MARCHIONNE’S MERGER PLANS: THE SPEED AND MUSCLE OF AN SRT 8, THE AGILITY OF A GIULIETTA…AND PLENTY OF FERRARIS FOR WALL STREET

5/25/13 

This weekend’s (i.e., 5/25-5/26/13’s, page B1) Wall Street Journal featured an article “Fiat Chief Pulls Out the Deal Wrench,” on a topic I’ve been dealing with extensively for at least the last month or so, to wit

CHRYSLER’S QUARTER:   HOW DO YOU SAY “POOR MOUTH” IN ITALIAN? 5/1/13

and

IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13

The Journal emphasizes the complexity of Chrysler and Fiat CEO Sergio Marchionne’s plan to merge Fiat and Chrysler and take the company public on a U.S. exchange.  Indeed, this is a complicated deal.   In grossly simplified terms, Mr. Marchionne and his colleagues must

• Buy out the voluntary employee beneficiary association’s (“VEBA”’s) 41.5% stake in Chrysler.  Estimates on the value range from $1.75 b to $4.27 b.   Not only is that quite a spread (and probably serves as a useful proxy for the bid/asked), but final determination hinges in part on an upcoming court ruling.
• Arrange financing to do the above, or use cash.  But if the company eats into its $14.4 billion cash pile to buy out the VEBA, it imperils it credit rating and strains its development budget; designing and building cars isn’t cheap.
• Merge the operations of the two companies; this step is for the most part completed
• Do an IPO of the merged company on a U.S. exchange to raise cash but, more importantly, to establish a higher market valuation (largely because U.S. car companies trade at higher multiples than European car companies) and thus afford the new company greater financial flexibility.
• Raise some money from the IPO and as a result of the heightened financial flexibility to refinance the $2.9 billion in debt Chrysler incurred to repay the U.S. government and $3.2 of other bonds.  These issues must be refinanced because they both contain covenants restricting the transfer of cash from Chrysler to Fiat.  Any debt used to buy out the VEBA would also be refinanced, presumably at or about this time.

Phew!  And that’s a SIMPLIFIED explanation.

As I have argued in my 4/25/13 post, however, at least as daunting as the deal’s complexity may be its timing.   If Mr. Marchionne moves in the very near future, he may be buying into what has been a very ebullient market for U.S. car company stocks.  (See my 5/23/13 piece, THE CAR SALES BUBBLE:  “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME” for further elucidation on this topic.)   If he buys rich, he will have to move very quickly to do the IPO to avoid selling cheap; to use two trite analogies, he appears to be playing a game of hot potato or musical chairs and wants to avoid getting burned or being left without a chair while holding an expensive Chrysler stake.  If many of the Street analysts are correct, however, and the U.S. car stocks are cheap, as they appear to be based on those analysts’ earnings estimates, there is no concern here.   Gulp.

Further, if Mr. Marchionne is unable to talk down the value of the VEBA stake in Chrysler (See my 5/1/13 post.) and goes ahead and buys rich, not only will he have to move quickly with the IPO, but one would think he would like to make the IPO larger than a symbolic, price establishing issue in order to reap the benefits of a rich price.   Doing so, however, would make it difficult to make the new shareholders happy.

Then we still have the issue of Chrysler’s product line; see my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!, which will take plenty of skill, and money, to get up to the standards set by Chrysler/Fiat’s competition.

So Mr. Marchionne’s plans require skill, speed, timing, and luck.  Doubtless Wall Street will get rich on these plans.  But enriching Fiat’s shareholders, and Chrysler’s new shareholders will strain even the formidable skills of Sergio Marchionne, the auto industry’s current man of the hour.