MILAN (AP) - Italian automaker Fiat announced Thursday it has reached a deal to buy another 16 percent stake in Chrysler LLC for $1.27 billion, raising its ownership to 46 percent and bringing it a step further to fully integrating the U.S. automaker.
Fiat SpA will exercise an equity call option once Chrysler has repaid loans to the U.S. and Canadian governments. Fiat said that would happen in the second quarter of 2011.
Sergio Marchionne, CEO for both Fiat and Chrysler, said the move was "a fundamental step toward completion of the momentous integration of Fiat and Chrysler, initiated less than two years ago, that will result in the creation of a global automaker."
The terms mark the first time that Fiat is putting up cash for Chrysler, which it has been running since 2009 and aims to fully integrate this year.
Fiat first received a 20 percent share in bankrupt Chrysler in June 2009 in exchange for small car and more fuel-efficient engine technology, as well as management know-how - but no cash.
The deal with the U.S. Treasury also laid out three benchmarks for Chrysler to raise Fiat's stake in 5-percent increments. It has exercised two this year - for making a fuel-efficient four-cylinder engine in the United States and boosting Chrysler's sales outside North America. Approval of a new Dodge that gets 40 miles to the gallon will be the last of the three.
Marchionne has said he expects the 40 mpg car to be approved this year, which would raise Fiat's stake to a majority 51-percent.
"To the extent the deal was designed to allow us to get 51 percent, that defines happiness for Fiat," Marchionne told analysts on Tuesday. "It was intentionally designed to allow Fiat control of Chrysler at some point in time."
Fiat has the further option to increase its stake beyond 51 percent - including the possibility to acquire an additional 8 percent from the U.S. Treasury, Marchionne has said.
Marchionne's next logical financial move would be a public offering of Chrysler - something he has indicated he'd like to do by the end of the year. But Marchionne also said the timing would depend on the cash needs of the U.S. automaker and the auto workers union trust fund, which pays health benefits for retirees and holds a large Chrysler stake, which is diluted each time Fiat raises its share.
Analysts had expected that Fiat would exercise the call option before floating Chrysler publicly, to get a better price.
Marchionne's goal is to create an automaker capable of making 6 million cars a year - the scale he believes necessary to remain competitive - by 2014.
Marchionne cited Chrysler's "extraordinary industrial and financial turnaround."
"Fiat is ready to take control in order to bring even greater stability and strength to the relationship in the interests of both," Marchionne said.