30 March 2009

A Shotgun Wedding For Chrysler, Fiat

Originally Posted to Forbes

Time is running out for Fiat and Chrysler to become fast friends.

The U.S. government has threatened to suspend federal aid for Chrysler unless it secures a deal with the Italian carmaker within 30 days, senior administration officials told Forbes. (See “Obama Takes The Wheel In Detroit.”) Chrysler, along with General Motors, has already received $17.4 billion in federal loans and has asked for billions more.

Fiat and Chrysler announced in January that the two were entering a partnership in which Fiat would take 35.0% of Chrysler in return for sharing its technology and product platforms with the firm, and not pay any cash toward the investment, with a final accord between the two to be announced in April.

Chrysler is expected to tap into Fiat’s product line of smaller cars. (See “The Steal Of The Century.”)

But analysts were cautious about whether the carmakers would meet the 30-day deadline. "I give a potential deal a 50.0% probability,” said Martino de Ambroggi, an analyst with Equita SIM. “It depends on the agreement with U.S. aid, trade unions and suppliers. Fiat is like a spectator right now. The deal will go ahead in the case of the survival of Chrysler, which is not in the hands of Fiat.”

Fiat has been cautious about a potential partnership with debt-laden Chrysler. The Italian automaker said earlier this month that it would not take on Chrysler's debt, current or future. The company said it "intends to make absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness to Chrysler." (See “Fiat, Chrysler Clash Over Debt.”)

“I would not rate it as a "good deal" but as a "good opportunity" because the capacity of Chrysler to become profitable has to be checked in the medium- to long run,” Ambroggi said.

Fiat CEO Sergio Marchione has said that in order to survive, a carmaker needs to sell between 5.5 to 6 million units per year. But Fiat and Chrysler are still well below this level by more than 2 million units, Ambroggi added. “The deal would allow Fiat to become larger and to take advantage of geographical diversification and common platforms, but it’s not a secret that Fiat is looking for a third partner to join the venture."

Shares of Fiat (nyse: FIA - news - people ) fell 6.3%, or 33 euro cents (44 cents), to 4.94 euros ($6.51) in Milan.

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