Fiat and Chrysler Ink Partnership Agreement Business Development

January 20, 2009

Today it was announced (Full press release below) the Italian conglomerate Fiat Group, Cerberus Capital Management and Chrysler LLC have entered into a non-binding term sheet to establish a global strategic alliance.

Fiat will take a 35 percent stake in Chrysler initially in exchange for giving the company access to its fuel-efficient small car platforms and engines. Fiat has the option to increase its ownership up to 55%. As part of the pending agreement Fiat is not investing money into Chrysler. It is believed the deal would not violate the terms of the $4 billion loan agreement with the US Treasury. However, the government would have to agree to the partnership.

Currently, Fiat Group has a market capitalization of about $7.5 billion. As of 2007, Fiat sold 2.2 million vehicles across the globe. Fiat’s European sales were down almost 15% in December 2008 and 6% for the year. Fiat Group had €3 billion at the end of September 2008.

For the first nine months of the year ending 30 September 2008, Fiat’s net revenues increased 8% to €46.295 billion. Net income for the period increased 5% to €1.45 billion (Figure 1). Net revenues reflect an increase in demand for the company's automobiles. Net income was partially offset by increased research and development expenses. Fiat Group had €3 billion cash on hand at the end of September 2008. That was down from €6 billion at the start of the year (2008 3^rd Quarter Financial Results).

Figure 1: Fiat's Financial Results 2004 through 2007

Moody’s Investors Service recently placed Fiat Group under review for possible downgrade of its Baa3 long term and Prime-3 short term ratings. Fiat group has approximately €15 billion in debt of which €3billion is attributed to the Industrial Group. The possible downgrade is a result of the current economic problems.

As I discussed in (Red Ink Warning – The Auto Slump is Global Including the Imminent Fallout), the problems facing the automotive industry are global and the pending Fiat-Chrysler deal is likely the start of the first wave of consolidation in the industry.

Fiat CEO Sergio Marchionne recently told the Rome daily La Repubblica:

"The auto sector has the obligation to find a new type of management that will bring about consolidation within the next 24 months."

He also told Automotive News in an interview:

"…the only way for companies to survive is if they make more than 5.5 million cars a year."

This deal would add about 1.5 million Chrysler vehicles for a combined 3.7 million global sales. That is well under Marchionne’s goal of 5.5 million. Based upon that, I would expect another company to join the partnership.

Fiat is not re-capitalizing Chrysler as part of this deal and does not appear to be talking on much risk. However, in order to realize its goals it will have to fund future Chrysler vehicle programs. With only €3 billion in cash, Fiat does not have a lot of capital to invest into Chrysler. Given the strain in the markets globally, Fiat’s successful turnaround since 2005 is likely to end.

I am not bullish on this deal because of Fiat’s weaker balance sheet and does little to address my concerns at Chrysler. It is still possible that another deal will be inked with Chrysler selling Jeep to the Renault-Nissan alliance. That would be a quick way for Chrysler to raise needed cash. As far as this deal is concerned, I believe if Fiat and Chrysler are to be successful, Chrysler will need to retool its plants to produce Fiat designed products ASAP. There currently is little product overlap between Fiat and Chrysler and that is a problem.

The over crowded US market does not need more brands so I anticipate Fiat will not try to relaunch its name in the US. To do so would be unwise. Selling Chrysler or Dodge branded Fiats is the only quick way to realize the economics of scale to survive this crisis. In addition, Daimler's 20% stake in Chrysler LLC still needs resolution. At this point I assume Fiat would purchase Daimler's remaining interest for a minimum fee.

Suffice it to say, I am not sold on this deal because it does not address the overcapacity in the US market. All things being equal, Chrysler could sell about a million vehicles globally in 2009 if it makes it that far. Also given how crowded the European market is, I do not see Chrysler expanding their limited operations there. With that I am skeptical this will work out without cash and draconian cuts at Chrysler. All one needs to do is look at Chrysler's 2008 year end results in the US (Figure 2).

