Exclusive: How Chrysler got out from under Washington's wing
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3:11pm EDT
By Deepa Seetharaman, Michelle Sierra and Soyoung Kim
http://www.reuters.com/article/2011/06/10/us-chrysler-idUSTRE7595Q420110610DETROIT/NEW YORK (Reuters) - On the morning of May 24, an upbeat Sergio Marchionne was combing his music library to compile a playlist for an employee event that afternoon at Chrysler Group LLC's headquarters.
As the chief executive settled on Bruce Springsteen's version of "Eyes on the Prize," he received a phone call with long-awaited news: Chrysler finally repaid $7.6 billion of bailout loans from the U.S. and Canadian governments.
That day marked a new chapter in the comeback of the smallest of Detroit's three automakers, the one the Obama administration wasn't sure was worth saving back in 2009.
It was the Italian businessman's deep involvement in Chrysler, and Fiat SpA's (FIA.MI: Quote, Profile, Research, Stock Buzz) willingness to put in $1.27 billion, that helped the company pull off one of the largest debt deals since the financial crisis -- winning the backing of some of the same banks that were wiped out in its bankruptcy.
Investors who looked at the deal were initially skeptical about the large size of the financing as Chrysler still had to address concerns over its vehicle lineup and financial outlook, people involved in the process said. There were also questions over whether the company had really transformed itself.
"Without Sergio, this deal would not have happened," one person said, declining to be identified as the talks were confidential. "You wouldn't jump off the plane if you wouldn't think the parachute would work. You're betting on the parachute."
Two years ago, Chrysler emerged from bankruptcy under the management control of Fiat, also led by Marchionne.
Last week, Fiat reached an agreement to buy Treasury's 6-percent equity stake in Chrysler for $500 million, a deal that will end any ties between the U.S. government and the company.
It has achieved what remains elusive for bailed-out peers including General Motors Co (GM.N: Quote, Profile, Research, Stock Buzz), American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) and Ally Financial: escaping U.S. government control.
Now comes another difficult chapter. Marchionne must weigh the upside of an initial public offering against that of an outright purchase of the stake held by the VEBA, the health care trust tied to the United Auto Workers, the second-largest shareholder in Chrysler with 45.7 percent.
It also must make good on its promise to offer competitive cars and sedans, a segment that makes up half the U.S. auto market and where Chrysler has not yet been competitive.
"We're very pleased at what we've done, but we're very realistic and humble about what we need to do," Chief Financial Officer Richard Palmer told Reuters. "We're constructing credibility."
FIAT ANTES UP
In one of its first tasks as a new company, Chrysler had to rekindle its ties with Wall Street. Lenders that were owed nearly $7 billion took a huge loss in its bankruptcy.
The most badly burned was JP Morgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz). The bank played no role in Chrysler's refinancing despite leading GM's initial public offering last year. Two sources said JP Morgan was offered a junior role, but declined.
Other major Wall Street banks were clamoring to get involved, especially after the widely acclaimed Jeep Grand Cherokee launched last summer. After that, at least two bankers visited Chrysler's Auburn Hills, Michigan headquarters every month, pitching options.
Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) was hired in late 2010 to advise Chrysler on its debt restructuring options. Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) joined in the first quarter.
Chrysler considered a handful of options to re-enter the markets, including a small benchmark bond offering to whet investors' appetites. The company also considered coupling an IPO with the refinancing.
That idea did not gain much traction because the deal was already complicated because of the sheer size of the offering, the number of stakeholders and complex rules laid out in the 2009 bankruptcy documents.
A turning point was Fiat's decision to buy a 16 percent stake in Chrysler -- in cash, sources said. The move signaled that Fiat, which got 20 percent of Chrysler in 2009 for free, was now invested in Chrysler's revival.
"Fiat needed to put real money on the table, which they did, and that kind of got the ball rolling," one person said.
WHAT'S AN AUTOMAKER WORTH?
While Fiat's cash infusion was a key piece of the refinancing, it also diluted the stakes of Chrysler's other shareholders: the U.S. Treasury, Canada and the VEBA, which stands for voluntary employee beneficiary association.
Each party, as well as the board of directors, hired a team of advisers to pore over the deal, adding to the complexity. One February meeting at Goldman's headquarters in downtown Manhattan drew about 60 people, including 10 on the phone.
One of the topics discussed at the meeting was Chrysler's valuation. The company put its value at $4.8 billion at the end of 2010. The Treasury deal pinned it at $8.3 billion. Morningstar thought it was worth $11 billion. It took time for everyone to agree on a price -- a little less than $8 billion.
To avoid conflicts, Chrysler's board formed a finance committee, led by Scott Stuart, to manage the exercise of Fiat's call option and valuing Chrysler.
Marchionne excused himself from talks that may have been a conflict of interest for him as CEO of Chrysler and Fiat. Palmer and General Counsel Holly Leese represented management.
On May 2, Chrysler reported its first net profit since emerging from bankruptcy. Two days later, the roadshow kicked off in New York.
Until earlier this year, Marchionne had said Chrysler was planning to go public in the second half of 2011.
But last week he said that an IPO was not necessary and any stock offering was unlikely before 2012, although it would be nice to have a third public U.S. automaker and an IPO still is the "most efficient" way for the VEBA trust to cash out.
Chrysler executives think an IPO this year is premature because the stock markets are not supportive, the automaker would need to show a few more quarters of profits, and it was generating enough cash to invest in new products.
Analysts and bankers question if an IPO will happen at all. Fiat has bought Treasury's right to purchase the Chrysler stake held by the VEBA, meaning it could just buy out VEBA and make Chrysler a wholly owned subsidiary.
Under the rules set by Treasury, the maximum the trust fund can get is just under $5 billion, and any upside beyond the threshold amount would go to Fiat. That means there is no incentive for VEBA to hold out and try to maximize returns.
As the VEBA needs to fund healthcare obligations for Chrysler's retirees, it may not be able to wait for an IPO.
"A lot of it depends on how receptive the markets are and performance and what could be raised," Marchionne told reporters on June 3. "My gut would suggest no earlier than 2012."
(Editing by Robert MacMillan)
