Fiat may have to pay top dollar to avoid Chrysler IPO

By Deepa Seetharaman, Soyoung Kim and Jennifer Clark

DETROIT/NEW YORK/MILAN (Reuters) - A retiree healthcare trust will force Chrysler Group LLC to go public unless Italian automaker Fiat SpA agrees to pay top dollar - more than $5 billion - for the trust's stake in the U.S. automaker, several people familiar with the matter said.

Sergio Marchionne, chief executive of both Chrysler and Fiat, is eager to buy out the trust's 41.5 percent stake in Chrysler as quickly and as cheaply as possible so he can merge the two companies, which would form the world's seventh-largest auto group.

But the talks have stalled because Marchionne believes the United Auto Workers-affiliated trust's price values Chrysler at more than it is worth. The UAW trust assumed its stake in Chrysler, the third-largest U.S. automaker, as part of the company's 2009 government-funded bankruptcy restructuring.

The more than $5 billion represents the highest possible payout for the trust, according to a formula laid out in Chrysler's 2009 bankruptcy documents.

The UAW trust and its independent fiduciary have no intention to sell the Chrysler stake for less, the people said. The trust has the legal duty to pursue every possible path to maximize the value of those shares and to failing demonstrate that effort would likely expose it to legal liability.

If the two sides cannot agree on a price, the trust plans to sell a portion of its stake in an IPO, and divest the rest of its stake in stages over time, the people said.

The fund, dubbed the UAW Retiree Medical Benefits Trust, has been talking to banks about selling roughly one-fifth of its stake through an IPO, one person said. Fiat owns the rest of Chrysler, or 58.5 percent.

The UAW trust, which manages retiree health benefits for blue-collar auto workers, believes that Chrysler's worth will continue to rise in the next few years as the U.S. auto industry sustains a robust recovery, the people said.

Under a formula in the 2009 bankruptcy documents, the possible payout for the trust is also steadily rising as well.

According to the 2009 agreement with the U.S. Treasury, the trust's proceeds from a sale of its Chrysler stake are capped at the "threshold amount." This amount was set at $4.25 billion initially and was set to grow at a 9 percent compound annual interest rate. When factoring in the effect of this interest rate, the cap on the union's payout exceeds $5 billion.

"If you were a seller and you thought the price was rising over time, you'd layer in your selling price, you'd sell it in stages," said one of the people familiar with the matter. "That happens to be the opposite of what Sergio wants."

The people asked not to be named because the discussions are confidential. Chrysler and Fiat declined to comment. Brock Fiduciary, which has managed the trust's holdings in Chrysler since 2010, also declined to comment.

The UAW trust is a type known as a voluntary employees' beneficiary association (VEBA).

VEBA HAS THE UPPER HAND

The question of how the VEBA will handle its investment in Chrysler is one of the remaining unresolved issues from the restructuring brokered by the Obama administration more than four years ago.

In January, the trust demanded Chrysler register a portion of its stake in an IPO. Marchionne has said the company will be in a position to "move on an IPO" in November or December, although that is not his favoured option.

Chrysler has mounted a strong recovery under Marchionne's stewardship. The company's value has grown over the last few years on the back of key models like the Jeep Grand Cherokee sport-utility vehicle and the Ram 1500 pickup truck.

Investment bank UBS has estimated Chrysler's market value at about $9 billion based on trading multiples for competitors Ford Motor Co and General Motors Co. At that level the VEBA's stake would be worth about $3.735 billion.

Marchionne already runs Chrysler and Fiat as a single company. Now, he wants to buy the rest of Chrysler to squeeze out more synergies, cut borrowing costs and access some of Chrysler's cash flow.

But a buyout of Chrysler is getting more expensive by the day as rising interest rates increase the cost of borrowing and the U.S. automaker benefits from resurgent demand for new cars and trucks among American consumers.

On the other side, the VEBA can wait. A gradual exit for the VEBA would mirror the U.S. government's slow-motion sale of General Motors Co shares.

"There's no hurry on VEBA's part and they know time isn't Sergio's friend. As time goes on, Chrysler just gets more and more valuable," the source added.

The VEBA was established in 2007 as a way for Chrysler and its Detroit-based rivals GM and Ford to shift the responsibility of paying for retiree healthcare. The companies said that the obligation made them uncompetitive against foreign rivals like Toyota Motor Corp .

In 2009, the UAW agreed to convert part of the debt Chrysler owed to the VEBA fund to equity in an automaker that many had written off as worthless, an act Marchionne once described as a "flying leap of faith."

That relationship has since grown more tense as the talks drag on between the two sides, now also mired in a legal dispute over price.

Last year, Fiat sued the VEBA for refusing to sell some of its Chrysler shares, a 3.3 percent stake, for $139.7 million. The VEBA countersued, claiming those shares were worth about $343.1 million. A trial may not come until 2015.

(Editing by Leslie Adler)