Milan, Jan. 2 (Reuters): Fiat shares jumped on Thursday after it struck a $4.35-billion deal to gain full control of Chrysler Group LLC, but doubts remained over whether the Italian car maker can use the merger to cut losses in Europe.
Investors welcomed the deal struck by chief executive Sergio Marchionne under which Fiat will buy 41.46 per cent of the No. 3 US auto maker it does not already own, without raising funds from the stock market.
Marchionne, who has run both companies since Chrysler’s 2009 US government-funded bankruptcy restructuring, aims to merge the two into the world’s seventh-largest auto group.
However, analysts are worried about how 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 per cent to levels last seen in August 2011 after the agreement, announced late on Wednesday, which aims to combine the two auto makers’ resources and rejuvenate Fiat’s product line-up.
“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,” the trader added.
Fiat will buy the stake in the profitable US group from a retiree healthcare trust affiliated to the United Auto Workers union.
The trust will receive $3.65 billion in cash for the stake, $1.9 billion of which will come from Chrysler and $1.75 billion from Fiat.
After the deal closes, Chrysler has committed to giving the UAW trust another $700 million over three years.
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) upon completion of this transaction... leaving it the most indebted OEM (original equipment manufacturer) in Europe,” they said in a note.