Bloomberg News

Fiat Judge Seen Leaving Marchionne in Lurch Over Chrysler (1)

June 20, 2013

Fiat SpA CEO Sergio Marchionne

Sergio Marchionne, chief executive officer of both Fiat SpA and Chrysler Group LLC, said this month that he expected a ruling on the option value by the “third quarter at the latest.” Photographer: Alessia Pierdomenico/Bloomberg

Fiat SpA (F)’s Sergio Marchionne may have to wait months longer than planned to learn the price of shares he needs to complete his purchase of Chrysler Group LLC.

Fiat, the Turin, Italy-based automaker, asked Delaware Chancery Court Judge Donald Parsons, 64, last year to rule that a call-option agreement covering some shares held by a United Auto Workers’ retiree health-care trust are worth $139.7 million. The trust puts the value as high as $342 million.

Parsons, who is considering the matter based on pretrial filings by the two sides, is likely to call for a trial, where witnesses and experts can be questioned and cross-examined, before placing a value on the shares, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. That would add months to a process Marchionne had estimated would be completed by the end of September.

The judge would “want to take the time to get all the information” in a trial, Elson said in an interview. “He’s a very careful judge.”

A decision, either valuing the shares or forcing a trial, could come as soon as next month, although there’s no solid deadline.

Marchionne, chief executive officer of both Fiat and Auburn Hills, Michigan-based Chrysler, said this month that he expected a ruling on the option value by the “third quarter at the latest.” A Fiat representative declined to comment further on the chancery proceeding beyond Marchionne’s statement about the timing.

Shares Fall

Fiat dropped as much as 11 cents, or 2 percent, to 5.43 euros and traded down 1.2 percent as of 9:26 a.m. in Milan. The stock has gained 45 percent this year, valuing the Italian automaker at 6.85 billion euros ($9.1 billion).

A decision by Parsons that the valuation dispute must go to trial may push back a final ruling on the stock’s value for as long as a year, said Larry Hamermesh, a Widener University professor who specializes in Delaware corporate law.

“Since the parties still have to depose witnesses and get ready for trial, it would be incredibly fast to get that all done in six months. I’d say nine to 12 months is more realistic,” the Delaware-based professor said. A trial “is the most likely scenario,” he said.

Marchionne, 61, has spent the past four years working to unify the companies so they can better compete with Toyota Motor Corp. (7203), General Motors Co. (GM:US) and Volkswagen AG. (VOW) He has said the push to acquire the UAW trust’s shares is part of the unification effort.

‘Not Good’

“Uncertainty over Chrysler is not good,” said Philippe Houchois, an automotive analyst with UBS AG in London. “It’s not good for a company to have shareholders arguing, and Marchionne is very aware of those things.” Houchois said he thinks a deal can still be reached by the end of the year. Fiat may pay as much as $4.5 billion for the entire 41.5 percent holding, UBS estimates.

Chrysler has become Fiat’s reliable profit generator as the Italian company struggles to end losses in Europe, which totaled 704 million euros last year.

Marchionne has been counting on Chrysler and its 38 straight monthly U.S. sales gains to offset losses at Fiat’s mass-market brands in Europe. Chrysler’s share of the U.S. market has risen for three straight years, reaching 11.4 percent in 2012, according to researcher Autodata Corp. Chrysler’s 2012 sales in its home market climbed 21 percent to 1.65 million vehicles.

Chrysler reported first-quarter net income of $166 million and maintained its forecast for full-year revenue of $72 billion to $75 billion and net income of about $2.2 billion.

$10 Billion

Fiat may raise as much as $10 billion from banks to increase its stake in Chrysler and to refinance both companies’ debt, people familiar with the matter said in May. As part of those talks, Marchionne may refinance $5.65 billion in loans for Fiat and Chrysler as soon as tomorrow, people familiar with the matter said last week.

