Debt fears haunt Fiat's grand Chrysler plan

Concern over Fiat SpA's (FIA.MI) ballooning debt dragged its stock lower on Tuesday as the Italian carmaker moved a step closer toward a full merger with Chrysler Group LLC by outlining plans for a single management team.

Fiat CEO Sergio Marchionne, who also runs Chrysler, raised his 2011 targets on the back of forecast-beating second-quarter results that incorporated the No. 3 U.S. automaker for the first time since Fiat took a majority stake in it last month.

But the new targets were below some analysts' estimates, and worries about higher-than-expected debt at year-end pushed Fiat shares 4.5 percent lower to 7.17 euros at the market close.

The joint management team which Marchionne plans to unveil in the next few days is seen as a logical step bringing the two companies closer to a full-blown merger. But analysts say Fiat needs to first explain why its debt is rising, and how it might fund the purchase of the Chrysler stake it does not already own.

"Everything about the operating line looks good. The big confusion would be around the net debt figure. We'd like to know why there will be a 2 billion net outflow in the second half," said a London-based analyst who asked not to be named.

Fiat, Europe's sixth-biggest automaker by market share, forecast net industrial debt of 5.0 to 5.5 billion euros ($8 billion) at the end of 2011 -- compared with full-year analyst forecasts of 4.8 billion euros and a second-quarter debt of 3.4 billion euros.

Asked about the debt levels in a conference with analysts, Marchionne noted that the pro forma combined net debt stood at 6.3 billion euros in 2010, so the projected figure for this year would be an improvement.

Fiat said it now expects 2011 revenues of more than 58 billion euros -- up from an earlier forecast of 37 billion euros which did not incorporate Chrysler. However the target was below pro forma combined net revenues of 67 billion euros in 2010.

Fiat also raised its trading profit target to around 2.1 billion euros -- slightly below an analyst consensus of 2.2 billion euros.

Also weighing on the shares was news that Fiat expects its share of Brazil's market, which hit record sales in the first half of the year and is Fiat's fastest-growing market, to remain flat in 2011 compared with 2010.

"Q2 results are better than consensus but the outlook is slightly below," wrote J.P. Morgan Cazenove in a report.

Funding Worries

Marchionne, credited with turning around Fiat in recent years, wants to elevate the Italian carmaker to a global player through a revamped Chrysler. The group has targeted around 100 billion euros ($144.2 billion) in combined revenues by 2014.

He took over management of a bankrupt Chrysler under a 2009 bailout deal and has built up Fiat's stake in the U.S. carmaker cheaply and more quickly than anticipated.

By the end of this year Fiat's holding will rise to 58.5 percent -- an increase linked to Chrysler developing a Fiat-based fuel-efficient mid-size car.

But Fiat needs to decide what to do with the rest of Chrysler, a 41.5 percent stake that is owned by VEBA, the United Auto Workers union trust fund. Fiat already has an option to buy 40 percent of that stake, starting in June next year.

After initially planning an IPO to allow VEBA to cash in on its stake, Marchionne now seems to be aiming to buy it.

But if he went for a full takeover of Chrysler, he would need to convince ratings agencies Moody's and Fitch -- which have already warned they may downgrade Fiat's debt -- that Fiat's finances are solid enough.

Marchionne kept his cards close to his chest on Tuesday, saying Fiat had a variety of options on what to do with VEBA. With 18 billion euros of liquidity expected at end-2011, he said Fiat had enough money to buy the stake if it wanted, but added he would not put Fiat's credit rating at risk to do so.

He reiterated that there was a "dichotomy" between the valuation Fiat put on VEBA's stake -- just over $3 billion -- and the $4.25 billion capped "threshold amount" that was set in 2009 and that VEBA is hoping to cash in.

Expectations that Marchionne would end up buying VEBA's stake have led to speculation that Fiat might float luxury sports car maker Ferrari, although Marchionne said there was no such project on his desk. He said, however, there were assets he could consider selling.

Fiat, posted second-quarter group trading profit of 525 million euros ($753 million), as strong U.S. and Brazilian sales helped offset a weak European market in a quarter that included profits from Chrysler for the month of June.

That compared with a trading profit of 307 million euros for Fiat alone a year ago and a median analyst forecast in a consensus distributed by Fiat of 485 million euros. Fiat did not release 2010 proforma results for the second quarter alone.

[Source: By Silvia Aloisi, Reuters, Milan, 26Jul11]

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