Fiat's (NASDAQOTH: FIATY) quest to merge with Chrysler by buying the 41.5% of shares currently owned by UAW Retiree Medical Benefits Trust has taken an interesting turn. The UAW is pushing for an IPO to sell its shares of the American automaker to the public in an effort to push up their value. UAW covers the health-care costs of some of Chrysler's union retirees and has about $3 billion in unfunded obligations. The rise in value of Chrysler shares in recent months has minimized the trust's shortfall, but the trust is looking to boost the value of its Chrysler shares even more by selling them on the open market.
Chrysler's surprising turnaround
Chrysler has exceeded Wall Street expectations since Fiat bailed out the company in 2009. For fiscal 2012, worldwide vehicle sales were up 18% from fiscal 2011. Nine months into fiscal 2013, the company had a year-to-date increase of 9% in third-quarter vehicle units sold compared to the prior period.
While Chrysler was busy clearing out its vehicle inventory, Fiat has been negotiating with UAW on a price for the outstanding shares the European automaker needs to gain control of Chrysler. As talks between the two companies stalled, UAW suggested an IPO for Chrysler because the trust believes the market value of the shares it owns is higher than the price Fiat is offering to pay.
The Italian automaker is currently losing money in Europe – 2012 marked the fifth-straight year of declines in this market. In the second quarter of fiscal 2013, the company posted a profit thanks to Chrysler; otherwise, Fiat would have had a $340 million loss for the period. The company is counting on access to Chrysler's cash account to expand its lineup of vehicles. As of the third quarter of 2013, Chrysler's total liquidity was $12.8 billion and includes a $1.3 billion revolving credit line.
An analysis by credit rating agency Fitch Ratings and reported in The Wall Street Journal shows that Fiat's credit rating could be adversely affected if the company does not have sufficient cash to acquire the outstanding shares. While the agency finds no need to change Fiat's current credit rating of BB-, the use of debt in the share buyout and the presence of other public shareholders could make it difficult for Fiat and Chrysler to combine balance sheets. Fitch believes there may still be a chance for a private deal to be hashed out.
Fiat's need to compete on a global scale
Joined with Chrysler, Fiat will be better able to compete with rivals like Ford Motor (F +2.36%), General Motors (GM +2.38%), and Volkswagen (VLKAY +2.06%). Internationally, Fiat is focusing on expanding Chrysler's Jeep brand and further developing its Maserati and Alfa Romeo lines. Chrysler vehicles sell mostly in North America and Fiat's goal is to expand the brand overseas.
Similar to Fiat, Ford had significant losses in Europe during 2012 and record earnings in North America. As of the third quarter of fiscal 2013, the strong results in North America continued, as did those in the Asia-Pacific-Africa and South America regions. While losses from the European market continued in 2013, they were significantly lower than losses from the current year's second quarter and 2012's third quarter. By the end of fiscal 2013, Ford expects automotive operating margin to be higher than last year. The company also believes that its operating cash flows from the automotive sector will grow from the levels present in 2012.
For General Motors, 72% of its automotive sales volume occurred outside the U.S. For its market segment covering North and South America, the company holds 16.9% market share, the largest in the market. GM is focusing much of its energy on China, currently the fastest-growing market by number of cars sold. As of the end of 2012, GM had a 14.6% market share in China. Like its rivals, Europe's macroeconomic issues adversely affected the company and market share dropped 0.2% in 2012, and losses continued into the third quarter of this year. In the next few years, GM plans to grow the Buick, Cadillac, and Chevrolet brands, as well as three additional regional brands that cater specifically to the Chinese market.
Fiat's European rival, Volkswagen, also had to deal with Europe's challenging environment, but managed to sell more cars in 2012 than in 2011, with a total of 9.3 million vehicles sold worldwide. In Europe, sales revenue increased 11%, due to higher volumes and the consolidation of the company's Porsche and MAN brands. Volkswagen's highest growth rates were in North America (up 32%) and the Asia-Pacific region (up 19%). The company is also working to reach the top ranks of the automotive sector by 2018. VW's premium brands, Porsche and Bentley, are considered best-sellers, so Fiat's increased commitment to its Alfa Romeo and Maserati lines will help it compete more effectively with its German rival.
My Foolish conclusion
Fiat's future ability to successfully compete in the automotive sector is highly dependent on its merger with Chrysler. An IPO can complicate matters and force Fiat to pay more for Chrysler's shares than the original price the company had in mind. Yet, this may end up being the only option left for Fiat to finally acquire complete control of the Chrysler brand.
