12.04.2011 AFTER RENEGOTIATING TERMS FIAT TAKES CHRYSLER GROUP STAKE TO 30 PERCENT

JEEP COMPASS 2011

Having completely renegotiated the terms of the second 5 percent increment, Chrysler Group today announced that Fiat's ownership interest has increased from 25 percent to 30 percent with immediate effect. "The increase is the result of the achievement of the second of three performance-related milestones," says Chrysler Group, noting that the revised terms were "outlined in a recent amendment to its June 10, 2009, Operating Agreement."

The second 5 percent ownership tranche came in two steps and this time focused on international sales. The first phase required Chrysler Group to tot up revenues of more than $1.5 billion in sales made outside of Canada, Mexico and the United States after June 10, 2009, a total that has since been achieved.

The second phase of this 'middle' 5 percent step covered Fiat dealers in Europe and Brazil - the two global areas where the Italian carmaker is strongest - taking on Chrysler Group products, at a penetration level of 90 percent. However, with the Chrysler Group having a poor reputation in both regions, coupled to a weak product mix, Fiat would have been highly unlikely to persuade dealers any further than the reasonably resilient Jeep brand, albeit it the off road division being something of a longer term proposition.

Instead, Fiat has renegotiated with the U.S. Treasury to see that Chrysler Group products sold with Fiat Group badging will count in place of the original terms. With Dodge's Journey now being rebadged as a Fiat Freemont and to be available on European markets (starting with Italy next month) as well as Brazil, this will satisfy the now watered down requirements. It is shrewd negotiating by Fiat as sales volumes haven't been mentioned, meaning that the Journey's arrival on the pricelists - even if it is a flop as many predict - will be enough to tick the boxes. As the deal says "one or more", the Journey's showroom arrival will be enough to satisfy the terms. It also somewhat explains Fiat Group's enthusiasm for the forthcoming rash of badging - as, as well as the Dodge Journey becoming the Fiat Freemont, the Lancia brand will take Chrysler's 200 (Sebring), 300 and Town & Country - when the earmarked products will find it hard to achieve success.

According to the statement issued by Chrysler Group today the new terms are three fold: "An agreement covering at least 90 percent of Fiat dealers in Brazil for the distribution of one or more company products (including Chrysler Group products rebadged and sold under the brand names of Fiat Group Automobiles); an agreement covering at least 90 percent of Fiat dealers in the European Union (EU) for the distribution of one or more company products (including Chrysler Group products rebadged and sold under the brand names of Fiat Group Automobiles), and providing for the pooling of Chrysler Group and Fiat vehicle fleets in the EU for CO2 emissions ratings; and an agreement providing for compensation to the company for the use of its technology by Fiat or its affiliates outside of the NAFTA countries."

The ownership interests of the Chrysler Group’s stakeholders now stand at 59.2 percent for the unions (UAW/VEBA), Fiat moves up to 30 percent, while the U.S. Treasury (8.6 percent) and Canadian governments (2.2 percent) make up the balance.

The Chrysler Group reached the first "performance event" in January 2011 with the U.S. production of the fuel efficient FIRE engine in Michigan which increased Fiat’s ownership from the 20 percent, which it was given when the Chrysler Group emerged from the Chapter 11 bankruptcy process, to 25 percent. Once Fiat hits the final five per cent step by building an efficient compact car, scheduled for the end of the year, it will be able to exercise a call option to purchase a 16 percent stake in Chrysler, to take its shareholding to a controlling 51 per cent. The sums involved aren’t fully fixed, but Bloomberg, quoting JPMorgan Chase & Co. analyst Ranjit Unnithan, last week said it would add up to a figure of $1.14 billion if Fiat bought the stake this year, or US$1.37 billion in 2012, as the call option's rate is tied into earnings. Regarding the 35 percent level, Marchionne said last Friday: "The last bit, which is linked to the approval of a car that will get 40 miles a gallon, is expected to be there by the end of this year. By the end of 2011, everything will be done. We'll reach a 35 percent stake by the end of 2011, maybe."
 

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