Italian automaker Fiat SpA is snatching up the broken remains of American automakers and forging an automotive juggernaut. With a deal with U.S. automaker Chrysler ready to trigger once Chrysler emerges from Chapter 11 bankruptcy protection, Fiat will already have a major equity stake in the recovering Chrysler and a means to distribute its small fuel-efficient vehicles across North America. But Fiat wants more, much more.
Fiat met in Berlin Monday with German officials to discuss a possible bid on GM's chief European holdings -- Opel (Germany) and Vauxhall (UK). The group would be spun off to form one of the world's five biggest automakers. Together with Fiat's main company and the Chrysler equity stake, the move would form a $106B USD company under the control of Sergio Marchionne, chief executive officer of Fiat.
One obstacle is union resistance. Germany's largest automotive union, IGMetall, has previously voiced opposition to the tie-up, fearing job cuts. Another key obstacle is the Fiat-proposed government aid for the deal. Fiat hopes to be given $6.6B USD in aid to pick up the struggling European brands. Further, it also has a rival suitor -- Canadian group Magna International.
If a deal can be reached, along with its Chrysler offerings, Fiat believes the combined company would sell 5.5 million vehicles a year, above the analyst-estimated survival threshold. Fiat also plans to reduce Opel and Vauxhall to only four platforms, cutting $1.3B USD in costs. Cars would continue to be sold under the separate brand names.
The move would give Fiat a strong presence in several continents -- a potentially dominant position in Europe and Britain, a strong North and South American presence, and a means to launch into other markets. Gregor Matthies, a Munich-based partner at Bain&Co. who focuses on the auto industry, states, "If they can make this happen within five to eight years, they could emerge as a strong global competitor."
One key problem about the deal though would be that Fiat might have to assume more of GM Europe's debt than with the Chrysler deal. Fiat already has $8.6B USD of its own debt, and its bonds currently are "junk" status. It does have a few "jewel assets", high performing brands like Iveco truck unit or Case-New Holland, however, overall it is struggling to turn the corner to profitability.
Max Warburton, a London-based analyst at Bernstein Securities, is among those to question the possible tie-up. He states, "Can a spun-off collection of loss-making auto companies really be liquid and viable? What happens if [the new company] needs to be recapitalized? Will Fiat need to sell a jewel asset?"
Mr. Matthies says that the success or failure of the potential company, would likely rest on CEO Marchionne, who has thus far seemed an energetic and effective leader. He concludes, "It all comes down to 'Super Sergio,' driving it from the top with ruthless, pragmatic focus on speedy implementation."