Fiat has helped Chrysler make big improvements to products like the Dodge Charger. A closer relationship would be good news for both companies. Photo credit: Chrysler
Chrysler, the smallest of the three Detroit automakers, is on course for an initial public offering by the end of the year.
At least, that's what Chrysler has said, and it has hired investment banks to prepare for its return to the public markets.
But now it's looking like that public offering might never happen -- and that could be very good news for Chrysler.
A dispute over Chrysler's value is driving the IPO
Here's the background. Right now, Chrysler's shares are split between two owners. Italian automaker Fiat (NASDAQOTH: FIATY) owns 58.5% of Chrysler, and controls the company. The remaining stock is owned by a United Auto Workers health-care trust.
The trust was set up as part of a landmark deal between the UAW and the Detroit automakers several years ago. It pays for health insurance for some of Chrysler's retired workers -- an obligation that Chrysler, like Ford and General Motors, was glad to have taken off of its books.
But the deal that set up the trust required Chrysler, like its Detroit rivals, to fund its trust over a period of several years. Chrysler couldn't make the payments when it was in bankruptcy, in 2009, so the court gave the trust a chunk of Chrysler's shares. A similar arrangement was made with the trust that was set up for GM's retired workers.
It's a portion of those shares, representing 25% of Chrysler, that are expected to be offered to the public soon.
The trust's managers very much want to sell their shares, in order to diversify their holdings. Meanwhile, Fiat would very much like to buy them -- but the two haven't been able to agree on price.
That's why the trust is planning a public offering. But the latest word on those plans suggests that the IPO might not happen after all.
Chrysler's valuation could lead to a deal
One of the most important steps that banks take when preparing a company's stock for an initial public offering is to determine the company's valuation. In order to know what price to ask for the stock, it's important to know what you think the company is worth -- and what the market will likely think it's worth.
The goal with an IPO valuation is to get the highest price possible. But if it's too high, investors won't buy the shares. That means an ideal valuation has to be one that the stock market will support.
Bloomberg reported this past week that the investment banks advising Chrysler are considering a valuation of around $10 billion for the company. That would mean that the UAW trust's stake -- 41.5% of Chrysler -- would be worth $4.15 billion.
The trust's asking price for its stake is a secret, but it's widely believed to be quite a bit more than that -- $4.15 billion is a lot closer to what Fiat is believed to be willing to pay.
If the banks are telling the trust, "Look, this is really what we think your shares are worth," then the trust's managers might be willing to skip the IPO and sell their shares directly to Fiat for that price.
And Fiat might be willing to buy them at that price. If so, then the IPO won't happen.
The best outcome for Chrysler
For Chrysler, that would be the best outcome. For the most part, Fiat has done an excellent job of getting Chrysler back on its feet since 2009. A full merger between the two companies would lead to even greater operational efficiencies. It would make both Fiat and Chrysler stronger.
Investors would lose out on a chance to buy a stake in Chrysler, but a full merger at a price that Fiat could afford would benefit both Fiat and Chrysler more than any other outcome. And it's likely that investors would get another chance later on, when the merged Fiat-Chrysler lists its shares on the New York Stock Exchange.
To make that merger happen, Fiat needs to buy all of Chrysler's stock. If the news we've heard this week is true, then that purchase might be a lot more likely to happen soon.
