Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.
If an agreement with the car maker's lenders can be reached, Chrysler would file for bankruptcy protection to rid itself of some liabilities. That would let Fiat pick and choose which operations it wants, these people said. The U.S. government would provide bankruptcy financing while the reorganization plays out.
The United Auto Workers union is on board with the plan and likely would end up owning a sizable stake in the restructured car maker, said these people.
A relatively orderly bankruptcy filing along these lines would represent a measure of success for the Obama administration. But if a deal with Chrysler's banks and Fiat cannot be reached, the company would begin the process of liquidation, with assets potentially sold to many buyers or shut down, said these people. Chrysler has shrunk radically in recent years but still employs 66,000 people in the U.S.
Meantime, Fiat has begun talks with
General Motors Corp. about joining forces in Europe and Latin America, people familiar with the matters said, a surprise move that could have profound implications for the restructuring of GM and Chrysler. GM and Fiat have begun discussions about the Italian company buying a majority stake in Opel, the heart of GM's European unit, these people said.
But no GM deal would go forward until Fiat's plans with Chrysler are settled. Fiat has said it wants to take an initial 20% stake in Chrysler.
A Chrysler bankruptcy filing, while long expected by some, would nonetheless represent a watershed moment in Detroit's long decline as the first such move among the once-dominant Big Three auto makers. GM is working through similar issues and could be forced to file for bankruptcy in May.
In either Chrysler scenario, the impact would ripple through the supply chain of car dealers, parts makers and others, as well as the economies of Midwestern states. The Obama administration said a bankruptcy proceeding wasn't inevitable, with officials insisting that a successful outcome outside of court was still possible.
"In a negotiation like this, everything is speculation until there's a deal," said an administration official. "It should surprise no one that the administration is planning on contingencies, but we remain focused on the goal and engaged with all stakeholders to bring Chrysler and Fiat to a working partnership."
Fiat negotiators also believe Chrysler can steer clear of bankruptcy. "If we reach a deal with all the banks, there simply is no need," one person said.
But Chrysler's chief financial officer told major lenders Wednesday that even if a deal can be worked out between the government and lenders, the company still will need to file for bankruptcy to seal a Fiat alliance, said people familiar with the situation. The executive, Ron Kolka, told lenders that a provision of U.S. bankruptcy code known as section 363 would allow Fiat to pick which brands, plants and dealership agreements it wants to keep, said these people.
The idea of linking GM with Fiat, on top of a Fiat-Chrysler union, opens the door to a restructuring of much more global scope than the car makers and Obama administration had envisioned.
Reorganizing three auto makers on three continents could move the world-wide car industry a big step toward the kind of large-scale consolidation that long has been overdue. For years, auto makers have struggled with excess capacity that has fostered intense price competition and squeezed profits.
The problem has festered because stronger car makers have steadily added plants while governments often have stepped in to prop up ailing car companies to preserve jobs.
Any bid to restructure three auto makers is likely to prove highly complex and risky for the companies involved and the Obama administration. Chrysler is in such bad shape precisely because its cross-border merger with
Daimler AG ended in failure after eight years.
Obama advisers said they wouldn't oppose Fiat moving to acquire Opel, which would ease the strain on GM's finances. But the administration doesn't appear to be considering a wider alliance between Fiat and GM.
Officials with President Barack Obama's auto task force have repeatedly dismissed talk of a potential GM-Chrysler merger, with or without Fiat, saying they saw little logic in bringing together two companies reeling under similar strains.
Both GM and Chrysler have needed billions of dollars in government loans since the beginning of the year to stay in business. Fiat is in better shape but is also struggling. On Thursday, it reported a quarterly net loss of €410 million ($531 million), compared with a net profit of €405 million in the same period a year earlier. The result was worse than analysts' expectations for a loss of €300 million.
The administration's task force has told Chrysler it must reach a deal by May 1 to slash labor costs with the UAW, work out an agreement with secured lenders to cut its debt and finalize a Fiat alliance.
Chrysler's lenders are owed $6.9 billion. The last government offer to cut that debt left the U.S. and lenders at least $3 billion apart. The two sides are also far from agreement on how big an ownership stake in Chrysler the lenders would get.
Under the government plan, a restructured Chrysler would be owned by Fiat, the lenders, the UAW and the Treasury, said people familiar with the talks.
The UAW, Chrysler and the Treasury have reached a tentative agreement to partially protect union members' pension and retiree health-care benefits under bankruptcy, said these people. The deal needs to be ratified by union members and courts.
Under the agreement, the Treasury or Chrysler, if it returns to profitability, would pay in cash half the $10.6 billion the company owes a retiree health-care fund. The remainder would be paid in an undetermined amount of Chrysler equity.
For Fiat, a deal with GM, meantime, would significantly strengthen the company's presence in markets it already serves. But any GM alliance remains in limbo until Fiat resolves the Chrysler negotiations, said people familiar with the situation.
By negotiating with the two Detroit car companies at once, Fiat Chief Executive Sergio Marchionne is making a big double bet. Mr. Marchionne made it clear last year that he wants to boost Fiat's capacity from its current 2.2 million cars a year to between 5.5 and six million cars a year.
Fiat considers GM's assets complementary to its pursuit of a Chrysler stake because the car maker will only truly propel itself to the big leagues of the global market if it has a strong U.S. presence, said people familiar with the matter.
During a conference call after Fiat released financial results, Mr. Marchionne said Fiat was interested in Chrysler "in its totality."
—Marcus Walker and Neil King Jr. contributed to this article.
Write to Jeffrey McCracken at
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