May 27, 2011 / 4:43 PM / in 8 years

Fiat to gain Chrysler majority by buying U.S. stake

DETROIT/MILAN (Reuters) - Fiat SpA FIA.MI plans to exercise an option to buy the U.S. Treasury’s stake in Chrysler, which paves the way for the Italian automaker to clinch a majority share in the company by early next month.

A Fiat badge is seen on a car in Sestriere January 28, 2011. REUTERS/Alessandro Bianchi

Fiat notified the Treasury of its intent on Friday. The purchase price will be based on the equity value of Chrysler agreed by Treasury and Fiat within 10 business days.

If Fiat and Treasury cannot settle on the price, the amount will be determined by two of three investment banks appointed by the company and the U.S. government.

The option would allow Fiat to increase its stake in Chrysler by 6 percent, Fiat said in a release on Friday.

Treasury confirmed that it received notice from Fiat, but declined to discuss the announcement further. The announcement comes ahead of President Barack Obama’s planned visit to a Chrysler plant in Toledo, Ohio, next week.

This week, Fiat boosted its stake in Chrysler to 46 percent after repaying $7.6 billion in loans from the United States and Canada through a refinancing deal.

A deal with Treasury would bring its stake to 52 percent.

Sergio Marchionne, the chief executive of both Fiat and Chrysler, has said his overarching goal this year was for Fiat to obtain a majority share in Chrysler.

Marchionne told Reuters on Friday that Fiat would be interested in buying Canada’s stake in Chrysler for a “reasonable price”, but said he had not discussed it with Canadian authorities.

Earlier this month, Chrysler said in a regulatory filing that Fiat had options to increase its holding to more than 70 percent, which included buying the U.S. Treasury stake within 12 months of repaying the loans.

Starting July 2012, Fiat also has the option to buy up to 40 percent of the interest held by the healthcare trust affiliated with the United Auto Workers, known as the VEBA.

The timing of a potential initial public offering depends on the needs of the VEBA, Marchionne has said. Analysts have said Fiat is likely to buy as much of Chrysler as possible before the U.S. automaker goes public.

“Marchionne is ... acutely aware that acquiring additional equity in Chrysler once listed will prove to be more expensive than is currently the case,” Bernstein Research analyst Max Warburton said in research note.

UP TO 57 PCT

This week, Ron Bloom, the Obama administration’s point man for auto restructuring, said Chrysler’s payoff qualified it for “comeback of the year” and was also a feather in Obama’s cap as he gears up for the 2012 presidential race.

Chrysler, which declined to comment on the news from Fiat, emerged from a bankruptcy restructuring under the management of Fiat in June 2009.

At that time, Fiat was given a 20 percent stake in the U.S. automaker and given a series of tests that Chrysler had to meet before Fiat could lift its stake.

Chrysler is expected to meet the last test in the fourth quarter by developing a car that gets 40 miles on a gallon of gasoline. Meeting this test would give Fiat another 5 percent in Chrysler.

After meeting the last test later this year, Fiat’s stake in Chrysler will be 57 percent, Fiat said Friday. Completion of the transaction will be subject to obtaining the requisite regulatory approval.

Analysts have said stronger ties between Chrysler and Fiat would be attractive in an initial public offering for Chrysler, which could come this year or next. The deal also allows Chrysler to cut ties with the U.S. government, another plus.

After Chrysler repaid its loans, Treasury’s stake in the company fell to 6.6 percent.

Fiat said the 6 percent figure takes into account the expected dilution of shares held by the Treasury and other parties after Chrysler meets the final test.

Reporting by Deepa Seetharaman in Detroit and Valentina Za in Milan; additional reporting by Glenn Somerville in Washington; editing by Gunna Dickson and Matthew Lewis

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