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 Investors welcomed the deal struck by Chief Executive Sergio
Marchionne, under which Fiat will buy the 41.46 percent of the No. 3
U.S. automaker it does not already own, without raising funds from
the stock market.
Marchionne, who has run both companies since Chrysler's 2009 U.S.
government-funded bankruptcy restructuring, aims to merge the two
into the world's seventh-largest auto group.
However, analysts were concerned that the deal will increase Fiat's
already heavy debt burden, despite a relatively low price negotiated
by Marchionne after more than a year of talks.
Fiat shares rose as much as 16 percent to levels last seen in August
2011 after the deal, which aims to combine the two automakers'
resources and rejuvenate Fiat's product line-up. It was the stock's
biggest intraday gain since April 2009.
"They paid less than the market had expected, and there will be no
capital increase to fund this, so no wonder the stock is flying," a
Milan-based trader said.
"While it's still to be seen how this will bode for Fiat's future,
this is a good start to the year for a company that has had quite a
tough ride recently, especially in Europe."
Fiat will buy the stake in the U.S. group from a retirees'
healthcare trust affiliated to the United Auto Workers union, with
Chrysler putting up most of the funding.
However, Citigroup analysts said Fiat's debt would become the
highest for any European motor manufacturer.
"Group net debt will rise to around 10 billion euros ($13.8
billion)," they said in a note. "We continue to have concerns about
the sustainability of this heavy debt burden."
ITALY INVESTMENTS
It remains to be seen whether the merger will cut Fiat's losses in
Europe, where it had promised to break even by 2016. Fiat's plan
depends on its ability to share technology, cash and dealer networks
with Chrysler easily and cheaply.
Chrysler and Fiat currently have to manage their finances
separately. A full merger will make it easier — but not automatic — to combine the cash pools of the two companies, giving Fiat more
funds to expand its product line-up.
Fitch ratings agency said Fiat may not immediately be able to fully
access Chrysler's cash as this would require a refinancing of the
U.S. firm's credit agreement and bonds. Fitch will review its rating
in early 2014.
Chrysler's booming U.S. sales are now a profit center for Fiat,
helping to offset losses in Europe. The deal raises expectations
that investments could be channeled into underused Italian plants to
launch new models in what analysts expect to be a steadying market
from 2014.
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Italy's unions and government hope the deal will boost jobs and cut
state spending. Several Fiat plants have been working only a few
days a month, with thousands of workers currently in state-backed
temporary lay-off schemes to avoid job losses.
"It's essential that Fiat tells us what they plan to do in our
country," Susanna Camusso, head of the CGIL union, said.
Fiat has repeatedly reassured unions and politicians it does not
intend to close factories, unlike some of its competitors, but
doubts remain, given Fiat's growing U.S. presence. Analysts already
said a U.S. listing could be the next step.
"We assume Fiat will go on to pursue a U.S. listing of some sort in
due course," Bernstein said in a note.
Fiat has said it plans to build Jeeps and a new line of Alfa Romeos
in Italy for export to markets in Asia, Latin America and the United
States to offset flagging demand in crisis-hit Italy. A new
industrial plan outlining Fiat's overall spending strategy and
models will be released in April.
But whether Marchionne will put billions of euros into Italy and
Europe, where the group has lost much of its market position in
recent years, or elsewhere is still uncertain.
"The bad news is that he's spent no money for the past two years at
Fiat because he was waiting for this to happen," said a London-based
analyst at a major investment bank.
"He's not getting any exposure to European recovery. The U.S. asset
is not as good as its peers and needs money spent on it. Marchionne
has shown he can get the job done, but I'm still buying a dream."
By 1558 GMT Fiat shares were up 15.2 percent at 6.86 euros, with
traded volume six times the previous month's daily average.
($1 = 0.7257 euros)
(Additional reporting by Valentina Za in
Milan and Laurence Frost in Paris; editing by David Stamp and Will
Waterman)
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