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No Chrysler IPO in 2011? All Part of CEO Marchionne's Master Plan

Chrysler was supposed to follow General Motors (GM) back to the public markets with an IPO later this year. But now their are rumblings from the combined Fiat-Chrysler CEO, Sergio Marchionne, that the IPO may no longer be the priority. Instead, upping Fiat's stake in Chrysler is the first order of business.

After Chrysler's bailout and bankruptcy in 2009, Fiat took a minority, yet controlling, stake in the company, which rose to 25 percent in 2011. Assuming certain benchmarks are met, Fiat has the option of acquiring more of the U.S. carmaker. According to a WSJ report, this is high on Marchionne's to-do list:

Mr. Marchionne... reiterated his expectations of having Fiat raise its stake in Chrysler to 51% by the end of the year. Fiat would like to exercise an option to buy an additional 16% stake in the U.S. car maker ahead of the IPO.
Playing with other people's money
This is from the same report:
Mr. Marchionne has repeatedly said he wanted to take Chrysler public in the second half of 2011. It would need to repay U.S. government loans the company received during its bankruptcy in 2009 and raise its liquidity. The loans carry 10% interest rates that cost Chrysler more than $1 billion last year.

But the company is still in discussions about securing funding to repay the loans. Chrysler has had an "incredibly good reception" from a potential pool of lenders and arrangers to refinance its loans, Mr. Marchionne said. But he added: "We are looking for solutions."

What's important to note here is that Chrysler is not looking to repay its debt out of profits -- unlike GM, it hasn't made any since coming out of bankruptcy. Rather, it wants to clean up its balance sheet through finance, something that appeals to Marchionne. Remember, it cost Fiat nothing to acquire its stake in Chrysler. In fact, the U.S. government basically lent Fiat $6 billion to take Chrysler off its hands.

Fiat, on the other hand, is back in the black
Fiat notched a profit of almost €2 billion in 2010. But it's not like the company wants to spend all that money to pay off the more than $7 billion it owes to the U.S. Treasury and the Canadian government. Enter leverage.

The big question is obviously what kind of rates Fiat would be able to get for Chrysler debt. The company's bond ratings are at junk level, and anyone with a memory will recall how badly the pre-bankruptcy bondholders got hammered in the lead-up to Chrysler's warp-speed Chapter 11 proceeding.

However, Chrysler has a lot of new cars in its product pipeline, and Fiat is about to introduce its peppy little revamped 500 model into a looming U.S. gas crunch. Bankruptcy removed debt from Chrysler's books, and pre-IPO speculation had set the company's market cap at around $15-20 billion. This could obviously be a very attractive investment for lenders who want to give Marchionne the money he needs to simultaneous prep Chrysler's IPO and gobble up more of the company.

So what's the real reason for stalling on the IPO?
Obtaining a majority stake in Chrysler seems to be Marchionne's driving interest, pre-IPO. But true to form, he doesn't want to put any of his "own" funds into the game. His strategy is far from straightforward, but if he can shed Chrysler's billion-dollar liabilities with borrowed money, then make it all back and then some with an IPO, he will have set Fiat-Chrysler up to be both a U.S. domestic and global player by 2014.

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Photo: Fiat-Chrysler Media
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