Fiat shares surge after deal to buy remaining Chrysler stake
- 2 January 2014
- From the section Business
Shares in Italian car giant Fiat have jumped more than 15% following the announcement of its plan to buy the remaining 41% of Chrysler it does not own.
Fiat has owned a majority stake in the US company since 2009.
The agreement ends long negotiations with the current owners, Veba, the healthcare trust affiliated to the United Auto Workers' union (UAW).
The move will create the world's seventh-largest car company.
Chrysler and Fiat will pay the trust an initial $3.65bn (£2.2bn).
Once the deal is signed off, Chrysler will pay Fiat another $700m.
Fiat's chief executive, Sergio Marchionne, said that he planned to widen the company's global reach. He was also quoted as saying that the deal was one of life's "defining moments that go down in the history books".
Robert Naftaly, chair of the committee that governs the trust, said: "This agreement is in the best interests of the trust's UAW Chrysler retiree members and their families who rely on the trust to provide vital health care benefits."
The Veba trust looks after medical benefits for 117,000 retired Chrysler workers and their dependents.
'Big debt burden'
David Bailey, professor of industrial strategy at the Aston Business School, told the BBC that while the deal has been well received by the markets, there were still outstanding financial concerns at Fiat.
He said: "Chrysler has been doing well of late, having been rescued by the Obama government, and the previous tie up with Fiat has helped both firms. The idea is that the sharing of platforms, technology and components will enable the new combined entity to reduce costs and compete more effectively with bigger players like Volkswagen."
However, Prof Bailey warned that the company still faced challenges.
"The deal still leaves Fiat hugely indebted when the European market is pretty moribund, despite a nascent pick up from a 20 year low. After the deal, the firm's net debt will rise to some 10bn euros (£8.3bn), making Fiat-Chrysler the most heavily indebted car assembler in Europe. That's a big debt burden to be carrying," he said.
Fiat is the largest private employer in Italy - a third of its 215,000 strong global workforce is based there.
In response to the news of the Chrysler purchase, unions in Italy expressed concerns for the future.
The CGIL Labour confederation's leader Susanna Camusso said in a statement that Fiat must keep its "strategic direction and planning" Italian, and keep a "significant presence" in Italy.
The FIOM metalworker's union, which has close ties to CGIL, also said that reassurance over Italian jobs was needed.
Michele De Palma from the union said: "Before celebrating, we contend it is fundamental to understand the deal's terms".
The alliance between the two companies came amid the major restructuring of the US car industry following the financial crisis of the late 2000s.
The link-up gave Fiat access to the vast US car market, while Chrysler was able to benefit from the Italian firm's expertise in developing small, fuel efficient vehicles.
Recently, Chrysler reported a 22% rise in third-quarter profits to $464m, with net revenue up 13.5% to $17.6bn.
The company said its results had been helped by strong sales of its Jeep Grand Cherokee and the Ram 1500 pickup.
Prof Bailey said that new product development would require further investment from another company.
"I can't see this being enough on its own to give Fiat the scale to generate revenue to plough back into new model development given this debt pile," he said.
"I still think a further tie up and perhaps an equity stake by an outside investor- perhaps with a Chinese auto firm - will be needed to get debt down and to give scale to exploit volume economies across brands. This isn't the end of the story."