| DETROIT/NEW YORK/MILAN, Sept 12
DETROIT/NEW YORK/MILAN, Sept 12 A retiree
healthcare trust will force Chrysler Group LLC to go public
unless Italian automaker Fiat SpA agrees to pay top dollar -
more than $5 billion - for the trust's stake in the U.S.
automaker, several people familiar with the matter said.
Sergio Marchionne, chief executive of both Chrysler and
Fiat, is eager to buy out the trust's 41.5 percent stake in
Chrysler as quickly and as cheaply as possible so he can merge
the two companies, which would form the world's seventh-largest
But the talks have stalled because Marchionne believes the
United Auto Workers-affiliated trust's price values Chrysler at
more than it is worth. The UAW trust assumed its stake in
Chrysler, the third-largest U.S. automaker, as part of the
company's 2009 government-funded bankruptcy restructuring.
The more than $5 billion represents the highest possible
payout for the trust, according to a formula laid out in
Chrysler's 2009 bankruptcy documents.
The UAW trust and its independent fiduciary have no
intention to sell the Chrysler stake for less, the people said.
The trust has the legal duty to pursue every possible path to
maximize the value of those shares and to failing demonstrate
that effort would likely expose it to legal liability.
If the two sides cannot agree on a price, the trust plans to
sell a portion of its stake in an IPO, and divest the rest of
its stake in stages over time, the people said.
The fund, dubbed the UAW Retiree Medical Benefits Trust, has
been talking to banks about selling roughly one-fifth of its
stake through an IPO, one person said. Fiat owns the rest of
Chrysler, or 58.5 percent.
The UAW trust, which manages retiree health benefits for
blue-collar auto workers, believes that Chrysler's worth will
continue to rise in the next few years as the U.S. auto industry
sustains a robust recovery, the people said.
Under a formula in the 2009 bankruptcy documents, the
possible payout for the trust is also steadily rising as well.
According to the 2009 agreement with the U.S. Treasury, the
trust's proceeds from a sale of its Chrysler stake are capped at
the "threshold amount." This amount was set at $4.25 billion
initially and was set to grow at a 9 percent compound annual
interest rate. When factoring in the effect of this interest
rate, the cap on the union's payout exceeds $5 billion.
"If you were a seller and you thought the price was rising
over time, you'd layer in your selling price, you'd sell it in
stages," said one of the people familiar with the matter. "That
happens to be the opposite of what Sergio wants."
The people asked not to be named because the discussions are
confidential. Chrysler and Fiat declined to comment. Brock
Fiduciary, which has managed the trust's holdings in Chrysler
since 2010, also declined to comment.
The UAW trust is a type known as a voluntary employees'
beneficiary association (VEBA).
VEBA HAS THE UPPER HAND
The question of how the VEBA will handle its investment in
Chrysler is one of the remaining unresolved issues from the
restructuring brokered by the Obama administration more than
four years ago.
In January, the trust demanded Chrysler register a portion
of its stake in an IPO. Marchionne has said the company will be
in a position to "move on an IPO" in November or December,
although that is not his favored option.
Chrysler has mounted a strong recovery under Marchionne's
stewardship. The company's value has grown over the last few
years on the back of key models like the Jeep Grand Cherokee
sport-utility vehicle and the Ram 1500 pickup truck.
Investment bank UBS has estimated Chrysler's market value at
about $9 billion based on trading multiples for competitors Ford
Motor Co and General Motors Co. At that level the VEBA's stake
would be worth about $3.735 billion.
Marchionne already runs Chrysler and Fiat as a single
company. Now, he wants to buy the rest of Chrysler to squeeze
out more synergies, cut borrowing costs and access some of
Chrysler's cash flow.
But a buyout of Chrysler is getting more expensive by the
day as rising interest rates increase the cost of borrowing and
the U.S. automaker benefits from resurgent demand for new cars
and trucks among American consumers.
On the other side, the VEBA can wait. A gradual exit for the
VEBA would mirror the U.S. government's slow-motion sale of
General Motors Co shares.
"There's no hurry on VEBA's part and they know time isn't
Sergio's friend. As time goes on, Chrysler just gets more and
more valuable," the source added.
The VEBA was established in 2007 as a way for Chrysler and
its Detroit-based rivals GM and Ford to shift the responsibility
of paying for retiree healthcare. The companies said that the
obligation made them uncompetitive against foreign rivals like
Toyota Motor Corp.
In 2009, the UAW agreed to convert part of the debt Chrysler
owed to the VEBA fund to equity in an automaker that many had
written off as worthless, an act Marchionne once described as a
"flying leap of faith."
That relationship has since grown more tense as the talks
drag on between the two sides, now also mired in a legal dispute
Last year, Fiat sued the VEBA for refusing to sell some of
its Chrysler shares, a 3.3 percent stake, for $139.7 million.
The VEBA countersued, claiming those shares were worth about
$343.1 million. A trial may not come until 2015.