Fiat closes in on Chrysler with $1.3 billion stake deal

MILAN Thu Apr 21, 2011 12:25pm EDT

A Fiat logo is seen on the front of a Fiat 500 during the press days for the North American International Auto show in Detroit, Michigan, January 11, 2011. REUTERS/Mark Blinch

A Fiat logo is seen on the front of a Fiat 500 during the press days for the North American International Auto show in Detroit, Michigan, January 11, 2011.

Credit: Reuters/Mark Blinch

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MILAN (Reuters) - Fiat SpA FIA.MI will pay $1.27 billion for another 16 percent of Chrysler in a deal that was sooner and cheaper than expected and takes the Italian company within reach of controlling the U.S. No. 3 automaker.

By taking over Chrysler less than two years after its bailout, Italy's largest industrial group will expand its reach beyond Europe where it is losing market share.

Fiat Chief Executive Sergio Marchionne, who runs both Europe's No. 6 automaker and Chrysler, said on Thursday he had worked late into the night to clinch a deal with Chrysler and its other investors to exercise an option to buy the 16 percent stake in the second quarter.

That will take Fiat's holding to 46 percent, close to its target of owning 51 percent of the Detroit car group and allow U.S. taxpayers to recoup money spent to help Chrysler get through the global economic crisis.

The deal also paves the way for consolidating Chrysler's accounts into Fiat's even before taking a 51 percent stake, making the combined company stronger in the face of another wave of mergers that Marchionne expects to hit the car sector.

"We want to be the guys that survive this process. The consolidation with Chrysler is essential," he said on Thursday.

Fiat expects to add another 5 percent of Chrysler at no extra cost by the end of 2011 as it reaches a performance goal.

Citigroup (C.N) is the adviser on the Chrysler stake deal.

TURNAROUND STORY

Marchionne, who has made Fiat one of Europe's top turnaround stories, wants to elevate Fiat to a global player through Chrysler. The Italian company agreed in June 2009 to take as much as 35 percent in the stricken U.S. car maker in exchange for sharing know-how and reaching three main technology goals.

It had initially envisaged taking over Chrysler in 2013.

"It's a very positive step for the core shareholders of Chrysler and for Chrysler itself. The main shareholders will get their stake paid back and Chrysler will refinance its balance sheet," said Royal Bank of Scotland analyst Jose

"The timing (of the stake buy) is a bit earlier than what market was expecting and the price is more than reasonable. For Fiat shares, this is just brilliant," Asumendi said.

Three sources familiar with the issue said last week Fiat was looking to pay around $1.5 billion for the stake.

Shares in Fiat were up 4.6 percent by 1514 GMT, outpacing a 0.8 percent rise in the STOXX Europe 600 autos index .SXAP.

The option to buy the stake would be exercised when Chrysler repays around $7 billion of debt with the U.S. and Canadian states.

"We are looking forward to the full repayment of our loan to Chrysler," U.S. Treasury Acting Assistant Secretary for Financial Stability Tim Massad said in a statement.

KEY FOR IPO

Securing majority control is likely to accelerate a Chrysler initial public offering (IPO). The listing had been planned for the second half of 2011 but could be pushed into 2012.

Marchionne said on Thursday the timing of the IPO was not yet set, adding that a decision would depend on discussions with the Veba healthcare trust, which is affiliated to the United Auto Workers union and is currently the largest investor in Chrysler.

He also said he did not see the need for two separate listings for the combined group, but did not disclose details of the future operational set-up

"The IPO will be the icing on the cake for Chrysler," said

Asumendi. "I am not worried about when they do it. Once Chrysler refinances its debt, it will be perceived as a very strong, free capital generating company."

One auto analyst who declined to be named said the option price paid by Fiat was fair based on a consensus value of Chrysler pre-IPO of around $8 billion. Fiat would reap a 30 percent capital gain if Chrysler's value reached, as expected, $10 billion or $11 billion after its listing, he said.

Italian-Canadian Marchionne said on Wednesday he did not expect damage to Fiat's credit rating from the purchase of the 16 percent Chrysler stake. The Italian group is planning to pay for it with its own cash.

(Additional reporting by Valentina Za and Lisa Jucca; Editing by David Holmes and Erica Billingham)

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