Sometimes the only thing to do when you reach an impasse is take it to the markets.
Sergio Marchionne, the Italian auto executive, has a problem. His company, Fiat, agreed to rescue Chrysler from bankruptcy, purchasing most of the company in 2008 after the US Treasury bailed it out.
Now, Chrysler is doing well, and its sister firm across the Atlantic is the one that needs a helping hand. Fiat could use Chrysler’s free cash flow and some synergistic cost-cutting, so Marchionne wants to merge the two firms, or at least increase Fiat’s stake in Chrysler.
The only thing standing in his way is Chrysler’s union. Its health benefits trust owns 41.5% of the company, and wants to sell it dear. As part of the bailout deal, the union committed to a ceiling on its potential profits from the equity, about $5 billion today and rising each year. The union’s negotiators want to hit that ceiling, which means selling off their stake, now worth about $3.75 billion, in chunks, as it the company presumably grows in value. Chrysler is valued around $9 billion today, up from perhaps zero dollars in 2008. (The company was bought by Daimler in 1998 for $36 billion.)
But Marchionne wants to buy that stake now, and he says he won’t pay $5 billion. The union, unwilling to go lower, suggested Fiat take Chrysler public.
So, unable to reach a deal, Chrysler filed for an IPO aimed at selling off a 16.6 percentage-point chunk of the union’s stake and obtaining a proper market valuation on the company. That kind of reality check could bring the union trust back to the negotiating table, which might mean Chrysler doesn’t go public at all: Either the union sees the wisdom in a lower price, or the company is more valuable than Marchionne expects, and he’s willing to pay up to the union’s ceiling. Ultimately, Marchionne is betting an IPO could give Fiat a chance to purchase the shares at a better price than the union offers.
Earlier this month, Marchionne recommended the union trust “should buy a ticket for the lottery” if it wants a better deal. It looks like they just did.