(Fri 01 May 09)

Chrysler and Fiat have arrived at an agreement in principle to establish a global strategic alliance with the aim of forming what has been described as "a vibrant new company".

A joining of forces between the two manufacturers has been on the cards for some time, and it has become inevitable now that Chrysler has filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. Chrysler's Chairman and CEO Bob Nardelli admits to being "personally disappointed" by this move, which came about because not all of the company's lenders were persuaded to agree on various concessions that might otherwise have helped stave off the action.

Chrysler will also file a motion under Section 363 of the Bankruptcy Code requesting both approval of the agreement with Fiat and the sale of Chrysler's principal assets to the new company. This is a fast-track process which should mean that the new company is up and running within 60 days, or perhaps as little as 30.

Assuming all this goes ahead as planned, the new company would initially be owned 55% by the Voluntary Employee Beneficiary Association, 10% in total by the US and Canadian Governments and 20% by Fiat. Fiat's shareholding (which was at one point being mooted at 30%) can increase to 35% in three stages - an extra 5% when it brings a 40mpg vehicle platform to be produced in the US, 5% for providing a "fuel-efficient family engine" to be built in the US and fitted to Chrysler vehicles, and 5% for giving Chrysler access to its worldwide distribution network to increase exports.

None of these requirements is likely to be a major problem, since they have all been part of the discussion process for some time now. In theory Fiat's shareholding could increase to more than 50%, but that won't be allowed to happen until all US Government loans have been repaid, which might take some time.

Nardelli, who has headed Chrysler since August 2007, has announced that he will leave the company "to let others take the lead in the transformation of Chrysler with Fiat". He will become an advisor to Cerberus Capital Management, the company which became Chrysler's principle stakeholder when Mercedes-Benz pulled out.

A very intriguing extra twist to the story is that another agreement in principle has been reached to the effect that financial services company GMAC will become Chrysler's preferred lender for dealer and consumer business. GMAC, which has been in operation since 1919, became a bank in December 2008 but was previously the lending arm of General Motors, and is still jointly owned by GM and an investor group led by (for it is indeed a small world) Cerberus Capital Management.

These are interesting times for GMAC, and no mistake. As reported in yesterday's <Wall Street Journal>, after turning itself into a bank it received $5 billion from the US Treasury's Troubled Asset Relief Program, and it may receive more Government funding to help it finance Chrysler dealers and customers during the restructuring process. On top of all that, GMAC has said that it will not take on the existing portfolio of loans and leases, thereby avoiding any problems that might arise from the bankruptcy. Those loans and leases will continue to be the responsibility of Chrysler Financial Services, which is 100% owned by Cerberus.

As we have had cause to mention before, Fiat's record with the Big Three US manufacturers over the past few years has been something to behold. The Italian giant was saved from virtual collapse by a co-operation with GM which the Americans spent a lot of money buying their way out of, it has done well out of an agreement with Ford (the Ka and the 500 are built in the same Fiat-owned factory in Poland) and now it is on course to become a significant shareholder in Chrysler - with very substantial support from other parties - for a relatively small investment. Who would have bet on all this happening ten years ago?

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