How Much is Chrysler Worth? That Little?

The saga involving the failing American automakers continues to amaze us here at Ockham Research. We have covered the disappointment in the barrage of advertisements in a recent post. Anyone that has watched the NFL playoffs has seen ad after ad for American made trucks, with each one I get further from wanting to buy an American truck. The latest stunner comes from the Wall Street Journal:

“Is Fiat getting a free option on Chrysler? The Italian car maker is paying no cash in return for a 35% stake and access to the massive U.S. auto market. Instead of money, Fiat provides its fuel-efficiency technology to Chrysler and a road into European markets.”

So there you have it, Nardelli and company at Chrysler have shown just how much they believe their business is worth. They are willing to part with more than a third of their business for a push forward in fuel-efficiency technologies. But wait there is more; Fiat won’t touch this sinking ship unless there is another $3 billion injection by the U.S. Government. To recap, Chrysler was given $4 billion through TARP funding on January 2nd, last week the Treasury Department promised an additional $1.5 billion to Chrylser’s lending arm. Now, in order to receive the last $3 billion that Chrysler says it needs to stay in business, they will need a plan to become a viable company by February 17th. The crux of this plan seems to revolve on this partnership with Fiat, yet Fiat won’t join without the infusion. Amazing.

This corporate partnership with Fiat is Chrysler’s first major restructuring effort to become a “viable company”. Never mind the fact that market forces, which used to determine viability, have been thrown completely out the window. Now apparently, viability will be determined by a Washington committee or even a car czar. From a joint statement:

“The alliance, to be a key element of Chrysler’s viability plan, would provide Chrysler with access to competitive, fuel-efficient vehicle platforms, powertrain, and components to be produced at Chrysler manufacturing sites. Fiat would also provide distribution capabilities in key growth markets, as well as substantial cost savings opportunities. In addition, Fiat would provide management services supporting Chrysler’s submission of a viability plan to the U.S. Treasury as required.”

There is one more tasty bit of information as well that should not be overlooked, Fiat will have the option to buy an additional 20% stake in the Chrysler within a year for the price of $25 million. So, based on the agreed upon framework of the deal, one-fifth of Chrysler is worth $25 mil, making the company’s valuation $125 mil. Furthermore, Fiat could own 55% of Chrysler for an investment of basically sharing technologies, providing “management services” and $25 million. I doubt this is the sort of return on investment that the federal government had hoped for, or that the citizens who will eventually pick up the tab should accept.

There is really no reason to find hope in this deal. Fiat, nicknamed “Fix It Again Tony”, seems to be getting the sweetheart deal of the century, gaining access to the prized America auto market and giving up so little for it. Admittedly, I know nothing about Fiat’s fuel-efficiency technology but if it is lynchpin of Chrysler’s turnaround strategy, it must be impressive. Perhaps Fiat has figured out how to run a company on worthless stock certificates? There are no noxious gases for shredded paper emissions. What I do know is that joining two struggling automakers does not make a “viable company”. Perhaps this is Cerberus’s way of slinking away from a venture that has become a total bust.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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