By Mike Caggeso
Associate Editor
Money Morning
Fiat S.p.A. (OTC: FIATY) agreed to buy a 35% stake in fledgling Chrysler LLC in a deal that will boost Chrysler's small-car technology and give Italy-based Fiat access to the U.S. auto market.
Fiat and Chrysler's controlling shareholder, Cerberus Capital Management LP, signed a non-binding agreement that requires approval from the U.S. Treasury.
Fiat said it would not make a cash investment in Chrysler, nor commit to provide funding in the future. Rather, Fiat will give Chrysler a platform to make smaller and fuel-efficient cars and a distribution channel to sell them.
The deal has a number of benefits for both parties.
U.S. drivers are demanding smaller, more fuel-efficient cars, and Chrysler's offerings in that department are lacking. This initiative gives Chrysler that at a considerable cost savings since design, engineering, manufacturing, purchasing, and sales and marketing networks are already in place.
Fiat, which has a market cap of about $7.5 billion, is too small to survive the financial crisis on its own. This deal allows it to tap the U.S. car market, which despite a dearth of demand, is still the world's largest. Fiat's best selling vehicles are Fiat, Lancia and Alfa Romeo lines, and the company also owns luxury sports brands Maserati and Ferrari. Its highest performing markets are Europe and Brazil, the latter being the source for nearly all the company's product, Reuters reported.
"This initiative represents a key milestone in the rapidly changing landscape of the automotive sector and confirms Fiat and Chrysler commitment and determination to continue to play a significant role in this global process," Sergio Marchionne, Chief Executive Officer of Fiat, said in a joint news release.
Chrysler CEO Bob Nardelli said the deal will have an immediate return on the sour American economy. He told his workers that the partnership should be complete by April.
"The partnership would also provide a return on investment for the American taxpayer by securing the long-term viability of Chrysler brands in the marketplace, sustaining future product and technology development for our country and building renewed consumer confidence, while preserving American jobs," Nardelli said in the release.
In 2000, General Motors Corp. (GM) took a stake in Fiat, an agreement that was dissolved in 2005. Fiat previously sold its Fiat and Alfa Romeo brands in the U.S. market from 1983 to 1995, Bloomberg reported.
"We'll have to see how much Fiat will need to invest, but this would allow them to enter the U.S. market as a protagonist in a forthcoming recovery with its expertise in small cars, and that's a great opportunity," Davide Manenti, head of research at Nuovi Investimenti Sim SpA in Biella, Italy, told Bloomberg.
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