Chrysler moves closer to Fiat

Posted by: David Welch on May 6, 2009

Chrysler moved closer toward selling the company—or at least, the brands and plants that potential buyer Fiat Auto wants to keep—in bankruptcy court yesterday. What happened doesn’t seal the deal, but bankruptcy judge Arthur Gonzalez said Chrysler can start preparing a sale in which the company will be divided in two, with the good assets going to Fiat and the bad ones being liquidated.

Bear with me while I explain some of the legal ins and outs of this one. The judge’s decision is an important one because a group of dissident creditors who refused to take 29 cents on the dollar for their debt have argued that Chrysler’s assets have not been auctioned off in a proper fashion. They say that the government is ramrodding a Fiat-Chrysler marriage. If the court gave them more time, perhaps other buyers for Chrysler might step forward. That would drive up the price of the assets, and hence, make the collateral securing their loans more valuable. Then they could get more than 29 cents on the dollar.

While the dissident creditors, who make up about 10% of the $6.9 billion in debt that was crammed down to $2 billion, have legal standing to argue the case, their premise that another bidder will step forward is on shaky ground to say the least. My reason is simple. Who wants Chrysler? It’s in bankruptcy, has declining market share and only a few strong product lines. Its brands command weak prices and buyers in lower tiers of credit. Years of cost cuts have shipped expertise out the door.

Who might bid? Not private equity. Every other private investor has already watched Cerberus crash and burn with its $7.4 billion Chrysler adventure. Not the Indian and Chinese carmakers. They don’t want to deal with the legacy problems of an old U.S. carmaker. Chrysler executives knocked on their doors and no one stepped forward. Not General Motors. They have enough problems, according to GM CEO Fritz Henderson. Given Daimler’s disastrous investment in Chrysler and BMW’s horrid experience with Britain’s Rover Cars, the Germans are not exactly beating the bushes for M&A deals.

Renault-Nissan President and CEO Carlos Ghosn would love to get a bigger piece of the U.S. market. But he has had a couple of chances and balked. Billionaire Kirk Kerkorian made a bid for Chrysler before Cerberus bought it with the understanding that Renault-Nissan would partner up with the U.S. carmaker if a deal was done. Ghosn stayed in the background and no deal happened. Chrysler representatives spoke to Mr. Ghosn in late December and told him Fiat was interested. If he wanted Chrysler, they said, he better make a move. He didn’t.

Chrysler executives have said in sworn affidavits that they tried to hail anyone who will listen (and probably even a few who didn’t want to) in an effort to sell the company. But those efforts went begging. Chrysler’s best vehicles are trucks, suvs and minivans, most of which would get hammered by a spike in fuel prices. Its sales are sinking fast and only bankruptcy can help erase a mountain of long-term liabilities. And by the way, with nearly every automaker in the world burning cash in the face of a severe recession, there aren’t many car companies pining for more brands to sell and more factories to run.

Frankly, Chrysler is lucky to have found Fiat, even though its CEO, the dynamic Sergio Marchionne, is not willing to put cash into the company. He is bringing technology, but is only doing the deal because the U.S. government is willing to fund Chrysler and shepherd it through bankruptcy. In the end, Judge Gonzalez will probably let the “sale” go through. Fiat won’t pay cash for it. They will give Chrysler vehicles and technology and perhaps assume some liabilities. Then we will see if the lone suitor can turn the company around.

Reader Comments

Pete

May 6, 2009 11:20 AM

I hope the lenders appeal. Obama and the government actions are illegal. There is precedence for this position, google Youngstown Sheet & Tube for the Supreme Court decision backing Truman up when he tried to nationalize steel mills during the Korean War.

Obama and the government need to either get out of trying to own or operate private enterprise, or someone needs to take this up and get the Supreme Court to back the government up.

Art

May 6, 2009 11:29 AM

Welcome to the new socialist government.
If Fiat buys most of Chrysler it would no longer be a US company. So why is Obama willing to "back" the warranties with our tax dollars?

