Fiat Fails to Get Judge to Put Price on Chrysler Shares
By Jef Feeley, Phil Milford & Tommaso Ebhardt - Jul 31, 2013 4:23 AM ET
Fiat SpA (F) failed to persuade a judge to set the value of some Chrysler Group LLC shares now owned by a union health-care fund, delaying a plan to combine the two companies.
Delaware Chancery Court Judge Donald Parsons rejected Fiat’s request to find that a call-option agreement covering at least 54,000 Chrysler shares valued the stock at more than $139 million. The decision clears the way for the case over the United Auto Workers retiree trust’s Chrysler holdings to go to trial. Parsons ruled in Fiat’s favor on several claims affecting the value of the shares held by the trust, known as VEBA.
Contractors working on the entrance of the Chrysler Group LLC Assembly Plant in Sterling Heights, Michigan. Photographer: Bryan Mitchell/Bloomberg
While the agreement applies to more than 270,000 shares the trust received when Chrysler emerged from bankruptcy in 2009, yesterday’s decision pertains only to some of that stake. The ruling may slow Fiat’s push to acquire the shares, along with the UAW’s entire Chrysler portfolio of 676,000 shares, or 41.5 percent of the carmaker, as part of a plan to transform the two regional carmakers into a global auto producer.
Fiat officials haven’t shown the union fund “is required to deliver the shares in return for Fiat’s payment of $139.7 million,” Parsons said in the decision. “It would be premature for me to enter an order requiring” the fund to hand over the shares, the judge said.
“Fiat looks forward to resolving the few remaining issues in the litigation through the discovery requested by the court,” the Italian carmaker said in a statement today. Fiat “remains confident that those residual issues will also be resolved in its favor.”
The court’s decision may push Fiat and the union’s trust to find an agreement on the shares and end a dispute over the value of the holding that’s gone on for about a year.
“While the court did not require that VEBA deliver the shares, we view the ruling as positive for Fiat and likely to help an out-of court agreement,” said Philippe Houchois, an analyst at UBS inLondon, who estimates Fiat may pay $4 billion euros to buy out Chrysler.
Fiat shares fell as much as 2.65 percent in Milan and traded at 5.97 euros, down 1.2 percent, at 10:01 a.m. The stock has risen 57 percent this year, giving the company a market value of 7.46 billion euros ($9.9 billion).
Marchionne, who runs both Fiat and Chrysler, has spent the past four years seeking to unify the companies so they can better compete with Toyota Motor Corp. (7203), General Motors Co. (GM) and Volkswagen AG. (VOW) A fully integrated automaker would feature the mass-market Fiat, Chrysler, Jeep and Dodge brands, along with the high-end Maserati and Ferrari lines.
As part of the unification effort, Marchionne wants to acquire the trust’s Chrysler holdings. Fiat now owns about 58.5 percent of Chrysler. Chairman John Elkann has said Marchionne put on hold the effort to buy the union’s stake while awaiting Parsons’s ruling.
Marchionne, discussing Chrysler’s first-quarter results on an April 29 conference call with analysts, said if an agreement is reached with VEBA on its stock, Fiat could close that transaction “in short order.”
Fiat executives lowered their profit forecast for Chrysler earlier yesterday, shifting the Italian carmaker’s focus to reducing losses in Europe as the key to meeting full-year targets. Chrysler’s 2013 operating profit may miss an earlier forecast by as much as 13 percent as Fiat’s U.S. unit spends money on rolling out new models such as the Jeep Cherokee.
Marchionne told analysts yesterday Fiat is “not close” to an agreement with VEBA over the value of the shares and it “remains available” for talks.
Fiat bought a stake in Chrysler in June 2009 after the U.S. carmaker sought bankruptcy-court protection from creditors and accepted more than $8 billion in financing help from the U.S. and Canadian governments.
Only 40 percent of the UAW’s Chrysler holdings were subject to the call-option agreement at issue in the Delaware Chancery Court case. The union, one of Chrysler’s largest creditors, got the shares as part of the resolution of claims in the carmaker’s bankruptcy.
As part of Chrysler’s Chapter 11 reorganization, the union healthcare fund wound up with a 41.5 percent stake in Chrysler as well as promissory notes in exchange for taking on retirees’ claims.
The UAW’s Retiree Medical Benefits Trust provides healthcare services to more than 800,000 retirees and their dependents, according to the trust’s website. It’s the largest nongovernmental purchaser of retiree health services in the U.S.
Patricia McCarthy, a spokeswoman for the fund, declined to comment on yesterday’s ruling.
Fiat’s review of the first bloc of union shares available for purchase pegged their value at about $140 million, according to court filings. The union trust countered that its calculations found the bloc was worth as much as $342 million. Both sides are seeking to use the first bloc as a value guide for the rest of the union’s stake.
The stock agreement, created to avoid disputes over the value of the trust’s shares, “has led to substantial disagreement” over what the stock is worth, Parsons said. “The value of this dispute potentially could exceed a billion dollars,” he said.
In his decision, the judge focused on the call-option agreement’s formulas for valuing 54,154 of the UAW’s Chrysler shares. That stock represents the first portion of the more than 270,000 shares covered by the agreement, according to court filings.
The formulas are based, in part, on Chrysler’s reported earnings before interest, taxes, depreciation and amortization for the four most recent financial quarters, minus the carmaker’s “net industrial debt” as listed in its most recent financial statement, according to court filings.
The UAW argued in court papers that Fiat shouldn’t include promissory notes from the bankruptcy in Chrysler’s debt calculations. The notes don’t meet the call-option agreement’s definition of “borrowed money” and improperly lowered the carmaker’s value, the UAW contended. That adversely affected the value of the trust’s shares, the union said.
Parsons rejected those claims and backed Fiat’s arguments that the notes met the definition of borrowed funds and were properly included in the debt calculations.
The language of the agreement makes clear that “indebtedness for borrowed money includes the notes,” he said. The judge’s decision is likely to affect the value of VEBA’s shares and may reduce what Fiat ultimately pays for them.
Other provisions of the agreement’s stock-value formulas are still at issue, Parsons said. The judge added that Fiat and the union must provide more information on those sections of the pact before he can rule on them.
“Discovery is necessary to determine the correct way to calculate or interpret the other items in dispute,” he said.
Parsons also said he may not have the legal right to evaluate the fund’s claims that Fiat’s valuation of the shares violates U.S. government rules on handling of employee retirement benefits.
“I seriously question whether the court has subject-matter jurisdiction to hear and decide questions” about exceptions to rules promulgated by the U.S. Labor Department, the judge said.
The case is Fiat North America LLC v. UAW Retiree Medical Benefits Trust, 7903, Delaware Chancery Court (Wilmington).
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