Italy's Fiat SpA is poised to take a 35% stake in U.S. car maker Chrysler LLC, people familiar with the matter said, in a move aimed at helping both firms weather an economic downturn threatening the survival of some of the auto industry's biggest companies.
Under terms of the deal, Fiat is likely to take a 35% stake by midyear and have the option of taking as much as 55% of the company over time, these people said. Cerberus Capital Management LP, Chrysler's owner, is looking to retain an interest in the U.S. car maker, these people said, adding that it is unclear whether Daimler AG will want to keep its entire 19.9% stake.
The deal could be unveiled as early as Tuesday, barring any last-minute offers. As recently as last week, Chrysler executives had discussions with Nissan Motor Co. over a possible alliance, according to one person familiar the matter.
At the heart of the potential alliance is an agreement whereby Fiat would share its engine and transmission technology with Chrysler, allowing the U.S. car maker to introduce new, low-emission small-car models to its fleet, the people familiar with the matter said. Fiat would also build and sell its own small cars in the U.S., possibly via Chrysler's U.S. dealership network, thereby extending its reach beyond Europe's car market, these people said.
Cost savings associated with the partnership are expected to be estimated in the $3 billion to $4 billion range, they said.
A Chrysler representative didn't return calls seeking comment, which was previously reported on the Web site of Automotive News Europe.
For both companies, the potential deal is a defensive move aimed at long-term survival.
At the end of 2008, Chrysler, the smallest of the U.S.'s Big Three auto makers, was nearly out of money until the U.S. government provided $4 billion in emergency loans. Chrysler Chief Executive Robert Nardelli last week said that the company needs $3 billion more in federal loans. The loan terms require Chrysler to show it can be viable by March. Striking a partnership with Fiat should enable Chrysler to make a better case to the government that it has a good shot at recovering.
Analysts have doubted whether Fiat, which produced just 1.7 million units in the first nine months of 2008, has the scale to survive as an independent manufacturer of small cars. Small vehicles produce relatively thin margins, making it hard to make money in Europe's high-cost labor market.
Fiat has for months been exploring ways to gain a foothold in the North American car market, hunting for a partner that could manufacture its Fiat 500 minimodel and relaunch its high-end Alfa Romeo brand in the U.S.
The financial crisis has exacerbated Fiat's challenges. Car sales have plunged around the world as potential car buyers struggled to get loans to finance new-car purchases. New-car registrations in Europe, a measure of demand, reached a 15-year low in 2008, falling 7.8% to 14.7 million, compared with 2007, the European Automobile Manufacturers Association reported last week.
Fiat also risks higher fees to finance its debt, which stands at about €7.2 billion ($9.57 billion). Last Thursday, Moody's Investors Service placed Fiat under observation for a possible downgrade on short- and long-term debt.
The potential alliance will need the blessing of Fiat's founding family, the Agnellis. The family, which still holds a 30% controlling stake in Fiat, has said in the past that to stay competitive, Fiat needed to link up with a larger rival. Fiat's board is likely to discuss the potential deal with Chrysler when it meets on Thursday to approve third-quarter results, one person familiar with the matter said.
Chrysler and Fiat are similar and, in some ways, complementary companies. Chrysler operates almost exclusively in North America and gets about three-quarters of its sales from trucks, sport-utility vehicles and minivans. Fiat specializes in small and midsize cars. Both companies could benefit from having a larger global volume of sales over which to spread development costs.
Last summer, Chrysler confirmed it was in talks with Fiat about the Italian auto maker's interest in obtaining U.S. manufacturing capacity for the Alfa Romeo brand.
In snagging control of Chrysler, Fiat would add assembly capacity in North America, while giving Chrysler access to fuel-efficient small cars and engines, and better entree to Europe and Latin America. Fiat has about 2.6 million units of global manufacturing capacity, with nearly half of the production facilities based in Western Europe. The rest of Fiat's plants are primarily in Eastern Europe and South America.
Chrysler has 14 assembly plants in North America and 26 car and truck lines that are sold throughout a network of thousands of dealers. Chrysler employs about 66,000 people.
Most analysts said Chrysler has little hope of surviving as a stand-alone company. Following a rash of mergers in recent decades and the rise of well-funded competitors in China and India, the auto industry is dominated by multinational companies that can quickly move production and engineering from region to region.
Chrysler is almost entirely dependent on its share of the U.S. market for revenue. In 2008, Chrysler sold 1.45 million cars and trucks in its home market, about 30% fewer than the two million it delivered in 2007.