Mike from NYC

May 6, 2009 12:16 PM

Looks like Ghosen had common sense and realized that Chrysler was a money pit and a has-been company with not much of a future. Fiat's Marchionne on the other hand sees an auto empire for the taking, especially now that he has his eyes on Opel too. Marchionne needs more humility and his empire building will probably sink him and Fiat. I'm sure Fiat will rush a car to market before it has been fully vetted and will be a problem plagues car, in the same tradition that sunk Chrysler, GM and Ford. I really don't think that is a viable market for the first proposed car - the Fiat 500, as it is just too damn small and there are numerous alternatives to Fiat's car. American's are tougher today in regards what they expect from a car, while Europeans are not quite so tough. If Fiat doesn't get it right the first time there will be no going back, and the brand will fail and probably take Fiat with it.

Elrod

May 6, 2009 12:27 PM

This is NOT illegal. The 90% creditors have the legal right to force their way on the 10% dissident holdouts; this is what happens when the first-lienholders are not united in bankruptcy court. The judge makes a determination that the dissidents, in this case, will never get 50 cents on the dollar in liquidation. Thus, their plans are not feasible.

Seren

May 6, 2009 12:46 PM

I am amazed at how ONLY white older males literally hate a progressive ethical, brilliant, president of the United States!
If Obama had been white every fundamentalist, every financier would be yelling HURRAH we were able to keep our racist views alive.
Literally every day Obama and his team are doing what NO other president ever has had the guts to do and say..he has spoken truths, he is listening, he is guiding, he is making major inroads literally every day for ALL Americans in green energy, affordable Medical for (whats left) of the middle class(without them guys there would be no US democracy left), in giving kids more affordable College choices, in creating millions of new LONG TERM jobs for the young, in separating right wing taliban mentality from mainstream America and more.
ONLY WHITE older males hate Obama because he has more courage than any of you guys have ever dreamed of wishing for and yes I am white.

Good Point

May 6, 2009 1:19 PM

I hope the lenders fight for their rights.

The company is being reorganized and sold to a junior creditor (the UAW health care trust) right from under the senior creditors.

This smacks of a sub rosa reorganization to me.

Bob

May 6, 2009 1:42 PM

This attempt to salvage the union consituency that in part elected Obama is a joke. There will need to continue to be reductions in union workers, and the profitability is in question. Furthermore, there is no assurance that the jobs will not be disproportionately saved or increased in Canada or Mexico. Almost all of this done on the taxpayer's back with no intention of repayment. And as Art pointed out, this will NOT be a US controlled company.

James Raider

May 6, 2009 1:47 PM

WHITE HOUSE INTERFERENCE

Chrysler and its “rogue” debt holders shouldn’t give in to the Administration’s bully pulpit.

http://pacificgatepost.blogspot.com/2009/05/dilettantes-at-chrysler-gate.html

Floyd

May 6, 2009 3:34 PM

There is not to many people have anything good to say about the Unions anymore and Obama is going to see that they come out smearing like a rose you can bet 0n that. They are the ones that broke the companies to start with. I was a union man for 19 years, I saw more then one company broke by unions.

Floyd

John Wayne

May 6, 2009 3:53 PM

Since none of you fat cats pay any taxes , what do you care about the "taxpayer"

Us middle class drones need jobs to buy your cosumables. don't ever forget that

John Wayne

May 6, 2009 3:53 PM

Since none of you fat cats pay any taxes , what do you care about the "taxpayer"

Us middle class drones need jobs to buy your consumables. don't ever forget that

AJ

May 6, 2009 4:23 PM

To Art:
Fiat gets a 20% stake and can increase it additionally by 15% down the line. UAQ has a 55% stake. 10% goes to the Govts of US & Canada/ How do you conclude that Fiat-Chrysler will be an Italian company?

Eric

May 6, 2009 4:39 PM

When the government interfers with a natrual processes like supply and demand, strong survive, or smart hard-workers out preforming dumb lazy-workers they get it wrong every time. The government put the car companies in this situation to start with or at least handicapped them. Everything goes in a cycle; nature, government, economies. We are not smart enough to predict the long term effects of most decisions made regarding our economic health. I really dont'e believe we're that good. When we interfeer with the inevitable, it only prolongs the problem, and usually makes it worse. It's like building a sand bag dam to save a flood town. Yea, it's a noble idea, but the best idea was not to build in the flood town. All these "want it all" liberals don't get it!

The complex problems we're talking about are all realated to just a very few simple laws, just like laws of nature. It only works one way, that's ONE WAY. When Obama props up these companies to pay back the unions for votes, we are only prlonging a greater problem. Either cut them loose and allow these companies to become competitve again or let them fall and become a history lesson. And, where the heck was the bale out for small business. If it's the back bone wouldn't you treat it first. Oh yea, they don't swing a vote like unions do.?....

