Chrysler-Fiat Finalize Accord


Move follows U.S. Supreme Court go-ahead and clears the way for the automaker to exit bankruptcy

Fiat (FIA.MI) completed its purchase of Chrysler assets on June 10, just hours after the U.S. Supreme Court denied a hearing to pension funds objecting to the White House-assisted reorganization of Chrysler that transfers management control of the troubled Detroit icon to the Italian automaker. The deal clears the way for the newly constituted Chrysler to emerge quickly from Chapter 11 bankruptcy.

The deal gives Fiat, which manufactures Fiat-, Alfa Romeo-, and Lancia-branded vehicles in Europe, 20% of the equity in Chrysler in exchange for sharing billions of dollars worth of technology and engineering assets with the U.S. automaker. The company has an option to buy up to 35% of Chrysler down the road after taxpayer loans are repaid.

Chrysler entered Chapter 11 on Apr. 30 with the help of federal loans granted by the White House auto industry task force and the U.S. Treasury out of the Troubled Asset Relief Program funding.

While the automaker got major concessions from the United Auto Workers and large banks holding billions in secured debt, a group of Indiana pension funds holding about $42 million of the automaker's debt objected to their treatment doled out in the bankruptcy process and challenged the legality of the process. Last Friday the appellate court upheld the decision by New York bankruptcy judge Arthur Gonzalez approving Chrysler's reorganization plan with Fiat.

Deciding Against an Appeal

In denying a hearing of the case, the Supreme Court issued a brief, unsigned opinion explaining its action. To obtain a delay, or stay, of the deal, a plaintiff must convince at least four of the nine justices that the issue raised is serious enough to warrant hearing a full appeal and that a majority of the court will conclude the lower court decision was wrong. "The applicants have not carried that burden," the court said.

Indiana Treasurer Richard Mourdock, who led the cause of the pension funds, expressed disappointment with the decision and said options seem limited for opponents of the sale. "Obviously, the Supreme Court of the land is the supreme court of the land," Mourdock said. "The United States government has, I continue to believe, acted egregiously by taking away the traditional rights held by secured creditors."

The White House issued a statement applauding the decision: "The Chrysler-Fiat alliance can now go forward, allowing Chrysler to re-emerge as a competitive and viable automaker."

President Barack Obama last month predicted a swift comeback for Chrysler, and the bankruptcy court obliged. Many bankruptcy experts have said in the past month, though, that the White House bent the bankruptcy laws in order to fast-track Chrysler's reorganization.

Advantage to Unsecured Creditors

Specifically, the United Auto Workers, an unsecured creditor to whom the company owed $8 billion in health-care payments, is getting $4 billion in cash and 55% of the equity in the company. The secured creditors—banks and pension funds—were forced to take a 75% "cram-down" on what they were owed. Secured creditors most often do much better in Chapter 11 proceedings because they are first in line if the assets of a company are liquidated for cash.

The Supreme Court acted on the same day the bankruptcy court judge in New York approved Chrysler's plan to sever franchise contracts with 789 dealers in a move to lower its distribution costs and cut underperforming dealers.

With the future of the company set, now comes the hard part. Fiat must integrate vehicle development and manufacturing between the Italian company and Chrysler. That will involve adapting some existing Fiat cars to the U.S. market before the companies have the opportunity to develop unique vehicles from scratch.

No More Chrysler Nameplate?

Fiat CEO Sergio Marchionne will also serve as CEO of the newly formed U.S. company. Though he has been silent on many of the specifics, sources familiar with the planning work say there is a strong likelihood that the Chrysler brand of cars and SUVs will be eliminated and replaced by Fiat, and sold alongside Dodge and Jeep vehicles in combined dealerships that will carry all three brands.

"Bringing the companies together in the middle of a global recession, when auto sales have been battered so, will be a very difficult task," said John Casesa, managing partner at Casesa Shapiro Group, a New York investment and advisory firm that specializes in the auto industry.

Jerome York, the former vice-chairman of Chrysler who has advised financier Kirk Kerkorian in his investments in Chrysler, General Motors (GM), and Ford (F), said he doesn't know if Fiat will be successful. But he predicted it would do a "better job with Chrysler than Daimler did." Daimler-Benz acquired Chrysler in 1998 and sold most of its interests to private equity firm Cerberus Capital Management in 2007. "Daimler did just a God-awful job" of managing the acquisition, said York.

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