Italian-owned Fiat ready to jump start bankrupt Chrysler

Sergio Marchionne's company will take majority control in five years if US car-maker repays $10.5bn

Fiat, the Italian car-maker, could end up with majority control of ailing US auto giant Chrysler in five years time if the new company to emerge from bankruptcy manages to repay all its loans to the American government.

Sergio Marchionne, the chief executive of Fiat, has struck a deal with Chrysler and the US government which gives him an initial 20 per cent stake once a company is given the go-ahead. The plan is for Chrysler, maker of the Dodge and Jeep marques, to complete its bankruptcy proceedings in 30 and 60 days and then sell its assets on to the new company.

Fiat's stake will then rise to 35 per cent on certain conditions, rising again to 51 per cent as early as 2013 if Chrysler is able to pay back the government loans of $10.5bn (£7bn).

As part of the new funding deal, the Washington will have an 8 per cent stake in the new Chrysler and the right to choose four independent directors while the Canadian government will take a 2 per cent shareholding. The United Auto Workers, Chrysler's main union, will also take stock in return for an agreement to cut labour costs and give up rights over strike action.

Mr Marchionne, credited with turning Fiat into one of the fastest growing car-makers in the world, said that bringing the two companies together will "create a powerful new automotive company, while helping preserve jobs and a manufacturing industry that is critically important to the US and Canadian economies."

Fiat is not paying anything for its stake but will in return be providing Chrysler with its technology, particularly for its smaller, more fuel-efficient cars. One of Chrysler's problems has been adjusting to the harsher economic climate and the recent spike in fuel prices.

This weekend, Chrysler, the third biggest US car-maker, is working on closing all its plants by Monday and temporarily laying off its staff. But the company has promised that all workers will continue to be paid until the new company is created, that dealerships would stay open and that all insurance warranties will be honoured.

Chrysler was forced into Chapter 11 bankruptcy proceedings last Thursday after the collapse of support from its creditors who refused to help restructure its $6.9bn of debt.

But the bankruptcy judge may yet face objections from some hedge-fund shareholders who have opposed the deal to swap the debt for $2bn of cash.

President Barack Obama, when announcing the rescue operation, blamed "a small group of speculators" – hedge-fund investors – for the bankruptcy. But analysts reckon the bankruptcy will go through as a majority of investors are ready to support the plan.

Next in line for US surgery is General Motors, which has until the end of May to reach agreement with workers and debt-holders to cut costs.