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Fiat Chrysler Merger Goes Well, But External Factors Threaten

Fiat’s merger with Chrysler is progressing impressively, but its achievements are being overshadowed by gloomy economic prospects, according to a report from Citigroup Global Markets.

Despite this, Fiat still faces major challenges, said the report’s author Citigroup auto analyst John Lawson.

“Fiat has moved faster and more decisively than any observer dared assume in the seamless combination of Fiat and Chrysler from a financial perspective,” said Lawson.

“This has run far ahead of the operational integration of the two companies, itself proceeding at a pace seldom seen in the industry. Unfolding gloom on the economic outlook looks likely to deflect attention from this achievement, with a focus on weakening markets in Europe and Brazil, and the revival of refinancing fears,” Lawson said.

Fiat has reportedly been losing money in Europe and making it up, and then some, in the booming Brazilian market. Brazil’s sales prospects are looking shaky now, while new entrants Hyundai, Renault, Peugeot and Nissan are piling in, anxious to share in the fat profits generated by Fiat and its fellow market leaders VW and GM.

Fiat’s first financial report to include its now majority owned Chrysler subsidiary a couple of months ago pleased investors at first, but they weren’t so happy when a deeper look into the numbers revealed alarming and rising debt. Fiat said its net debt will rise to between €5 and €5.5 billion by the end of 2011, up from the current €3.4 billion.

Not bullish
Fiat-Chrysler raised second quarter trading profit to €525 million from €307 million in the same period last year. Trading profit is forecast to rise to about €2.1 billion for 2011, up from the previous target of €1.2 billion, which didn’t include Chrysler.

Lawson said he reckons in the future about 70 per cent of Fiat profits will be generated by the U.S., Canada and Mexico, with around 30 per cent from Brazil. Despite its impressive merger progress Lawson isn’t expecting much profit progress anytime soon.

“We are not bullish on either of these themes, though this caution is becoming increasingly consensual. We feel Fiat has an uphill struggle ahead,” Lawson said.

Neil Winton – September 20, 2011

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