Fiat’s stock soared 15% to $6.84 per share in trading Thursday, one day after the Italian automaker announced it had reached a deal to buy all of the remaining shares of Chrysler owned by UAW Retiree Medical Benefits Trust.
That is the highest price that Fiat has traded at since July 2011. Fiat’s stock is traded on the Milan Stock Exchange.
The rally comes a day after Fiat announced a deal to acquire the 41.5% of Chrysler it does not yet own, in a deal valued at $4.35 billion. The deal ends a bitter feud between Fiat and the UAW Trust, which manages healthcare for 117,000 Chrysler retirees, over the value of Chrysler stock. It also dramatically speeds up the ability of Chrysler and Fiat CEO Sergio Marchonne to fully merge the two global automakers.
Max Warburton, an analyst for Bernstein Research, praised the agreement for its creativity and said it the way it is structured will benefit Fiat, because Chrysler is funding more than half of the deal.
“Today’s news on Fiat’s purchase of the rest of Chrysler is surprising on many levels. Surprising in its timing…the most surprising aspect of all is the source of funding – over 50% of the upfront cash will come from Chrysler itself,” Warburton said, in a research note published late yesterday. “The structure of the deal is favorable to Fiat and we would expect the announcement to drive a rally.”
Warburton also noted that under the terms of the deal Fiat will not need to borrow additional money to acquire the rest of Chrysler. Before the agreement was announced most analysts predicted that Fiat would need additional financing to prevent a credit rating downgrade, because it was believed the automaker would need to spend $4 billion or more.
But under the terms of the deal announced yesterday, Chrysler will use $2.6 billion of its own money, while Fiat will pay $1.75 billion, in a deal that is expected to close on Jan. 20.
“This is a bit of a coup and will be seen as a big, positive surprise – although, in retrospect, perhaps we should have seen this coming, given the complex arrangements and possibilities disclosed in various Chrysler documents,” Warburton said.
Fiat will own 100% of Chrysler after the transaction closes. Fiat became Chrysler’s controlling shareholder in June 2009, with a 16% ownership stake, after the automaker emerged from Chapter 11 bankruptcy.
Fiat currently owns 58.5% of Chrysler, while the UAW Trust, also known as a Voluntary Employee Beneficiary Association (VEBA), owns 41.5%.
The VEBA was created by the UAW and each Detroit automaker in 2007, as a way to alleviate the crippling costs of retiree health care that were negotiated many years ago, before health care costs increased far faster than the general rate of inflation.
On Wednesday, UAW Trust Chairman Robert Naftaly said, “This agreement is in the best interests of the Trust’s UAW Chrysler retiree members and their families.”
The UAW itself has not commented on the agreement.
But in Italy, where Fiat is the largest private employer, unions greeted the deal with a mixture of anxiety and excitement.
Italian unions have long fretted that the global reach of Fiat could come at their expense, in terms of production, job security and contract conditions. Their leaders immediately pressed for guarantees, appealing to the government to help safeguard their concerns.
“It is indispensable that Fiat say what it intends to do in our country,” Susanna Camusso, leader of the nationwide, left-leaning CGIL labor confederation, said in a statement.
Fiat has a total of 215,000 employees, almost a third of whom are in Italy.
While praising the deal as important for Fiat to keep up with rivals, Camusso insisted that the company’s “strategic direction and planning remain Italian” and that it “keep a significant presence in Italy.”
Allied with CGIL is the FIOM metalworkers’ union, which has a reputation as a hardliner in labor negotiations.
“We contend that the acquisition of the remaining capital shares of Chrysler group was possible thanks to the maximizing of industrial capital, and of human capital- of the workers of Fiat Group in Italy,” said Michele De Palma, in charge of FIOM at the automaker.