On Monday, Chrysler Group filed for an IPO, after its two parents, Fiat and the United Automobile Workers retiree health care trust, failed to reach an agreement over the U.S. automaker's future.
The deal is particularly fraught, as Fiat and the union both hold large stakes in Chrysler, and both played a role in rescuing Chrysler from bankruptcy after the 2008 auto industry bailout by the U.S. Treasury.
At the time, the union took on 41.5 percent of Chrysler, a stake now worth about $3.75 billion. The trust is now "eager to sell off a portion" of that stake, says The New York Times. But it reportedly wants a very dear price: $5 billion, the max they're allowed to profit from the stake based on the terms of the original deal.
Fiat, meanwhile, now owns 58.5 percent of Chrysler, "and the two companies collaborate on new vehicles, engines and parts purchasing" already, says the Times. Fiat's Sergio Marchionne, who's credited with getting Chrysler back on its feet, wants to fully merge the two companies, or at least increase Fiat's stake. But his offer to the union is believed to be $3 billion — nowhere close to that $5 billion ceiling.
So, with negotiations at a standstill, Chrysler on Monday filed for an IPO to sell 16.6 percent of the union's stake. "Sometimes the only thing to do when you reach an impasse is to take it to the markets," says Quartz's Tim Fernholz.
It's a strategic move on Merchionne's part. "[I]f the stock offering goes to market at a lower valuation, the trust could be accused of leaving a better offer from Fiat on the table," says the Times. The 115,000 union members who rely on the trust, probably won't take kindly to that.
"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," says Fernholz.
But Merchionne knows there's much at stake for Fiat. The Italian automaker is in a much different place than it was in 2008, when Merchionne fought to bring Chrysler under its wing:
Fiat, which is especially dependent on its struggling home market of Italy, would have lost money so far this year without the profits it has earned directly from Chrysler. Besides pumping up Fiat’s earnings, Chrysler is helping the Italian automaker re-establish itself in the American market with new products like the Fiat 500 minicar. [The New York Times]
At the same time, Chrysler has made it possible for Fiat to "spread the cost of buying components among a greater number of models," a strategy that Merchionne has relied on, says the Times. So, "Analysts are skeptical that Fiat would ever walk away from Chrysler."
Fernholz could see it playing out in one of two ways. "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," he writes. But at the end of the day, "Marchionne is betting an IPO could give Fiat a chance to purchase the shares at a better price than the union offers."
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