TURIN, Italy (Reuters) -- A plan by Fiat S.p.A. to convert preference and savings shares into ordinary shares will reduce the cost of equity and remove a potential hurdle to a merger with Chrysler, which is now majority owned by the Italian carmaker.
Fiat and its sister company Fiat Industrial said late on Thursday the proposed conversion would streamline the capital structure and simplify governance for both groups.
Analysts said the plan was moderately earnings-enhancing as it would reduce the total number of issued shares and eliminate the cost of higher dividends for holders of savings and preference shares.
Simplifying the equity structure would also allow Fiat to remove a possible barrier to a full merger with Chrysler, which it has managed since a bailout deal with the U.S. government in 2009, they added.
Fiat now owns 53.5 percent of the U.S. automaker, and that is due to rise to 58.5 percent by year end.
Mediobanca's senior analyst Massimo Vecchio said in a report that a merger with Chrysler -- which CEO Sergio Marchionne has said is the goal -- would be easier because savings shareholders would no longer be able to block it.
He also noted that if Fiat decided to spin-off luxury sports car brand Ferrari, it would no longer need to issue Ferrari savings and preference shares to Fiat shareholders.
For truck and heavy equipment maker Fiat Industrial, the conversion would similarly ease any disposal of truck unit Iveco by avoiding a vote with savings shareholders.
"The first thing that comes to mind is that this operation has been done to have a single type of share in view of a merger with Chrysler," said another analyst, speaking on condition of anonymity. "It removes a technical barrier."
Both companies are owned by the Agnelli family's holding company Exor S.p.A., which said on Thursday it intended to maintain its 30 percent stakes in both companies -- moving to quash at least for now long-running speculation that it may want to dilute its stakes.
In trading on Friday, Fiat savings shares were up 16 percent and its preference shares rose 19 percent. Fiat Industrial's savings shares advanced 32.5 percent and the preference stock gained 37 percent.
A Milan trader said the prices were moving in line with the premium implicit in the conversion rates for Fiat and Fiat Industrial.
Fiat ordinary shares, however, fell more than 7 percent to 4.74 euros, with one trader saying hedge funds were arbitraging the ordinary shares with the preference shares.
But several analysts said the fall was due to much higher than expected net industrial debt overshadowing a better-than- forecast trading profit in the third quarter.
"The biggest surprise in the quarterly release was certainly the ballooning level of net debt," said Credit Suisse in a report. It increased to 5.8 billion euros, well above analysts' consensus forecast of 4.1 billion euros.
Trading profit -- which is similar to operating profit but excludes one-off items, impairments, changes in the value of securities held by the company and profits from associates -- came in at 851 million euros, against 705 million euros in the analyst consensus distributed by Fiat.
Fiat reported results after the market close on Thursday, incorporating Chrysler for the full quarter for the first time.