Chrysler US Sales, December & YTD
			Dec.			12 mos.
	Dec.	Dec.	percent	12 mos.	12 mos.	percent
	2008	2007	change	2008	2007	change
Crossfire (I)	110	180	-38.9%	2,021	8,774	-77.0%
PT Cruiser	1,823	9,738	-81.3%	50,910	99,585	-48.9%
Sebring	3,572	9,274	-61.5%	71,663	93,130	-23.1%
300	3,707	9,950	-62.7%	62,352	120,636	-48.3%
Chrysler car (D)	9,102	28,962	-68.6%	184,925	313,351	-41.0%
Chrysler car (I)	110	180	-38.9%	2,021	8,774	-77.0%
Total Chrysler car	9,212	29,142	-68.4%	186,946	322,125	-42.0%
Aspen	1,515	3,022	-49.9%	22,254	28,788	-22.7%
Pacifica	574	2,009	-71.4%	7,345	53,947	-86.4%
Town & Country	8,152	14,211	-42.6%	118,563	138,151	-14.2%
Total Chrysler Division truck	10,241	19,242	-46.8%	148,162	220,886	-32.9%
Chrysler Division (D)	19,343	48,204	-59.9%	333,087	534,237	-37.7%
Chrysler Division (I)	110	180	-38.9%	2,021	8,774	-77.0%
Total Chrysler Division	19,453	48,384	-59.8%	335,108	543,011	-38.3%
Avenger	2,050	8,146	-74.8%	61,963	83,804	-26.1%
Caliber	2,896	8,851	-67.3%	84,158	101,079	-16.7%
Challenger	2,602	0	0.0%	17,423	0	0.0%
Charger	5,414	11,115	-51.3%	97,367	119,289	-18.4%
Magnum	31	2,278	-98.6%	6,912	30,256	-77.2%
Stratus	0	0	0.0%	0	1,478	-100.0%
Viper	152	46	230.4%	1,172	435	169.4%
Total Dodge car	13,145	30,436	-56.8%	268,995	336,341	-20.0%
Caravan/Grand Caravan	6,927	21,217	-67.4%	123,749	176,041	-29.7%
Dakota	1,701	2,873	-40.8%	26,044	50,702	-48.6%
Durango	1,435	2,480	-42.1%	21,420	45,503	-52.9%
Journey	4,275	109	3822.0%	47,097	109	43108.3%
Nitro	2,036	7,350	-72.3%	36,368	74,825	-51.4%
Ram	16,618	32,118	-48.3%	245,840	358,295	-31.4%
Sprinter	1,132	1,652	-31.5%	14,600	16,586	-12.0%
Total Dodge truck	34,124	67,799	-49.7%	515,118	722,061	-28.7%
Total Dodge	47,269	98,235	-51.9%	784,113	1,058,402	-25.9%
Commander	2,188	5,821	-62.4%	27,694	63,027	-56.1%
Compass	1,225	3,295	-62.8%	25,349	39,491	-35.8%
Grand Cherokee	5,504	11,753	-53.2%	73,678	120,937	-39.1%
Liberty	4,529	9,941	-54.4%	66,911	92,105	-27.4%
Patriot	2,597	4,987	-47.9%	55,654	40,434	37.6%
Wrangler	7,048	9,007	-21.7%	84,615	119,243	-29.0%
Total Jeep truck	23,091	44,804	-48.5%	333,901	475,237	-29.7%
Total Chrysler LLC car	22,357	59,578	-62.5%	455,941	658,466	-30.8%
Total Chrysler LLC truck	67,456	131,845	-48.8%	997,181	1,418,184	-29.7%
Chrysler LLC domestic	89,703	191,243	-53.1%	1,451,101	2,067,876	-29.8%
Chrysler LLC import	110	180	-38.9%	2,021	8,774	-77.0%
CHRYSLER LLC	89,813	191,423	-53.1%	1,453,122	2,076,650	-30.0%

Figure 2: Chrysler LLC 2008 US Sales (Source Automotive News)

JOINT PRESS RELEASE

FIAT GROUP, CHRYSLER LLC and CERBERUS CAPITAL MANAGEMENT L.P. ANNOUNCE PLANS FOR A GLOBAL STRATEGIC ALLIANCE

Fiat S.p.A., Chrysler LLC (Chrysler) and Cerberus Capital Management L.P., the private investment majority owner of Chrysler LLC, announced today they have signed a non-binding term sheet to establish a global strategic alliance.

The alliance, to be a key element of Chrysler’s viability plan, would provide Chrysler with access to competitive, fuel-efficient vehicle platforms, powertrain, and components to be produced at Chrysler manufacturing sites. Fiat would also provide distribution capabilities in key growth markets, as well as substantial cost savings opportunities. In addition, Fiat would provide management services supporting Chrysler’s submission of a viability plan to the U.S. Treasury as required. Fiat has been very successful in executing its own restructuring over the past several years. The alliance would also allow Fiat Group and Chrysler to take advantage of each other's distribution networks and to optimize fully their respective manufacturing footprint and global supplier base.

The proposed alliance would be consistent with the terms and conditions of the U.S. Treasury financing to Chrysler. Per the U.S. Treasury loan agreement, each constituent will be asked to contribute to Chrysler’s restructuring effort including: lenders, employees, the UAW, dealers, suppliers and Chrysler Financial. Such steps would greatly contribute to Chrysler’s long term viability plan. Completion of the alliance is subject to due diligence and regulatory approvals, including the U.S. Treasury.

As a consideration for Fiat Group’s contribution to the alliance of strategic assets, to include: product and platform sharing, including city and compact segment vehicles, to expand Chrysler’s current product portfolio; technology sharing, including fuel efficient and environmentally friendly powertrain technologies; and access to additional markets, including distribution for Chrysler vehicles in markets outside of North America, Fiat would receive an initial 35 percent equity interest in Chrysler. The alliance does not contemplate that Fiat would make a cash investment in Chrysler or commit to funding Chrysler in the future.

"This initiative represents a key milestone in the rapidly changing landscape of the automotive sector and confirms Fiat and Chrysler commitment and determination to continue to play a significant role in this global process. The agreement will offer both companies opportunities to gain access to most relevant automotive markets with innovative and environmentally friendly product offering, a field in which Fiat is a recognized world leader while benefitting from additional cost synergies. The deal follows a number of targeted alliances and partnerships signed by the Fiat Group with leading carmakers and automotive suppliers over the last five years aimed at supporting the growth and volume aspirations of the partners involved,” the CEO of Fiat Group, Sergio Marchionne said.

"A Chrysler/Fiat partnership is a great fit as it creates the potential for a powerful, new global competitor, offering Chrysler a number of strategic benefits, including access to products that compliment our current portfolio; a distribution network outside North America; and cost savings in design, engineering, manufacturing, purchasing and sales and marketing," said Bob Nardelli, Chairman and CEO of Chrysler LLC. "This transaction will enable Chrysler to offer a broader competitive line-up of vehicles for our dealers and customers that meet emissions and fuel efficiency standards, while adhering to conditions of the Government Loan. The partnership would also provide a return on investment for the American taxpayer by securing the long-term viability of Chrysler brands in the marketplace, sustaining future product and technology development for our country and building renewed consumer confidence, while preserving American jobs."

"This is great news for the UAW Chrysler team and we look forward to supporting and working with them to ensure Chrysler's long term viability,” said Ron Gettelfinger, President United Auto Workers (UAW).