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Tax Issues Delay Chrysler IPO Until 2014

Chrysler Group LLC had planned to offer its shares on the New York Stock Exchange by year end, but Fiat, its parent company, announced last week that it had do postpone the initial public offering until 2014. Fiat (FIADF) has been the majority owner of Chrysler since 2011, with a 58.5% stake, while the other 41.5% are owned by a healthcare trust fund that takes care of medical bills for retired workers from the auto industry. The Italian car maker wanted to buy out the trust's stake, but they haven't been able to agree on the price. That's why the trust pushed for an IPO, so that the exact value of Chrysler could be determined, and both parties can come to an agreement.

However, even though the IPO was originally planned to be held by the end of 2013, Fiat released a statement saying that "an initial public offering in 2013 is not practicable", and it would have to wait until sometime next year. Furthermore, the company said that the IPO could be launched within the first quarter of 2014, but it would depend on the conditions on the market at that time.

Sergio Marchionne, the CEO of both Fiat and Chrysler, wants to combine the two companies, so that they can compete with the world's largest car manufacturers, such as Toyota, General Motors and the emerging Tesla, and planned to become the sole owner of Chrysler without an IPO, but the healthcare trust that holds a minority stake insisted on it. The reasons for this delay are not quite clear, but they most likely have something to do with specific tax issues.

Some people have speculated that IPO can't be launched this year because Chrysler is a limited liability company, and it has not been transformed into a C corporation yet. The difference between an LLC and a C corporation is that the latter is subject to higher taxes and is allowed to have an unlimited number of shareholders.

Immediately after the delay was announced, Fiat's shares fell 2%, mainly because it's a sign that the car maker and the trust are far from reaching a deal. If and when the IPO happens, it would include all shares that the VEBA holds at the moment, which are said to be worth about $5.5 billion. As far as Chrysler's current value is concerned, some estimates say that it's no more than $10 billion, and if that's true, it would mean that VEBA's stake is worth $4.1 billion.

In addition to the tax issues, another reason for the postponement of the IPO may be the fact that the healthcare trust is not happy with the valuation of its shares, and is still considering the option of selling its stake to Fiat, without an initial public offering.

In the meantime, if an IPO doesn't occur, or if the trust doesn't accept Fiat's offer to buy out all of its shares, the Italian car maker will be able to buy up to 17 percent of them, within the next twelve months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.