MILAN, Italy (Bloomberg) -- Fiat S.p.A. will pay $1.27 billion to reach a 51 percent stake in Chrysler Group LLC as CEO Sergio Marchionne is set to gain control of the American carmaker two years faster than planned.
Fiat aims to increase its Chrysler stake to 46 percent in the second quarter after completing refinancing needed for Chrysler to repay government loans, the Italian carmaker said today. The remaining 5 percent will come from the U.S. later this year after meeting previously agreed targets.
The Obama Administration tapped Marchionne, who now runs both automakers, to revive Chrysler after it emerged from bankruptcy in 2009. In exchange for sharing technology, management and reaching operating milestones, the U.S. and Canadian governments are giving Fiat 35 percent of Chrysler without paying any cash. The original deal was for Fiat to buy the final 16 percent stake in 2013.
"The move today marks a triumph for Marchionne, as he has persuaded the U.S. Treasury and UAW union to let him do it two years earlier than the original master agreement stated," said stock analyst Max Warburton.
Fiat shares have gained about 1.6 percent this year, valuing the automaker at 8.4 billion euros ($12.3 billion).
Chrysler owes the U.S. and Canadian governments $7.53 billion, according to a Feb. 25 filing with the U.S. Securities and Exchange Commission. Marchionne needs to reach a refinancing deal with banks to pay back the government debt before he can exercise his option to buy the additional 16 percent.
Marchionne, who says Fiat will pay cash to exercise the option, is saving money by making the purchase earlier because the cost is linked to Chrysler's earnings. Marchionne is pushing Chrysler to post its first net income this year since emerging from bankruptcy as he works to finish the refinancing.
Chrysler expects to nearly triple what the carmaker calls modified operating profit to more than $2 billion in 2011 from $763 last year, and to earn as much as $500 million in net income, its first since emerging from bankruptcy in 2009. Modified operating profit excludes interest, taxes and items such as pension-related costs.
"Fiat should save more than $400 million by exercising the call option in the second quarter instead of in the following quarters," Gabriele Gambarova, a Banca Akros analyst in Milan, said in a note to investors. "As long as Chrysler's results improve, the call option exercise would have become more expensive."
Fiat, which had 13.1 billion euros of liquidity at the end of March, reported yesterday that first-quarter profit gained 9.1 percent powered by the Ferrari brand and demand in Brazil. Earnings before interest, tax and one-time items, which Fiat calls trading profit, advanced to 251 million euros.
Fiat received an additional 5 percent in Chrysler from the U.S. government last week, giving it a 30 percent holding, by reaching targets that included opening Fiat's dealerships in Brazil to Chrysler products. Fiat expects to get the final 5 percent from the government needed to reach a 51 percent majority by the end of the year after meeting a requirement for Chrysler to assemble a Fiat-derived car in the U.S. that gets 40 miles per gallon.
"Chrysler is undergoing an extraordinary industrial and financial turnaround and Fiat is ready to take control, in order to bring even greater stability and strength," Marchionne said in the statement.