Bloomberg News

Marchionne Duels UAW’s Chrysler Director Over $6 Billion

August 13, 2012

Fiat CEO Sergio Marchionne

Fiat SpA Chief Executive Officer Sergio Marchionne. Photographer: Nelson Ching/Bloomberg

Sergio Marchionne drives a hard bargain. After all, the Fiat SpA (F) chief executive officer gained control of Chrysler Group LLC in 2009 for nothing.

Now, he may have met his match in his own boardroom.

Erickson Perkins, a close adviser to United Auto Workers President Bob King with an extensive Wall Street background, is on Chrysler’s board as the representative of the union’s retiree health-care trust. He and Marchionne are about to play a multibillion-dollar game of chicken that lines up this way:

Marchionne needs the trust’s 41.5 percent of Chrysler to get full control and access to the automaker’s cash, so he’s a motivated buyer and Perkins knows it. At the same time, the trust has much of its assets tied up in stock that doesn’t trade on any market. It can’t pay its bills with shares of Chrysler, a company that required two government rescues in 30 years, so it’s a motivated seller. Marchionne knows that, too.

At stake: Somewhere around $6 billion.

“You’ve got a savvy discount buyer in Marchionne, who got 60 percent of Chrysler for bargain-basement value, negotiating with a guy with Wall Street background that has impetus to wind his trust’s equity stake down,” Eric Selle, a JPMorgan Chase & Co. analyst, who advised Perkins during GM’s bankruptcy process, said in a telephone interview. “It’s going to be a tough negotiation.”

Shrewd, ‘Invaluable’

Perkins, 57, is described by those who have worked with him as shrewd and analytical, with a knack for absorbing information. King called him “invaluable.” He joined Chrysler’s board June 10 to represent the union’s Voluntary Employee Beneficiary Association, known as VEBA. The fund holds all the equity in Auburn Hills, Michigan-based Chrysler that isn’t owned by Fiat.

For Turin, Italy-based Fiat, which took control of Chrysler in 2009 without paying any cash and by agreeing to share small- car and powertrain technology, a full merger means access to its American partner’s cash, a stockpile that had swelled to $12.1 billion by the end of the first half.

The U.S. carmaker has been propping up its majority owner as it piles up losses in Europe’s auto market, which is headed for a fifth straight year of declines.

Asked by an analyst on Chrysler’s second-quarter earnings call on July 31 if Fiat could access Chrysler’s cash with the capital structure that’s in place, Marchionne responded, “No. Firewalls are up; can’t get to it.”

Analyst Days

Perkins spent some of his 12 years at AllianceBernstein LP, then known as Alliance Capital Management, through 1999 as a buy-side auto analyst, said Joe Phillippi, an industry consultant who counted Perkins as one of his best customers when he was on the sell side at Lehman Brothers.

Perkins was “very smart, very sharp, always asked lots of good, solid, penetrating questions, and very fair to deal with,” Phillippi, principal of consulting firm AutoTrends Inc. in Short Hills, New Jersey, said in a telephone interview. “He understands the investment business intimately. Given the UAW’s ownership positions, that’s going to be important -- to have a straight-shooting, tell-it-like-it-is kind of guy.”

Perkins left Wall Street in 1999 to become an independent consultant advising labor organizations, including the AFL-CIO and the UAW, according to his biography on Chrysler’s website. He was “deeply affected” by Russia’s privatization process in the 1990s, said Michele Martin, a spokeswoman for the Detroit- based UAW. The process followed the dissolution of the Soviet Union and put much of the nation’s wealth into the control of a small group of oligarchs.

‘Common Good’

“He believes that building a strong labor movement is one of the ways U.S. citizens can protect themselves from similar outrageous depredations that benefit an elite that has trouble distinguishing between the common good and their own self- interest,” Martin said in an e-mail. Perkins declined a request for an interview, she said.

By 2006, Perkins became a consultant for the UAW’s Ford department, the same year that King was appointed vice president overseeing the division that negotiates with Ford Motor Co. (F:US)

“When he went into Ford, they were not happy with him because he went in and he was like an analyst, asking a lot of tough questions,” King said in a July 2011 interview. “Six months later, they all had tremendous respect for him. He had added a lot of value by the tough questions he had asked, getting them to relook at some of their strategies and ideas.”

King said Perkins was “invaluable on the VEBA,” the funds created in 2007 to remove retiree health-care liabilities from the balance sheets and labor-cost estimates of Ford and the predecessors of GM and Chrysler.

