Fiat might be biting off more than it can chew

PARIS Mon May 4, 2009 10:22am EDT

PARIS (Reuters) - Fiat's (FIA.MI) lifeline to Chrysler has cast it in the unlikely role of saviour of the U.S. car industry but a further deal with Opel might be a bridge too far.

Aside from the Chrysler deal, the Italian car maker also wants to pursue an alliance with General Motors Corp's (GM.N) European unit Opel and analysts are worried the situation might become unmanageable.

Turin-based Fiat agreed to buy an initial 20 percent of Chrysler on Thursday just ahead of the deadline imposed by the Obama administration to cement a partnership.

Fiat could eventually end up the majority owner of the Chrysler -- which resorted to a bankruptcy filing -- the first ever for one of Detroit's Big Three carmakers, after the downturn sparked an unprecedented slump in demand for new cars, and a plunged the industry deep into crisis.

BOOSTING VOLUMES

Fiat's dynamic CEO Sergio Marchionne hit the headlines late last year when he proclaimed that Fiat needed a partner to achieve production of 5.5 to 6.0 million vehicles per year, which he believes is the necessary scale to survive the unprecedented industry crisis.

Thursday's deal brings Fiat -- which Marchionne has brought back from the brink since his arrival as CEO in 2004 -- closer to this scale. The two partners combined equate to the world's fifth-largest carmaker, with sales of 4.2 million vehicles a year, putting them on an equal footing with South Korea's Hyundai Motor Co (005380.KS) but behind Toyota Motor Corp (7203.T), General Motors, Volkswagen AG (VOWG.DE) and Ford Motor Co (F.N).

However, "it still doesn't answer the question of Fiat's limited leverage and size in Western Europe", said Credit Suisse analyst Arndt Ellinghorst, although "it opens up a new and potentially attractive market for Fiat technologies."

OPEL IN FIAT'S SIGHTS

Not content with pulling off the Chrysler deal in a race against the clock, Marchionne insists he is still keen to secure a partnership with Opel, which according to Marchionne is Fiat's "perfect partner".

Analysts are already voicing concerns over the possibility that Marchionne might take over from Bob Nardelli as Chrysler CEO and are sounding alarm bells about Fiat's capacity to manage both projects simultaneously, although Marchionne has played a role in a three-way merger once before.

"The (Chrysler) deal as laid out presents limited financial risks for Fiat. Perhaps the main concern is the diversion of management away from the core business with Bob Nardelli, the current CEO, stepping down, said RBS Investment Grade Research analyst Jonathan White in a note to clients.

A deal with Opel would give Fiat the scale Marchionne wants, putting the two groups together behind European leader Volkswagen in terms of sales. But unlike the Chrysler deal, an Opel tie-up would not open new markets to the Italian company.

"It would be a huge risk, although it would be good for Opel. They are both huge projects," said Ellinghorst.

WORKING DAY AND NIGHT

"We worked day and night. I spat blood," Marchionne told Italian newspaper La Stampa on Friday after the Chrysler deal was inked, using the Italian idiom for heavy effort.

But the really hard work could lie ahead for Fiat if it is going to extract the benefits it wants from the partnership. And it won't happen quickly.

"There's limited risk, but it will be four or five years before there's any value for Fiat shareholders," said Ellinghorst.

"Striking alliances with Chrysler or Opel may be good for sentiment, but it won't pay the bills unless Fiat's banks buy into the new business plan," added Morgan Stanley analysts.

And JP Morgan's Ranjit Unnithan told clients: "New Chrysler will emerge from bankruptcy with $11.5 billion in debt...any future operational crisis and there may be few alternatives to a capital infusion from Fiat."

Some observers argue the alliance still might not be finalised. "They struck the deal they wanted to strike. Whether that will withstand court scrutiny remains to be seen," said Nomura International analyst Michael Tyndall.

(Reporting by Helen Massy-Beresford in Paris; Additional Reporting by Ian Simpson and Gilles Castonguay in Milan and Paul Hoskins in London)

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