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Thursday, January 2, 2014

The Final Act: Details on the Fiat/Chrysler Merger

Below are the details of the deal Fiat worked out with the United Auto Workers VEBA trust fund to buy the remaining shares of Chrysler. VEBA is short for Voluntary Employees’ Beneficiary Association and was set up when Chrysler went into bankruptcy in 2009.

Fiat, which owns 58.5 percent of Chrysler, had been negotiating for the past year to purchase the remaining 41.5 percent from the trust fund. These negotiations had grown contentious during this time and came to a head last September when trust fund forced Chrysler to file paperwork for an IPO to sell the stocks on the open market. The trust fund was gambling that they would do better by offering their shares to the public and force Fiat to pay market value for them. It was said at the time that VEBA and Fiat were about 1 billion dollars apart, and that trust fund wanted upwards of 6 billion dollars for its shares.

Fiat Chrysler Merger Timeline

Now in a masterful example of negotiation that averts the IPO, Fiat has agreed to pay VEBA $3.65 billion, plus an additional $700 million in four annual payments. This is well under what most analysts had predicted Fiat would pay for the remaining shares of Chrysler. The deal paves the way for Fiat and Chrysler to merge and become the seventh largest car maker in the world, offering economies of scale that car makers need to have in order to stay in business.

The merger will also give Fiat access to Chrysler cash on hand, estimated at $12.2 billion. These funds are needed to finance desperately needed new models in Europe. It should be noted that Chrysler generated these profits while under Fiat's management since 2009 and most experts say that, during this time, Fiat somewhat neglected its European operations to concentrate on saving the US company.

The following is the official agreement press release.

Fiat to acquire remaining equity interests in Chrysler Group LLC from VEBA Trust

Fiat S.p.A. (“Fiat”) today announced an agreement with the VEBA Trust1, under which its wholly owned subsidiary, Fiat North America LLC (“FNA”), will acquire all of the VEBA Trust’s equity membership interests in Chrysler Group LLC (“Chrysler Group”), representing the 41.4616% of Chrysler Group not currently held by FNA. The transaction is expected to close on or before January 20, 2014.

In consideration for the sale of its membership interests in Chrysler Group, the VEBA Trust will receive aggregate consideration of U.S.$3,650 million consisting of:
  • a special distribution payable by Chrysler Group to its members, in an aggregate amount of approximately U.S.$1,900 million (FNA’s portion of the special distribution will be paid by FNA to the VEBA Trust as part of the purchase consideration)2;
  • and at closing, FNA will pay the remainder of approximately U.S.$1,750 million in cash purchase consideration to the VEBA Trust.

Fiat expects to fund the U.S.$1,750 million in cash from available cash on hand. Chrysler Group expects to fund the special distribution from available cash on hand.

Contemporaneously with the transactions described above, Chrysler Group and the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (the “UAW”) have agreed to a memorandum of understanding under Chrysler Group’s xisting collective bargaining agreements to provide for additional contributions by Chrysler Group to the VEBA Trust of an aggregate of U.S.$700 million in four equal annual installments. The initial payment will be made on closing of the transaction with Fiat and additional payments will be payable on each of the next three anniversaries of the initial payment. Chrysler Group expects to fund the initial contribution to the VEBA Trust from available cash on hand.

In consideration for these contributions, the UAW will agree to certain commitments to continue to support the industrial operations at Chrysler Group and the further implementation of the Fiat-Chrysler alliance, including to use best efforts to cooperate in the continued roll-out of Fiat-Chrysler World Class Manufacturing programs, actively participate in benchmarking efforts associated with
implementation of these programs across all of Fiat-Chrysler manufacturing sites to ensure objective performance assessments and provide for proper application of WCM principles, and actively assist in the achievement of the Group’s long-term business plan.

“I have been looking forward to this day from the very moment that we were chosen to assist in the rebuilding of a vibrant Chrysler back in 2009” said John Elkann, Chairman of Fiat. “The work, commitment and achievement I have witnessed from Chrysler over the past four and a half years is nothing short of exceptional, and I take this opportunity to officially welcome each and every one of the people in the Chrysler organization to the integrated Fiat-Chrysler world.”

Sergio Marchionne, Chief Executive of Fiat and Chairman and CEO of Chrysler Group, had this to say: “In the life of every major organization and its people, there are defining moments that go down in the history books. For Fiat and Chrysler, the agreement just reached with the VEBA is clearly one of those moments. I will be forever grateful to the leadership team for the support and nwavering dedication shown to the integration project that today has taken its final shape. The unified ownership structure will now allow us to fully execute our vision of creating a global automaker that is truly unique in terms of mix of experience, perspective and know-how, a solid and open organization that will ensure all employees a challenging and rewarding environment.”

As part of the transactions, FNA and the VEBA Trust will agree to dismiss with prejudice the current proceedings before the Delaware Court of Chancery with respect to the interpretation of the call option agreement pursuant to which Fiat has, through FNA, exercised three tranches of a call option to acquire membership interests in Chrysler Group held by the VEBA Trust. All of these membership
interests will be acquired by FNA in connection with the transactions described above.

Given the funding arrangements for this transaction, it is not envisioned that Fiat will require equity capital to be raised via a rights issue.

Turin, January 1st, 2014

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1. The UAW Retiree Medical Benefits Trust, a Voluntary Employees’ Beneficiary Association, is an independently administered trust established to pay health care benefits for retirees from Chrysler.
2. In the event that the special distribution from Chrysler Group cannot be paid by the intended closing date (January 20, 2014 or earlier), Fiat intends to make payment to the VEBA Trust of the aggregate consideration and thereafter receive the special distribution when it is the 100% owner of Chrysler Group.

Fiat SpA press release

1 comment:

John M said...

Great job Chris!!! Fiat 500 USA's information gathering is the best!