Fiat Can Boost Chrysler Stake by Making Engines in U.S.

May 13th, 2009 at 10:14am Bob Trojan

DETROIT – Fiat SpA will be allowed to increase its ownership stake in Chrysler LLC if the Italian auto maker achieves certain goals such as starting production of its engines in the U.S., according to documents Chrysler submitted in bankruptcy court.

Under the terms of their alliance, Fiat will get an initial 20% stake in Chrysler and can increase its holding in 5% increments up to 35% if it achieves three goals by Jan. 1, 2013, the filings show.

Fiat will get an additional 5% if it starts production of Fiat engines in the U.S., and a further 5% if it introduces a Fiat-developed vehicle in the U.S. market that can go 40 miles on a gallon of gasoline. Fiat can get another 5% if Chrysler is able to generate more then $1.5 billion in sales outside of the North American market, according to a “Master Transaction Agreement” that was filed on Tuesday in the U.S. Bankruptcy Court in Manhattan.

The agreement also gives Fiat the option to purchase an additional 16% in Chrysler. If it achieves all three goals and exercises its option, it could eventually end up with a 51% stake in Chrysler.

It will not be able to take full control of Chrysler, however, until the American auto maker pays back the loans it has received from the U.S. government. Until the loans are paid, Fiat would not be able to increase beyond 49.9%, the agreement says. And until the loans are repaid, any Fiat shares above 35% will be held in a trust controlled by the U.S. Treasury.

The agreement also says the partnership between the two companies will be governed by a six-person “Alliance Cooperation Board” made up of three representatives from each company.

Chrysler will regain possession of its sprawling headquarters in Auburn Hills, Mich., as part of the restructuring plan the company has laid out in bankruptcy court.

The 504-acre site is currently owned by Cerberus Capital Management LP, the private equity firm that acquired Chrysler in 2007. As part of that deal, Cerberus took possession of the headquarters itself, and then mortgaged it to borrow $225 million from a unit of Citigroup Inc.

According to documents filed with the court, Chrysler’s reorganization plan calls for the auto maker to pay off the $225 million to Citigroup and re-take ownership of its headquarters. Cerberus is giving up its equity stake in Chrysler as part of the government-led restructuring.

The heart of the headquarters complex is a 15-floor office tower connected to a technology center that was once the workplace of more than 10,000 employees. Now only about half as many people work there because of waves of job cuts. The building comprises more than five million square feet of office space. Chrysler describes it as the second largest office building under one roof after the Pentagon.

Source: Wall Street Journal; May 13, 2009

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