Chrysler Group LLC's September 23 announcement of its plans to offer an IPO have been greeted with mixed feelings from some of the most important players in Chrysler's future. Chrysler's return to the market after several years of highly successful recovery will be a thorn in the side of majority owner Fiat SpA (FIA.MI), which has been angling to take full ownership of the re-emerging firm; the scattering of share ownership that will accompany Chrysler's public offering will leave Fiat with a much more difficult task.
The IPO is driven by Chrysler's minority shareholder, the United Auto Workers retiree healthcare trust fund. Fiat had hoped to purchase UAW's stake in Chrysler, but UAW and Fiat were unable to agree upon the value of Chrysler in order to settle a sale. UAW has stated that it will use the funds gained in the IPO to pay benefits to 60,000 members and to diversify its holdings. The IPO could be worth up to $100 million.
Chrysler's S-1 filing with the SEC notes that the IPO will likely prevent or set back Fiat's efforts to take full ownership of the firm; Fiat will have to consider whether the extra trouble is worthwhile, given that its central interest in combining the companies' finances is to use Chrysler's cash to expand Fiat's product line.
Fiat took over management of Chrysler in the aftermath of its 2009 government-sponsored bankruptcy, and has since led the American firm to significant success. Chrysler's full-year net income for 2012 is listed at $1.7 billion, compared to only $183 million the previous year. Net revenue for 2012 also increased by a healthy 20%, jumping from $55.0 billion the year before to $65.8 billion. These figures are fairly incredible, given that Chrysler was at death's door only four years ago, and are indicative of the skillful management that Fiat has employed since taking over the firm.
Though it is certainly too early to make any definitive call on the investment value of the IPO, which is as yet undated and without an expected price range, there's a lot to be said for Chrysler that makes this offering a potential buy. The firm's income and revenue numbers speak for themselves, and its products have been highly successful in recent years; the Chrysler 200 and 300 sedans have seen wide critical and consumer acclaim, and the Town & Country remains dominant in the minivan world. Despite Fiat SpA's disappointment with the IPO, Fiat remains an 58.5% shareholder and has every reason to continue to pursue its thus-far effective management and push Chrysler to ever-greater revenues and profitability, though there is an outside possibility that Fiat could choose to sell, as well.
The continuing recovery of the American economy in terms of growth and employment is a positive sign for all auto makers. Consumer confidence has stabilized and seems likely to continue to improve, meaning that far more consumers will be willing to make major purchases like cars, homes, and large appliances. The large number of consumers that chose not to buy during the downturn will leave a large population of potential new car buyers over the course of the next few years. Of course, Chrysler is not alone in pursuing these buyers. It faces major competition from two larger American auto makers, General Motors (GM) and Ford (F). Popular imports like Toyota (TM), Hyundai, and Volkswagen (OTCQX:VLKAY) also pose a threat.
Chrysler is not without any financial concerns. The firm remains deeply indebted, with some $13.7 billion in total debt as of June 30, 2013. Its pension plans are also massively underfunded to the tune of $8.9 billion, which could lead to trouble further down the line.
The announcement of the IPO has placed intense scrutiny upon Sergio Marchionne, chief executive of both Chrysler and Fiat. Marchionne has been the driver behind efforts to merge the two companies into a single entity, and rightly believes that a publicly traded Chrysler will lead to a significantly more difficult or even impossible merger. The failure to come to terms with UAW ultimately falls on Marchionne's head, and may lead him and other power players within Fiat to reconsider the partnership between the two firms.
Additional disclosure: This article was written for informational reasons. Investors should read the S-1 and consult with their financial adviser before making any investment decisions.