Paul (Vw)

May 6, 2009 11:46 PM

>>> Frankly, Chrysler is lucky to have found Fiat, even though its CEO, the dynamic Sergio Marchionne, is not willing to put cash into the company. In the end, Judge Gonzalez will probably let the “sale” go through. Fiat won’t pay cash for it. They will give Chrysler vehicles and technology and perhaps assume some liabilities. Then we will see if the lone suitor can turn the company around.

Wow that struck me..."even though?" Now that's loaded...

"Lucky to have Fiat?" Fiat who "is not willing to put cash into the company?" Who will "give" technology and vehicles (i.e. sell Fiat cars in Chrysler showrooms)? And for this we are supposed to feel lucky?

And that is reason enough for Team Obama by fiat (my play on words) to abrogate bankruptcy law?

It's like we have this butt-ugly, pregnant daughter. The only suitor is this "dynamic" fellow who brings nothing to the table (as compared to other suitors scared away), won't provide any financial support, and wants a dowry. Just because our daughter is in bad shape does not mean we should saddle her with a poor suitor merely because he is the only suitor.

________

>>> Who might bid? Not private equity.

Especially after Mr. Obama vilified secured creditors who had the audacity to assert their legal rights. This is the biggest shame of all this mess.

"The problem with socialism is that you eventually run out of someone else's money" -- Margaret Thatcher

zamora

May 7, 2009 3:27 AM

This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.
zamora

zamora

May 7, 2009 3:34 AM

Fiat gets a 20% stake and can increase it additionally by 15% down the line. UAQ has a 55% stake. 10% goes to the Govts of US & Canada.
zamora

alberto

May 7, 2009 6:57 PM

I guess that taking the fact that 90% of native americans don't know anything about the birth of civilization, try some history lesson,that should work!
Search for..romans, latin, vatican,lazio,Pizza,Carnaval..Rooco lol etc...search for Portuguese,Spanish,French, you have been colonized, and it never stoped, every year it recycles itself....lol

LCV

May 8, 2009 1:12 AM

"The problem with socialism is that you eventually run out of someone else's money" -- Margaret Thatcher"

Hmmm.....that was the same problem with Wall Street...they ran out of subprimes to leverage 30 plus to one, then the economy imploded.

Are they socialists?

RoyJ

May 8, 2009 9:30 AM

The problem with free market capitalists is they take risks involving other people's money and bankrupt an entire world. Do they care? Nope! They don't realize if you jip everyone around you you're only jipping yourself too. Greedy retards!!!

Paul (Vw)

May 8, 2009 10:44 AM

Martin (UAW)

May 12, 2009 12:16 PM

I'm not here to coment on the union slandering (I am used to that)and I am also not here to comment on Obama's actions.
Zamora is correct on the "ownership" of Chrysler. The UAW gets 55% out of the gate for the VEBA trust fund money that was not going to be paid. The Treasury gets 10%. Fiat starts with 20%, can get 5% more for each of these actions. 1)building a car IN THE UNITED STATES that gets 40mpg or better. 2)building an engine IN THE UNITED STATES (I believe a transmission as well) 3)sharing technology and Fiat's global distribution network. Fiat can not take majority ownership until the bailout money is repaid. set this way, this keeps Fiat working towards sharing platforms and technology and keeping americans their jobs (unionized or not). Dailmer promised to share platforms, tech, and network but never did due to their corporation. Cerberus is not an auto company and was only trying for bail out money for GMAC (Cerberus owns 51% of GMAC, the rest is GM for the time being).

Gus

May 18, 2009 1:38 PM

Serene, you are an idiot. I am not white and I am not old. I am in my mid 20's and my best friend for years was black, darker than Mr. Obama. And I will tell you that Obama is making huge mistakes in the way he is handling the economy. He is putting us so far in debt it will take generations to get us out of it. Plus it is undeniable he has socialist tendencies and contrary to what he said he would do he has turned the country into an even more partisan one. What you are seeing, is not a president with guts, what you are seeing is a fool running a country into the ground.

Young Conservative US Marine

June 11, 2009 2:31 AM

Say good-bye to capitalism and hello to socialism.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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