IMPORTED FROM DETROIT: MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8

4/25/13

This morning’s (i.e., Thursday, 4/25/13, page B1) Wall Street Journal reports that Fiat is considering buying from the UAW Retiree Health Care Trust (“Trust”) the 41.5% of Chrysler Fiat doesn’t already own, effectively merging the companies.

The idea seems to make sense…use Fiat’s cash horde to buy out the Trust, merge the companies, do an IPO of the new company and list it in the States (presumably on the New York Stock Exchange) and get a higher valuation as a U.S. car company than Fiat does as a European car company. 

There is a problem here, though.   Fiat’s $14 billion cash horde would be run down considerably by buying the company; Fiat would be left with about $10 to $12 billion after buying out the trust.  That sounds like a lot of money, but designing, manufacturing, and marketing cars is a capital and cash intensive exercise.   The bet is that money raised in the IPO, along with being able to borrow more cheaply as a presumably more financially sound merged company, would allow Fiat to replenish its cash horde.   To win this gamble, however, Fiat would have to show especially adroit market timing.

U.S. car companies, and their stocks, are doing quite well, thank you, of late.   European car companies and their stocks are not doing nearly as well, to say the least.   And to the extent the Big Two publicly traded U.S. car companies are having problems, those problems emerge primarily from Europe, for obvious reasons.   Given that GM and F are doing well, it would seem at this juncture that Fiat would have to pay the Trust top dollar for its stake in Chrysler.   Valuations on the stake range from $1.75 billion to $4.27 billion (How’s that for a spread?) and presumably will be settled in court, but one has to think that the final price tag for the stake, should this deal go through, will be much closer to the top of that range than to the bottom.

That would be fine for Fiat since it plans to turn around and sell some shares in the IPO and establish a higher valuation.   But the new company might have to move very quickly to effectively immunize itself buy both buying and selling at high prices.  

While I’m not the expert on the car companies and their stocks that I used to be, I get the distinct impression that both profits and stock prices are being artificially inflated by what I like to call Ben Bernanke’s war on the elderly, i.e., the artificially low interest rates designed to encourage spending, borrowing, and taking financial risk to solve a problem born of too much spending, borrowing, and financial risk.   (See, inter alia, my 1/29/13 post, BEN BERNANKE VS. THE DOLLAR AND THE ELDERLY.)  What industry, other than housing, benefits from lower interest rates more than the car business?   All this talk of pent-up demand and the age of the fleet has some surface validity, but you can be sure that if money were not so cheap and readily available for vehicle financing, and payments thus so low, people would be able to satisfactorily, and perhaps happily, drive their old cars for many more miles, given how well cars are built nowadays.  In other words, if financing cars were not so cheap and readily available, so called pent-up demand would stay pent-up.

So yours truly suspects that, once (if ever?) the low interest rate punch bowl is taken away, car sales will plummet.   And such sales may fall even if we are stuck in a Twilight Zone of cheap money more or less forever; even artificially juiced demand gets satisfied eventually and, the way cars have been selling of late, that day may come sooner than later.   So if the very talented and clever Fiat CEO Sergio Marchionne is to pull off this financial maneuver, he better move quickly.   He doesn’t want to pay a high price to the Trust for Chrysler and then be left holding the hot potato when car company valuations deflate; he has to buy at a high price and nearly immediately sell at a high price and/or borrow based on the higher valuations that result from an artificially inflated price.    

Also note that Chrysler may be especially susceptible to artificial inflation and to the resultant corrective deflation in car company prices because of the relative weaknesses in its product line.   See my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!   This situation is like anything else; a rising tide lifts all boats, but when the tide goes out, the leaky boats sink first.

I sincerely hope that Mr. Marchionne can pull this one off; Chrysler is one of the bedrocks of American industry, has a substantial presence in my home state of Illinois, and, as I recounted in my 1/31 piece, I may be a Chrysler owner again some day relatively soon.   But if this deal is done, Mr. Marchionne will be going in at a rich price and must move quickly to get out, or established, at a rich price.