VEBA Stakes

The trusts for GM and Chrysler hourly retirees were allocated some ownership of the companies by President Barack Obama’s automotive task force during their 2009 bankruptcies. By exercising options at a cost of $1.97 billion and meeting some performance milestones, Fiat has boosted its ownership stake in Chrysler to 58.5 percent. Chrysler said today in a regulatory filing that Fiat’s stake would rise to 61.86 percent by exercising an option to buy a portion of the VEBA’s holding.

Perkins sought input from Selle about the value of the equity the VEBA was getting in 2009, the JPMorgan analyst said.

“He was the guy making sure the numbers add up,” he said. “I envisioned him as the kind of accountant for the whole deal. He’s obviously a numbers guy. I found him to be very business- savvy and astute to accounting and valuation.”

Since July 2010, Perkins has been director of a UAW department created by King called Strategic Research. The division is a due-diligence group that supports bargaining and organizing by finding everything there is to know about a company that the union is entering negotiations with.

“Chrysler’s added a guy to the board that you can’t hoodwink,” Selle said.

2011 Bargaining

Perkins enters Chrysler’s board after having served as a member of the national negotiating teams that bargained with all three U.S. automakers late last year on new four-year contracts.

The UAW’s Chrysler department was “in the toughest spot” of the union’s three teams during those negotiations, said Rich Boruff, the chairman of that bargaining committee. The company was the least well-off financially of the three and argued it couldn’t fit the pattern of GM and Ford.

The VEBA could be in an even more precarious position. A significant portion of the assets that the fund has to pay for retirees’ health care is its Chrysler equity and a $4.59 billion note that Chrysler issued to the VEBA in June 2009, said JPMorgan’s Selle.

The VEBA’s equity stake may be worth about $6 billion, he estimated. The note pays 9 percent interest per year and matures in July 2023.

Right Person

“You’re supposed to diversify a trust and not put all your eggs in one basket,” Selle said. If Chrysler or the U.S. auto industry suddenly collapsed, the assets could be quickly depleted. “The guy running that trust has to be shaking in his boots every day,” Selle said.

After seeing Perkins negotiate the UAW’s national contract with Chrysler, committee chairman Boruff said the VEBA has chosen the right person for the job.

“He’s the only guy I felt comfortable sitting across the table from a guy like Sergio,” Boruff said in a telephone interview. “When Sergio and his group tried throwing numbers at us to say, ‘This is where we’re at,’ Eric countered and said ‘No, this is really where you’re at.’ He counters the discussion, and you can’t respond to him because he’s right.”

Perkins influenced the national contracts by getting all three automakers to agree to pilot programs on so-called chronic care, or medical care that addresses pre-existing or long-term illness such as diabetes, said Fran Parker, executive director of the UAW Retiree Medical Benefits Trust.

Chronic Care

Perkins is the UAW’s appointee to the National Institute for Health Care Reform’s board of directors. He got the idea for the chronic-care pilot from reading a piece about the topic in the New Yorker, Parker said. He also is a devoted reader of reports from the Medicare Payment Advisory Commission, or MedPAC, an independent congressional agency that advises Congress on issues affecting Medicare, she said.

“He’s the only person I know who will actually read through 269 pages of MedPAC reports as opposed to executive summaries,” Parker said in a telephone interview.

Perkins’s wife is an advocate for clean-water projects in developing countries, and they have an elementary school-age daughter.

Perkins replaced former Michigan Governor James Blanchard, 69, as the VEBA’s representative on Chrysler’s board. Blanchard’s three-year term began shortly after the company emerged from bankruptcy in June 2009. The U.S. government has said it recovered $11.1 billion of the $12.4 billion given to the company in a rescue that put Fiat in control of the No. 3 U.S. automaker.

Union Role

It’s unclear whether Chrysler will continue to have a union appointee on the company’s board if and when the VEBA exits its ownership stake.

Unions have a difficult time getting representation on U.S. boards because critics argue that the union “cannot wear two hats,” representing workers and other stakeholders, said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Massachusetts.

Potential conflicts may require Perkins to recuse himself from some discussions in Chrysler’s board meetings, said AutoTrends’s Phillippi.

“He’s got various fiduciary responsibilities and can’t be privy to certain kinds of ‘inside information,’” he said. “That gets a little dicey. He’s got different interests in mind. His fiduciary responsibility is to the VEBA.”

To contact the reporter on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net; Keith Naughton in Southfield, Michigan at knaughton3@bloomberg.net.

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net.


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