The smallest of the Detroit Three automakers is gearing up to file for an initial public offering. But this is no ordinary IPO. Chrysler's past few years have been met with reorganization, government bailouts, and a takeover by Italian automaker Fiat (NASDAQOTH:FIATY). Just as the past has been unique, the present is filled with uncertainty. Even as underwriters are being signed up, some analysts are questioning whether the IPO will ever happen.
When Chrysler fell on hard times, there were a lot of stakeholders that took sacrifices. Bondholders were burned, dealerships were closed, and Chrysler's owners took losses. However, shrewd maneuvering allowed Cerberus Capital Management to escape with more than 90% of its investment by selling off Chrysler Financial to Toronto Dominion Bank (NYSE:TD), which used its comparatively healthy position in banking to make a move on the U.S. auto market.
The Voluntary Employee Beneficiary Association, or VEBA, also saw modifications. The VEBA was set up as a health-care trust for the UAW and was originally set to receive cash payments from Chrysler. However, Chrysler wasn't exactly swimming in cash, so a new plan was developed.
While Chrysler couldn't pay the VEBA in cash, it could pay in common stock. As a result, the VEBA is currently a 41.5% owner of Chrysler, with Fiat holding the remaining 58.5%.
A similar plan was developed for fellow bailed-out automaker General Motors (NYSE:GM). Under GM's plan, the VEBA received common stock, preferred stock, and warrants to buy additional GM shares at $42.41 until Dec. 31, 2015. The warrants were sold by the VEBA onto the public markets and are now known as GM Class C warrants.
The Fiat plan
When Fiat took its stake in Chrysler, the plan was to eventually use Fiat platforms to replace much of Chrysler's aging lineup. Fiat CEO Sergio Marchionne has been enthusiastic about buying the VEBA's Chrysler stake and fully merging Chrysler and Fiat, and the VEBA is even looking to sell.
Fiat and the UAW would both like to execute a sale of the 41.5% stake to Fiat, but the problem is agreeing on a price. As the UAW pushes Chrysler toward an IPO, the union is able to turn up the heat on Fiat as it tries to squeeze out a better price.
As it is, Fiat is expected to need to borrow nearly $2 billion if it is to buy the Chrysler stake at the UAW's $5 billion valuation. So it's not a simple as just coughing up the cash. Taking on this amount of debt would quite likely worsen Fiat's already junk rating and drive up future borrowing costs.
Marchionne's grand plan was to turn Fiat into a world-class automaker by integrating it fully with Chrysler and entering the U.S. market in full force. But the price the UAW is asking threatens this integration, since Fiat and Chrysler can't be integrated to the same extent if Chrysler is only 58.5% Fiat-owned. And if the IPO does go forward, the process of having Fiat buy the shares from the public market (presumably Fiat would be healthier in the future) would be messy and take more resources.
So Fiat's in a no-win situation because it needs all of Chrysler (which it can't afford to buy) to complete its integration. For now, Marchionne is in the odd position of leading the IPO drive but being against having the IPO actually happen.
Not giving up
There is a possibility that a deal could be reached before the Chrysler IPO, but the two sides are more than $1 billion apart on their valuations of the Chrysler stake. If a deal is reached, it would probably involve some sort of other financial tactic such as issuing additional Fiat shares to the VEBA, making for a part stock/part cash purchase. That would allow Fiat and Chrysler to begin integrating and the VEBA to get the full value for its stake (it could sell the Fiat shares later or hold the shares and use the cash to fund health-care obligations).
If some sort of alternative financing deal can't be reached, then Chrysler will probably see an IPO, as it wouldn't be financially responsible for Fiat to borrow the full amount to buy the stake and the VEBA can probably get a better price in an IPO (UBS valued the stake at $5.6 billion). If Chrysler does become a publicly traded company again, investors should consider both company fundamentals and the condition of Fiat's health. After all, once Fiat is healthy enough, it may well want to finish its plan and make an offer for the publicly traded Chrysler shares.
Alexander MacLennan is long June 2014 $34 calls and January 2015 $40 on General Motors, and is also long General Motors Class B and C warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.