By Agnieszka Flak and Bernie Woodall
MILAN/DETROIT (Reuters) - Fiat (FIA.MI) Chief Executive Sergio Marchionne on Wednesday blamed overblown press reports and a "lack of understanding" of the merger with its U.S. unit Chrysler for a share sell-off that threatens to blow the planned tie-up off course.
Marchionne wants to incorporate the two carmakers into Dutch-registered entity Fiat Chrysler Automobiles (FCA), paving the way for a U.S. listing key to help fund an ambitious investment plan at the world's No.7 auto group.
But the merger could still fold if enough investors decide to exercise a right to sell their Fiat shares triggered by the carmaker's decision to move its headquarters and fiscal domicile away from Italy, its home for the past 115 years.
"The press has overplayed the withdrawal rights scenario," Marchionne told analysts during a conference call on Chrysler earnings. "We are paying the price for an overreaction ... based on a lack of understanding of what this means."
Concerns over the merger's completion triggered a sell-off that saw Fiat shares lose nearly 9 percent over the last two trading sessions. On Wednesday the stock hit its lowest level since Fiat announced on Jan. 1 it would buy out Chrysler.
Under the terms of the merger deal, dissenting investors can sell their shares for a cash exit price of 7.727 euros, nearly 20 percent more than Wednesday's closing price of 6.47 euros.
The recent share drop makes it attractive for these investors to accept Fiat's cash offer, increasing the chances that Marchionne's much sought-after merger may not go ahead.
Fiat has said if it has to put out more than 500 million euros ($668 million) to pay off shareholders and creditors, the merger would not go ahead.
"The problem remains the cash exit rights," one Milan-based trader said. "The more the stock drops, the more it increases expectations of more people selling out, which in turn increases the number of people selling."
Concerns over the merger were initially raised by two proxy advisors, ISS and smaller Frontis Governance, which recommended a vote against the merger, saying it decreased shareholder rights and tightened the grip on the company of holding group Exor (EXOR.MI) through a loyalty scheme put in place as part of the merger to reward long-term investors.
Fiat shareholders approved the merger with a two-thirds majority of those present at a meeting on Friday.
Investors holding around 8 percent of Fiat's share capital voted against the merger and are entitled to sell out. A spokesman for Fiat said shareholders that did not attend the meeting were also eligible for a cash exit, boosting the chances of the 500 million euro cap being reached.
But Marchionne played down the chances of this happening.
"I am absolutely unfazed by all of this," Marchionne said, adding that if the creation of FCA failed at this time, he would wait "until we have better conditions to get this done".
Marchionne said Fiat can still offer the dissenters' shares to current investors in the first place and later to the market in a bid to keep the payout sum below its self-imposed cap.
However, not many may be willing to buy shares at the set price of 7.727 euros a share if it stays above market levels.
The cash exit right is a right granted to shareholders under Italian law.
The number of shares affected by the exit rights will not be known until around Aug. 25, Marchionne said.
But it may take until early October to find out if the exercise has derailed the merger, Marchionne said last week.
Fiat said in a statement on Tuesday no shareholder had declared an intention to exercise the exit right at that stage.
The creation of FCA will not lead to significant operational cost savings or synergies, Fiat has said, and failure to get the final green light for the tie-up would have little operational impact.
However, a rejection would likely prove embarrassing for Marchionne, who has been working on bringing together Fiat and Chrysler since helping rescue the U.S. No.3 carmaker from bankruptcy in 2009. It may also result in higher financing costs going forward, analysts have said.
Chrysler on Wednesday reported second-quarter earnings of $619 million (463.5 million euros), up 22 percent, on net revenue of $20.5 billion.
(1 US dollar = 0.7483 euro)
(Additional reporting by Stefano Rebaudo in Milan and Ben Klayman in Detroit; Editing by Mark Potter and David Evans)