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Fiat agrees to buy remaining stake in Chrysler

Thursday, 2 Jan 2014 | 6:17 AM ET
Fiat/Chrysler: It is 'the best outcome'
Thursday, 2 Jan 2014 | 5:45 AM ET
CNBC's Phil LeBeau reports on the deal between Fiat and Chrysler and says it is the "best outcome" for all the parties involved but highlights that Chrysler's "regional auto-maker" status will be a challenge.

Italian carmaker Fiat struck a $4.35 billion deal to gain full control of Chrysler Group LLC, ending more than a year of tense talks that have obstructed Chief Executive Sergio Marchionne's efforts to combine the two automakers' resources.

The agreement, announced on Wednesday, cements Marchionne's reputation as the industry's consummate deal maker about a decade after he took the helm of Fiat as a car business newcomer, analysts and bankers said.

(Read more: Chrysler's Future According to Marchionne)

But it remains to be seen whether a merger will be enough to cut Fiat's losses in Europe. Marchionne's plan to shore up Fiat depends on the ability to share technology, cash and dealer networks with Chrysler, the No. 3 U.S. automaker.

"This is an increasingly American company now, because in Europe, and especially in Italy, the business conditions remain difficult," said Andrea Giuricin, transport analyst at Milan's Bicocca University. "Fiat has already lost many of its market positions in Europe and it won't be easy to recover that."

(Read more: Self-driving cars tobe 9% of auto sales in 2035: Study)

Fiat will acquire the 41.46 percent stake in Chrysler it did not already own from a retiree healthcare trust affiliated with the United Auto Workers union.

The trust, known as a voluntary employee beneficiary association or VEBA, will receive $3.65 billion in cash for the stake, $1.9 billion of which will come from Chrysler and $1.75 billion from Fiat. After the deal closes, Chrysler has committed to giving the UAW trust another $700 million over three years.

The deal is expected to close on or before Jan 20. Fiat said that because of how the deal is structured it will not need to make any capital increase through a rights issue.

The VEBA's payout is less rich than some analysts expected. The sale of the UAW trust's stake values the No. 3 U.S. automaker at lessthan $9 billion. When factoring in the additional $700 million, Chrysler is worth$10.5 billion.

"We thought they were going tohave to pay a lot more than that," a London-based analyst at a major investment bank said. "The market's going to love this - Marchionne's done it again. He's brought in adeal that looks like a cracking one on the face of it and he doesn't need to do a capital increase."

(Read more: The road ahead in autos: Luxury wins)

'Defining moment'

Marchionne, who has run both automakers since Chrysler's 2009 U.S. government-funded bankruptcy restructuring, aims to merge Fiat and Chrysler into the world's seventh-largest auto group.

But he has been at odds over the U.S. automaker's worth with the trust, which was pushing for a payout of more than $5 billion. In September, the trust exercised an option enshrined in bankruptcy documents to force Chrysler to file for an initial public offering.

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Wednesday's deal will allow Chrysler to avoid an IPO.

In a statement, Marchionne called the buyout a defining moment for the two companies.

"The unified ownership structure will now allow us to fully execute our vision of creating a global automaker," he said.

The Chrysler buyout talks have been closely watched by debt and equity investors as Fiat's long-term plan to cut losses in Europe depends on its ability to deepen ties with Chrysler.

(Read more: Ford develops solarpowered car for everyday use)

Chrysler is now a profit center for Fiat, but the two companies currently are forced to manage their finances separately. A full merger will make it easier - but not automatic - to combine the cash pools of the two companies, giving Fiat more funds to expand its product lineup.

The UAW trust was created in 2007 as a way for General Motors Co, Ford Motor Co and Chrysler to offload their obligations to pay retiree healthcare benefits.

Medical benefits for GM, Ford and Chrysler retirees are handled in separate accounts and each account was initially to be funded with cash. But during the 2009 financial crisis, the VEBA agreed to accept stakes in GM and Chrysler in lieu of cash.

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