In a move aimed at convincing investors and industry experts that it's on a path to financial success, Fiat S.p.A. (OTCMKTS: FIATY) announced on New Year's day it will take full ownership of Chrysler.
The news sent Fiat stock soaring some 15% when trading resumed today (Thursday).
The Italian automaker will buy the 41.5% position held by a United Auto Workers union trust for $1.75 billion (roughly 1.35 billion euros) in cash, plus $1.9 billion in extraordinary dividends. Chrysler has committed to giving the trust an additional $700 million.
The $4.35 billion deal is expected to close by Jan. 20. Analysts say the price paid for the outstanding 41.5% stake is lower than many had expected. Additionally, Fiat will be able to execute the deal without having to raise new equity capital - a plus for shareholders.
Supporters of the deal say it will permit Fiat to more effectively expand, compete, and grow revenue.
"Overall, this looks like a fair deal for the union and a reasonable valuation on Chrysler," Morningstar Inc. analyst Richard Hilgert told The Wall Street Journal.
An even bigger winner in the deal than Fiat stock holders is Chief Executive Officer Sergio Marchionne.
Fiat-Chrysler Deal Good for Marchionne
By fully integrating the two companies, Marchionne aims to create a single, global automaker with collective sales of 6 million vehicles. That would rank Fiat no. 7 on the list of world's largest automakers.
"The unified ownership structure will now allow us to fully execute our vision of creating a global auto market," Marchionne said in a statement. Marchionne called the deal one of life's "defining moments that go down in the history books."
The full combination also allows Marchionne to scrap the highly anticipated Chrysler IPO, planned for early 2014, which would have mired his efforts to attain total control of the lucrative U.S. auto maker.
Marchionne can instead now focus on overhauling Fiat's European operations, a unit that has struggled amid a prolonged sales slump.
Like other automakers, Fiat shares, sales, and revenue moved higher over the last five years. While still operating in the red, the Italian car company narrowed its losses, nearly by half.
But the Italian company, which bought Chrysler out of bankruptcy in 2009, has only had muted success with sales of its signature cars...
Fiat lowered 2013 full-year earnings projections in October amongst an ailing European economy and waning sales in Brazil. Without the Chrysler arm, Fiat would have posted a more significant Q3 loss than 15 million euros.
Chrysler posted third-quarter net income of $464 million, a 22% increase from $381 million in the same quarter a year earlier. Total revenue rose 13.5% to $17.6 billion, and cash on hand totaled a cushy $11.6 billion. It was Chrysler's ninth consecutive profitable quarter, with revenue through the first three 2013 quarters reaching $50.9 billion.
Fiat (FIATY) Stock Soars, But Unions Sour
While investors cheered the news, Italian unions worry what the deal means for jobs and investments in Italy.
Concerns include what Fiat's new global reach means to production, job security, and contract conditions. Fiat has some 215,000 employees, making it Italy's largest private employer. One-third of its workers reside in Italy.
Union leaders were quick to call upon the government for help in finding out about Fiat's future plans for Italian plants and securing some reassurances.
"It is indispensable that Fiat say what it intends to do in our country," Susanna Camuso, leader of Italy's liberal CGIL labor confederation, said in a statement.
While she agreed the deal is important for Fiat in order to successfully compete with rivals, Camuso is pressing for guarantees that the automaker's "strategic direction and planning remain Italian," and that Fiat "keep a significant presence in Italy."
Also wary are FIOM metalworkers unions.
Known for uncompromising labor negotiations, Michele De Palma, in charge of FIOM at Fiat, said in statement, "Before celebrating, we contend it is fundamental to understand the deal's terms."
De Palma maintains Fiat was able to acquire the outstanding Chrysler shares thanks to Fiat Group Workers.
Fiat stock was up more than 14% to $9.49 at 2:30 p.m. Thursday.
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FOX Business News:
Fiat Scores $4.35B Deal for Full Ownership of Chrysler
The Wall Street Journal:
Fiat to Get 100% of Chrysler