Monday, April 27, 2009

Chrysler, Fiat Make Progress

Italian carmaker Fiat took a step closer to clinching a crucial deal with Chrysler after the U.S. carmaker's unions gave their strongest signal yet that they were willing to ratify a tentative deal and Chrysler's chief executive expressed his commitment to qualify for U.S. emergency loans.

Chrysler, which has 8,000 unionized workers in Canada, is under immense pressure to secure a partnership with Fiat after the Obama administration threatened to suspend federal aid for Chrysler unless it secured a deal with the Italian carmaker.

In a first significant step toward meeting the deadline, Chrysler's Canadian and U.S. unions signalled that they were willing to pave the way to an agreement. On Sunday, the Canadian Auto Workers union ratified a new collective agreement with Chrysler to allow layoffs and pay cuts by about C$19 ($15.61) an hour, that would save the automaker about $198.0 million annually, the union said. It also includes the elimination of a third shift at a plant in Ontario, Canada.

Separately, the United Auto Workers union announced that it had also reached a tentative agreement with Chrysler, Fiat and the U.S. government on further concessions on a contract and a healthcare trust agreed with the automaker in 2007.

But while a thumbs-up from unions makes a deal between Chrysler and Fiat more likely, another obstacle is Chrysler's large debt pile. "The bigger unknown at the moment is the banks," said Massimo Vecchio, an analyst with MedioBanca. Lenders to Chrysler are reportedly owed $7.0 billion, but Fiat and the U.S. government are pushing the lenders to forgive $5.5 billion of the debt in exchange for a 5.0% stake in the company, the analyst said.

"It's difficult to say if at the end they will clinch a deal under the current terms. But Fiat will only take Chrysler if Chrysler's debt is negotiated," the analyst said.

Chrysler also signalled its willingness to avoid having to file for bankruptcy protection. The company's chief executive RobertNardelli said that German automaker Daimler was working with Cerberus Capital Management to divest Daimler's 19.9% stake in the struggling U.S. automaker. The top priority was to preserve Chrysler and the entire leadership team was focused on completing the required deals to qualify for emergency U.S. government loans, Nardelli said in a memo obtained by Reuters.

Last week, Sergio Marchionne, Fiat's outspoken chief executive, said that he was confident his company could reach a deal with near-bankrupt Chrysler. "In light of what I know today, I see no reason why it won't happen," Marchionne told reporters in Milan. (See "Can Sergio Marchionne Save Chrysler?")

Still, Fiat could even explore a potential partnership even if Chrysler files for Chapter 11 bankruptcy protection from creditors, a source close to the Italian carmaker told the Associated Press. Chrysler and the U.S. Treasury Department were preparing paperwork for bankruptcy filings, one as a reorganization in Chapter 11 with government funding and the other as a liquidation if no government money is available, sources in the United States have said, the AP reported.

But on Monday Chrysler said it was working "diligently to finalize our alliance with Fiat and restructure our business by the government's April 30 deadline".

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