Fiat needs to be fixed before Chrysler merger, Marchionne says
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DETROIT (Bloomberg) -- Fiat, the majority owner of Chrysler Group, is putting efforts to fix its European operations ahead of finishing a full merger between the two companies, CEO Sergio Marchionne said.
"Our primary objective right now is fixing the European environment and getting that up and running so we can restore the full Fiat level of profitability that it needs to achieve," Marchionne said on Tuesday on Chrysler's quarterly earnings conference call.
Marchionne, 60, who heads the two companies, said he's still targeting a combination of them both by 2015.
Fiat, which owns 58.5 percent of Chrysler, presented a plan to turn around the European operations that are generating wider losses and led the company to cut its 2014 profit goal by 31 percent to 5.2 billion euros ($6.7 billion).
Chrysler, boosted by demand for 200 sedans and Jeep Grand Cherokee sport-utility vehicles, on Oct. 29 reported third-quarter net income of $381 million, an 80 percent increase from a year earlier. The company also confirmed its forecast for 2012 profit of $1.5 billion.
On Tuesday, Fiat reported 20 billion euros of available liquidity at the end of the third quarter, down from 22.7 billion euros as of June 30. The company expects to generate cash from operations in the last three months of the year, according to a statement.
Fiat's plan
With Fiat's capital position, it's "highly unlikely" that the company would be able to "finance a takeout" of the minority stake in Chrysler," Marchionne said.
The business plan update that Fiat presented on Tuesday, which didn't include a monetary investment figure, calls for the introduction of 19 new models that will be produced from Italy through 2016. Of those vehicles, 15 will be made both for export and Europe's market, according to an investor presentation.
"If I were to take a look at cash utilization, given our plan here, there's no room left for the acquisition of the minority interest in Chrysler," Marchionne said. When asked by an analyst if he would consider ways to raise capital to complete a Fiat and Chrysler merger, Marchionne said that "everything is on the table." He has previously discussed the possibility of an initial public offering of Fiat's Ferrari super car division.
Court dispute
Fiat said last month that it asked a U.S. court to confirm the price it has to pay to increase its controlling stake in Chrysler after failing to reach an agreement with the United Auto Workers' retiree health-care fund. The fund, known as a VEBA, owns the remainder of Chrysler. The Delaware Chancery Court probably will rule on the matter by the end of the year, Marchionne said on the Fiat call.
As part of Chrysler's 2009 bankruptcy, Fiat was granted a call option to purchase a portion of the VEBA's stake every six months through June 2016. The VEBA is able to request a registration to sell some of its Chrysler stake beginning in January 2013, Marchionne said on the Fiat call.
"Once registration is in place, then I think they could ask that we take it public, and we will comply if they so desire," he said. Fiat is "standing by" its call options and will exercise them as they become due, Marchionne said.
Premium brands
Fiat's updated business plan calls for the carmaker to focus product development toward its Alfa Romeo, Maserati and Ferrari premium brands to improve margins rather than close one or more plants in Europe.
The automaker has capacity available in the region, and its U.S. partner is more constrained in North America. Chrysler will use 107 percent of its production capacity in its home region this year, Fiat estimated in Tuesday's investor presentation. The U.S. automaker in 2010 used just 73 percent of capacity, measured on the basis of 16 hours of output during 235 workdays a year.
Fiat reduced its forecast for Europe industry sales for this year through 2014 by a combined 10 million units. The automaker now sees 2014 deliveries of 14.1 million, from a previous estimate of 18.2 million.
Italy woes
Fiat's problems are compounded by its troubled home country, which accounts for half its European sales. Its plants in Italy, where car sales are on pace to plunge this year to the lowest level in more than three decades, are running at 50 percent of capacity, below the 80 percent threshold typically considered profitable. Chrysler, on the other hand, is benefiting from a rising U.S. auto market.
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