Marchionne, who wants to merge the two carmakers “as soon as possible,” must first buy the remaining 41.5 percent in Chrysler from the union’s trust. Fiat already owns 58.5 percent. Marchionne said this month that talks with the fund are “fundamentally” about price. He aims to buy the holding by the end of the summer, the people said last month.

Marchionne said this month that Fiat was in talks with the union about buying its stake and is seeking to complete a deal before a potential Chrysler initial public offering requested by the union is held.

Interpreting Formulas

The judge was asked to interpret the call-option agreement’s formulas for valuing the first block of the UAW trust’s stock up for sale, comprising more than 54,000 shares.

The agreement covers more than 270,000 shares in all, about 17 percent of the trust’s stake. Fiat Chairman John Elkann has said they are looking to Parsons to provide a benchmark. The trust’s entire Chrysler stake totals 670,000 shares.

The UAW trust’s lawyers argue the valuation formulas aren’t clear and need interpretation. The union’s calculations put the block of more than 54,000 shares at as much as $342 million, more than twice Fiat’s estimate.

Fiat acquired a stake in Chrysler in June 2009 after the U.S. carmaker sought bankruptcy protection from creditors and accepted more than $8 billion in financing help from the U.S. and Canadian governments.

As part of Chrysler’s Chapter 11 reorganization, the union health-care trust wound up with the Chrysler stake and promissory notes in exchange for wiping out retiree claims against the carmaker in the bankruptcy case.

Health Provider

The UAW’s Retiree Medical Benefits Trust provides health-care services to more than 800,000 retired workers from Chrysler, GM and Ford Motor Co. and their dependents, according to the trust’s website. It’s the largest nongovernmental purchaser of retiree health services in the U.S.

Fiat sued the UAW trust last year, alleging union officials reneged on promises to let the carmaker buy shares subject to the agreement at a value set by the accord. The agreement gives Fiat the right to purchase a portion of the trust’s shares every six months through June 2016.

The case turns on the agreement’s methods for assessing the shares’ value. The valuation formulas are based, in part, on Chrysler’s reported earnings before interest, taxes, depreciation and amortization for the four most recent financial quarters, minus the carmaker’s “net industrial debt” as listed on its most recent financial statement, according to court filings.

‘Borrowed Money’

The UAW argued in court papers that Fiat shouldn’t include the promissory notes from the bankruptcy case in Chrysler’s debt calculations. The notes don’t meet the call-option agreement’s definition of “borrowed money” and improperly lowered the carmaker’s value, the UAW contended. That adversely affected the value of the trust’s shares, the union said.

Fiat said the notes met the definition of borrowed funds and were properly included in the debt calculations.

At a hearing in April, Parsons said he was “kind of leaning” toward the union’s position on the debt calculations while indicating he wasn’t swayed by the UAW’s arguments that the shares should be sold at current fair-market value, according to court filings.

Parsons considered requests by Fiat and the union for judgments “on the pleadings” for different questions in the case during the April hearing. Such motions are made in hope of winning a case without suffering the time and expense of a trial.

Agreement’s Terms

Parsons could agree with Fiat’s position that the option agreement’s terms are unambiguous and rule the block of 54,000 shares is worth $139.7 million, said Randall Thomas, a Vanderbilt University professor of law and business who follows Delaware corporate cases.

“Chancery court judges do decide cases on motions for judgment,” Thomas said in an interview.

If Parsons opts for a trial, he could put the case on track for expedited discovery, accelerating the exchange of evidence between the parties, which means it could be ready for a full hearing within two to three months, Thomas added.

Elson, of the University of Delaware, doesn’t anticipate that happening. Given the complexities of the valuation case and the fact that “there’s a lot of money involved,” Elson said he didn’t expect Parsons to decide at the pretrial stage.

“It’s a very complex case,” Elson said. “These kinds of cases take time.”

The case is Fiat North America LLC v. UAW Retiree Medical Benefits Trust, CA No. 7903, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net; Phil Milford in Wilmington, Delaware at pmilford@bloomberg.net; Tommaso Ebhardt in Milan at tebhardt@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net


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