect” is the Fiat-Chrysler deal. If everything goes according to plan, the Turin group could be supplying technology to Detroit in exchange for shares in one of America’s former Big Three auto manufacturers. Chrysler is in deep trouble but the Italian carmaker is not believed to be running many risks. As things stand in the US crisis, the move could even be an opportunity. The main reason for this is obvious: Barack Obama’s White House team is determined to stave off the collapse of the US motor industry. After George W. Bush’s stop-gap finance last December, the serious aid is now on its way.

But the new president, who takes office today, has no intention of signing any blank cheques. GM and Chrysler have already received a first instalment of survival aid – Ford has said that it can ride out at least the next few months – and they know that the crucial funds will appear on one condition: that before the end of March, they can present serious recovery plans based on investment and environmentally-focused conversion. In other words, it’s goodbye to SUVs and big engines. America will have to learn to love small cars that consume and pollute less.

For Chrysler, the problem is not it does not possess the technology, which is where Fiat comes in. The Turin group has the know-how, the platforms and the engines. According to the Financial Times, the two groups are focusing on these points and have already signed a memorandum of agreement. Turin could offer access to its technology while Chrysler in Detroit could be a bridgehead for the distribution in the United States of Italian cars such as the Fiat 500 and Alfa Romeo. Payment could be partly in industrial-commercial exchanges and partly in shares. The Cerberus private equity fund, which has owned Chrysler since 2007, would retain its majority but Fiat’s holding would be anything but symbolic. Source close to the negotiators were talking about a maximum of 20% while the Financial Times mentions 35% with an option to buy control.

We will soon see whether the memorandum leads to a full-blown agreement. An official announcement requested by the Italian stock exchange watchdog CONSOB could be released as early as this morning, although Fiat prefers not to comment for the time being. Fiat bosses Sergio Marchionne and Luca Cordero di Montezemolo are preparing for Thursday’s board meeting, which could lead to new developments. Analysts are expecting a positive, if rather lower, result for 2008 from Fiat but the carmaker will still have to meet forecasts for the quarter and see a way forward to a profitable balance sheet for 2009. Now, the spotlight will be on the company’s financial situation. After Moody’s placed Fiat’s rating on review, shares lost 4.88% yesterday.

Raffaella Polato
20 gennaio 2009