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Second Look At Fiat Plan For Chrysler Rings Alarm Bells

Financial Results Show Fiat Profit Dives, Forecasts Too.
Cash Flow Shows Alarming Outflow.

First reaction to Fiat’s plan to take a 35 per cent stake in Chrysler was positive, but the second wave of reaction, with the benefit of the Italian company’s financial results for 2008, was more downbeat as analysts crunched a few more numbers.

U.S. agency Standard & Poors said it might cut Fiat’s rating, and it didn’t like the Chrysler plan.

“We do not see any immediate benefit for Fiat from the announced deal with Chrysler,” S&P said.

Max Warburton, senior analyst with Bernstein Research of London echoed the thought.

“Fiat seeking to take a 35 per cent stake (or more) in Chrysler is a mistake, in our view. It may be good for Chrysler and its employees, but the chances of it being good for Fiat – or for wider industry returns – look remote,” Warburton said.

Fiat said 4th quarter trading profit dropped 30 per cent to €663 million ($858 million), and slashed its forecast for 2009 to a minimum of €1 billion ($1.29 billion)  with a previous forecast of between €1.5 and €2.3 billion ($1.9 billion to $2.9 billion). Fiat’s sales for 2008 rose 1.5 per cent to €59 billion ($76 billion). Fiat Auto accounts for roughly 50 per cent of the Fiat Group’s sales. The rest of the company makes things like trucks and farm machinery.

Cash Flow shock
Investment bank Morgan Stanley was shocked by Fiat’s cash flow numbers.

“Fiat net liquidity declined by €6.2 billion ($8.1 billion) during the strongest trading year in the company’s history. If Fiat’s balance sheet deteriorated so sharply during a ‘good year’, what could happen in 2009? Fiat’s target for Auto division break-even and positive group cash flow in 2009 implies that Fiat Auto would be the most profitable major auto company in the world. We don’t think so,” said Morgan Stanley analyst Adam Jonas.

Bernstein’s Warburton said he found few industrial or financial benefits from Fiat’s plan to link with Chrysler. He said the task of altering Chrysler vehicles to make them suitable for Fiat platforms was huge, there were few potential purchasing and engineering synergies, and the Chrysler dealer network didn’t suit Fiat cars, or its sporty subsidiary Alfa Romeo.

“We conclude that success is not impossible – but it looks highly improbable, with very distant benefits for Fiat – and it will remain utterly reliant on U.S. government support in the near-term. Fiat’s strained balance sheet, weak outlook and M&A (mergers and acquisitions) plans all raise concerns. While one has to admire the fighting spirit of Fiat, one must also question the realism of a company with such a weak balance sheet embarking on global M&A,” Warburton said.

Neil Winton – January 29, 2009

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