The Story Behind Chrysler And Fiat, And Why The Stock Is So Cheap – Forbes
The following is a guest post by George Schultze, founder of Schultze Asset Management LLC, an alternative investments firm founded in 1998 that manages approximately $260 million in assets and specializes in event-driven and distressed securities investing. Mr. Schultze is author of The Art of Vulture Investing: Adventures in Distressed Securities Management (Wiley Finance, 2012).
Last week, Italy-based Fiat said it would take full ownership of Chrysler in a $4.35 billion dollar deal.
The move comes after Fiat picked up 58.5% of Chrysler in 2009 amidst the great restructuring in the US automotive industry. Just a few years later, Fiat is setting itself up to be the biggest automakers in the world.
Here’s how it all happened.
Fiat, s.P.a. (“Fiat”) is one of the world’s largest vehicle makers with roots dating back to 1899. It manufactures and sells automobiles and light commercial vehicles, engines, transmission systems, automotive-related components, metallurgical products, and production systems.
The company designs, develops, produces, distributes, and sells automobiles, such as cars, crossovers, minivans, SUVs, and trucks under the Chrysler, Jeep, Dodge, and, Ram, and SRT brand names, and related parts and accessories under the brand name Mopar. It also offers passenger cars and light commercial vehicles under the Fiat, Alfa Romeo, Lancia/Chrysler, Abarth, and Fiat Professional brand names, as well as providing financial services. The company also owns luxury vehicle brands, such as Ferrari and Maserati, and is headquartered in Turin, Italy. Fiat sells its products primarily through dealer networks in approximately 40 different countries worldwide. It generates about EUR 85 billion (USD $116 billion) in annual revenues and recently agreed to acquire the remaining approximate 42% of Chrysler equity that it did not already own.
Chrysler filed for chapter 11 bankruptcy protection during April 2009 in the Southern District of New York. At the time, it was owned by the investment firm Cerberus, which had purchased it from auto maker Daimler Daimler AG for $9 billion back in April 2007. Interestingly, Daimler AG had originally bought Chrysler in May of 1998 for $57 billion before dropping its price tag to sell the business to Cerberus. By the time Chrysler finally filed for bankruptcy, the event marked the first time ever where an acting president of the United States announced a corporate bankruptcy filing.
With the announcement of Chrysler’s bankruptcy, President Barack Obama favored a reorganization plan which would allow unsecured creditors to essentially leapfrog the claims of Chrysler’s first-lien lenders. In what appeared an obvious breach of the Constitution, the U.S. government’s plan transferred a majority of Chrysler’s reorganized stock over to Fiat and unsecured creditors for no consideration other than a promise to build more fuel-efficient vehicles in the U.S. over time. Chrysler’s Voluntary Employee Beneficiary Association (“VEBA”) Trust, a trust fund formed to provide benefits to Chrysler’s retirees, received the initial majority of Chrysler’s reorganized stock under the plan. However, over time Fiat was able to earn/purchase a majority stake in Chrysler by exercising lucrative options it received under the U.S. government’s plan.
Certain senior secured first-lien creditors, including some alternative investment funds later dubbed the “non-TARP lenders”, attempted to dispute this outcome in court. In fact, parties in this group pressed their constitutional law case all the way up to the U.S. Supreme Court but ultimately lost when the Supreme Court later threw the case out.
With the controversial government-sponsored sale to Fiat and the unions complete, Chrysler’s capital structure was substantially downsized – such that its prior $20.7 billion in debt was whittled down to practically nothing after netting cash on the newly-formed company’s balance sheet. The painful and controversial result for Chrysler’s first-lien lenders, which yielded only about 29 cents on the dollar, was broadly covered by the media and even inspired me to write a book about it. Naturally, the outcome for Fiat would be totally different.
A few quick years after assuming control of Chrysler for pennies-on-the-dollar, Fiat is now positioned much more favorably than most other auto makers. In fact, a few days ago it announced a deal to resolve a lawsuit which had been brewing between Fiat and VEBA (which owns 42% of Chrysler), whereby Fiat will acquire all of VEBA’s remaining Chrysler stock for $3.7 billion.
When the dust from this final acquisition of the remaining Chrysler stake settles, Fiat will control a combined EUR 87 billion (USD $118.5 billion) in revenue and EUR 8.1 billion (USD $11.1 billion) in consolidated EBITDA . It will no longer need to share a minority portion of its Chrysler business with the unnatural VEBA Trust owners. Meantime, Fiat’s balance sheet looks very healthy – to wit, it only has about EUR 11.2 billion in net debt (netting cash, net finance subsidiary assets, and a heavily discounted value for its tax assets from the face value of its total debt). Further, its total equity market capitalization, 1,216 million shares at EUR 6.80 per share, amounts to only EUR 8.3 billion. Combining these figures, Fiat’s total enterprise value (“TEV”) of EUR 19.5 billion compares very favorably with its expected EUR 8.1 billion in consolidated EBITDA for 2013. On an adjusted TEV/EBITDA basis , Fiat therefore trades at just 2.40x 2013 EBITDA and we expect that multiple to drop even further as the company makes progress integrating Chrysler in 2014-15.
Like its sister company GM, Fiat hasn’t really received sufficient attention from Wall Street lately – mostly due to its history and tarnished reputation. After the U.S. government’s arguably unconstitutional transaction wherein it sold Chrysler to an Italian company for essentially nothing, disenfranchised equity investors naturally took their business elsewhere. The subsequent recession in Europe made investors even less enthusiastic about companies, like Fiat, that relied on European sales for a material portion of their business. Today, Fiat can no longer be ignored by equity investors. The value created by the government-sponsored sale of Chrysler now stands to uniquely benefit Fiat’s public shareholders. In addition, many analysts now reasonably expect the European economy to begin improving later this year and into 2015.
It’s normal for so-called “post-reorganization” companies to be temporarily ignored by investors after emerging from the dark cloud of a corporate reorganization. This is often due to bad memories, including losing real money, associated with the bankruptcy. The old Chrysler fits this scenario perfectly – it was one of the larger bankruptcies and was hopelessly insolvent by the time the U.S. government got involved. In its reorganization, first-lien creditors were dealt a terrible and unprecedented hand. Meantime, many employees lost their jobs and dealerships around the country went under as well. Some even speculate that the Obama administration quickly changed its tune for addressing future auto company reorganizations after digesting the lessons it learned from the Chrysler deal. However, today investors can no longer afford to ignore the new Chrysler which now, packaged neatly within Fiat, appears very well positioned indeed as one of the cheapest major automakers on the planet.