Chrysler: Contentious IPO Nears

Fiat has a 58.5% stake in Chrysler and wants to acquire the rest of the company from the pension fund that owns the remaining 41.5% — an offer the fund has found easy to reject. The United Auto Workers Retiree Medical Benefits Trust, a voluntary employees’ beneficiary association known as a VEBA, has been trying to force Fiat to offer a portion of Chrysler in an initial public offering (IPO), believing that the trust will realize a larger gain. Fiat wants to buy the VEBA’s stake in Chrysler for as little as possible.

Last January, Fiat exercised a second call option on a 3.3% stake in Chrysler then held by the VEBA. The proposed price, $198 million, valued Chrysler at around $6 billion. In the agreement made in 2009 that saved Chrysler from bankruptcy, the VEBA’s proceeds from the sale of its stake in Chrysler were capped at an initial value of $4.25 billion, which would grow at a compound rate of 9% annually. At that level, the trust’s payout from its stake now exceeds $5 billion.

That values all of Chrysler at around $12 billion, which is $3 billion more than UBS bank estimate of the automaker’s value, according to a report from Reuters. At that valuation, trust’s stake is worth about $3.735 billion.

The VEBA demanded in January that Fiat register for an IPO of 16.6% of Chrysler shares owned by the trust. Marchionne may have no choice. As interest rates rise, financing a buyout gets more expensive, and time is not on Fiat’s side. Marchionne may not like the choice of an IPO, but other options have about disappeared.