Once again, Chrysler Group LLC's strong financial performance is saving its Italian parent company, Fiat SpA, from one of the worst crises in its recent history, and Fiat says it will likely increase its stake soon.
When Fiat took over a bankrupt Chrysler as part of a 2009 bailout deal brokered by the U.S. government, analysts on both sides of the Atlantic worried the Auburn Hills automaker would drag it down. But with the release of both companies' first-quarter financial results last week, it is clearer than ever that Chrysler is the rising tide lifting both boats. Chrysler made $473 million — its largest quarterly profit in 13 years. Fiat posted a trading profit of $1.14 billion for the quarter, but said 77 percent of that came from the group's operations in North America.
In other words, Chrysler.
Fiat is still heavily dependent on its home market in Italy, and that market is in serious trouble. Consumers there, as in the rest of Europe, are holding off on big-ticket purchases as concern about the region's sovereign debt crisis grows. As a result, new-car registrations were down 18 percent in Italy year-over-year.
Fiat-Chrysler CEO Sergio Marchionne said auto sales in Italy have now sunk to levels not seen since 1983.
"There is a lot of uncertainty in the European market," he said during a conference call with investors and reporters last week. "(But) the group has sufficient liquidity to deal with the European downturn."
Wall Street has a taken a dim view of Fiat's performance. Last week, Standard & Poor's cut Fiat's credit rating to "BB-" from "BB," citing "weak European performance" and "rising consolidated net debt."
"We expect substantial excess mass market auto manufacturing capacity in Europe and weak demand in Fiat's Italian home market in 2012 to weigh on profitability and cash flow," S&P said in its note. S&P added that Fiat's decision to consolidate Chrysler's finances with its own caused its debt load to rise substantially, partly because of Chrysler's sizable unfunded pension liabilities.
Not that S&P was complaining about the move.
"Fiat benefits from the diversity that Chrysler's North American market position provides, as well as joint purchasing and shared investments," its analysts wrote.
But if Chrysler is saving Fiat financially, the Italian automaker is returning the favor on the product side of the equation.
The all-new 2013 Dodge Dart — the first fruit of their marriage — takes Chrysler's game to a whole new level, thanks to the refined Alfa Romeo platform it is built upon. For the first time in years, Chrysler will have a credible contender in the hotly contested compact car segment. And more vehicles based on the same Italian architecture will be launched next year.
"We continue to focus on new product development," Marchionne said, adding that 2013 will be "a big year" for Chrysler.
It is hardly surprising, then, that Fiat is looking to make the ties that bind it to Chrysler even stronger.
While Fiat already owns a majority stake in Chrysler, making its control of the company virtually unassailable, Marchionne has made no secret of the fact that he wants the whole thing. Unfortunately for him, he has been unable to agree on a price with the United Auto Workers-run trust fund that owns the rest of the company.
But the agreement Fiat reached with the Obama administration to take over Chrysler back in 2009 does provide some additional opportunities for Marchionne to increase its stake. And one of those windows is scheduled to open this summer.
Fiat has the right to purchase an additional 3.32 percent stake in Chrysler on July 1. Fiat now holds 58.5 percent of Chrysler.
"I think we need to take a very hard look at that call. I think there's a better than 50 percent chance that Fiat will, in fact, exercise that call when the time comes," Marchionne said. "And we have a series of calls that are accreting over time until 2016.
"It doesn't resolve the ultimate issue about the 100 percent ownership or the 100 percent integration of the two businesses, but it gets us through — in a very reasonable way — the next period of time, which I think will provide clarity vis-à-vis resolution of the European issue. Europe requires better clarity before I think we expose ourselves to anything else."
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