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Share price of Italian automaker Fiat S.p.A. (FIATY) jumped 15.1% to $9.55 on Jan 2, 2014, after the automaker signed an agreement with the UAW Retiree Medical Benefits Trust (VEBA Trust) to acquire 100% stake in Chrysler Group. The VEBA Trust owns 41.5% of Chrysler.

Fiat, which holds a 58.5% stake in Chrysler, had been trying to acquire the remaining shares from the trust for months. However, the two owners were not able to settle on the purchase price earlier. In Sep 2013, this conflict also resulted in announcement of an IPO by Chrysler.

Fiat will be paying $1.75 billion in cash to finance the transaction. Further, the Chrysler Group will pay about $1.9 billion as extraordinary dividends to make partial payment for the deal.

The deal is expected to close by Jan 20. Fiat will not require additional capital to finance the deal. Both Fiat and Chrysler will make the payments from their respective cash balances.

Chrysler Group and the UAW have also signed a memorandum of understanding under which Chrysler Group will provide VEBA Trust with $700 million in four equal installments. The first payment will be made on the closing of the deal. The remaining three installments will be made over the next three years on the same date. As a result of this payment, UAW will support the industrial operations at Chrysler Group and the further implementation of the Fiat-Chrysler alliance.

Fiat strives to become the largest player in the automaker industry, beating automaker aces like Honda Motor Co., Ltd. (HMC - Analyst Report) and General Motors Company (GM - Analyst Report). With the completion of this merger, Fiat will become the seventh largest company in the auto industry.

Notably, Italian unions apprehend that the merger will negatively impact production and employment in the country. However, Fiat expects the deal to prove beneficial in the long run. In the third quarter of 2013, Fiat reported substantial losses owing to a sluggish European economy and weak sales in Brazil. This was partially offset by a significant contribution from Chrysler.

Chrysler traded on the New York Stock Exchange (NYSE) till Nov 1988. Later on, it was acquired by Daimler AG (DDAIF) and then Cerberus Capital Management purchased an 80% stake in the company. However, Fiat acquired Chrysler in 2009 when the latter went bankrupt. The parent company has managed to turn the subsidiary profitable.

Fiat currently carries a Zacks Rank #3 (Hold).

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