Sergio Marchionne, head of Fiat and Chrysler, reached a deal with the UAW for the union's stake in Chrysler.
Chrysler retirees have been one of the big winners in the deal that gave Fiat control of the large block of stock that was held by the employee benefit trust or VEBA.
Regardless of what might happen to Fiat or Chrysler or the new combination of the two – and there are plenty of doubts about Fiat’s ability to weather the economic storms in Europe and simultaneously expand there – the retirees will have a sizable insurance policy in the form of $4.35 billion that the new Italian-American company transferred directly to the VEBA.
The VEBA, which is no longer a Chrysler shareholder, plans to broaden and diversify its asset base in effort to protect the retirees, who depend on the trust for all or part of their health care.
As part of the final deal between Fiat and the VEBA, the United Auto Workers (UAW) and the Chrysler Group has wrapped up an addendum to its 2011 labor contract with the union that left the VEBA $4.35 billion richer and the union one of the biggest winners in the post-bailout reorganization of Chrysler, according to the VEBA’s top officer.
The memorandum calls for cash payment to the VEBA over and above what Fiat paid for the Chrysler shares owned by the VEBA since the company was reorganized in bankruptcy court in 2009. The payment was a key part of the deal that finally gave Fiat complete control over Chrysler.
The memorandum also underscores that union and the independent medical trust were among the big winners in the successful bailout of Chrysler. Protecting the medical benefits had been a major objective of the UAW’s leadership throughout the bankruptcy crisis in Detroit and as the VEBA payout indicates, the largely succeeded despite some long odds.
When the original deal was struck in 2009, the VEBA had relatively small asset base from which it was supposed to finance the medical benefits of more than 117,000 Chrysler retirees, covered by UAW contracts. The other assets held by the Chrysler VEBA were the shares in the new Chrysler that was being re-organized by Fiat, an Italian carmaker with a troubled history.
Fiat, however, was the only investor that had stepped forward to try and rescue Chrysler, which had already been abandoned by Daimler AG and private equity firm Cerberus. Even General Motors had passed on the opportunity to purchase its crosstown rival.
However, Chrysler’s revival during the past four years has made what a lot of union members, concerned about future benefits, originally had considered worthless paper into a valuable asset. In fact, the exact value of the Chrysler shares held by the VEBA became the center of a year-long standoff between the Fiat and the employee trust, which was demanding a higher valuation.
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The Fiat-VEBA deal closed this week at a valuation closer to the position staked out the trust than Fiat chief executive officer Sergio Marchionne.
Under the memorandum of understanding, Chrysler Group will provide additional contributions to the VEBA Trust of an aggregate of $700 million in four equal annual installments. Chrysler Group made the initial payment at the same time as the transaction between a wholly owned subsidiary of Fiat and the VEBA Trust in which Chrysler Group became a wholly owned subsidiary of Fiat.
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“This agreement is in the best interests of the Trust’s UAW Chrysler retiree members and their families who rely on the Trust to provide vital health care benefits,” said Robert Naftaly, chair of the Committee that governs the VEBA Trust.