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It’s time for Sergio Marchionne to blink. The Fiat chief executive officer has been in a year-long dispute about the value of Chrysler with the union’s health-care trust fund. The standoff has now culminated in the trust forcing Chrysler to lodge an IPO filing. Listing, though, would be an expensive waste of time.
Currently, Fiat owns 58.5 per cent of Chrysler while the trust owns the rest. Mr. Marchionne has offered to buy some stock covered by call options granted in a 2009 agreement that gave the Italian auto maker control of Chrysler. The price was supposed to be set by a predetermined formula. But different interpretations led to valuations that are miles apart. Resolving the dispute now lies in the hands of a court.
This formula applies to two-fifths of the trust’s remaining 41.5-per-cent stake. To sell the rest – 25 per cent of Chrysler – Fiat will either have to make a convincing offer or see the trust offload in a public listing.
The latter option puts Mr. Marchionne and Fiat in a quandary. Investors like the recovering U.S. auto market. It has helped push Ford’s stock up 65 per cent and GM’s 50 per cent over the past 12 months. Public market investors may lavish a Chrysler listing with similar exuberance, regardless of any business challenges that Chrysler may face. The IPO could, therefore, push up the price Fiat would have to pay for the health-care trust’s shares.
It makes more sense to agree a grand bargain for the trust’s entire stake. At the trust’s current valuation, Mr. Marchionne may at most have to shell out $4-billion (U.S.) – less if he can get the union to the negotiating table. An offer of hard cash, when the alternative is stock trading on a volatile open market, might prove attractive. And because Fiat got its hands on the stake it owns so cheaply at the height of the crisis, Mr. Marchionne’s total investment would be around $6-billion.
The sensible road out of this boggy no man’s land is marked “compromise.” Fiat is best placed to crank the process into first gear.