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updated 1/20/2009 11:08:16 AM ET 2009-01-20T16:08:16

Fiat and Chrysler said Tuesday they have agreed to form a strategic alliance that would give the Italian auto empire a 35-percent stake in the troubled U.S. carmaker and could eventually bring it full control.

The deal means Chrysler, which is fighting off bankruptcy and struggling to sell less fuel efficient larger models, would have access to new markets and cheaper, more environmentally friendly technologies.

Fiat Group SpA, which makes Fiat, Lancia and Alfa Romeo vehicles, would gain a foothold in the huge U.S. market. The company has bounced back recently with cars such as the tiny 500 two-door hatchback, a hit remake of an earlier iconic Fiat model that competes with Daimler AG's Smart, BMW AG's Mini and other very small cars.

The two companies said in a joint statement that in exchange for sharing its small-car platforms and fuel-efficient engines, Fiat would take an "initial" 35-percent stake in Chrysler but would not invest cash.

The indication that Fiat could eventually gain full control was further backed by John Elkann, Fiat vice president and heir of its founding Agnelli family, who was quoted as saying by the ANSA news agency that the company's stake "could increase."

However the joint statement stressed that the Turin-based Fiat was not committing to funding Chrysler in the future.

UAW offers support
The United Auto Workers union offered its support for the alliance, saying the tie-up has the potential to preserve U.S. manufacturing jobs. UAW President Ron Gettelfinger said in a statement issued by the union that the alliance “offers Chrysler new opportunities to compete in the U.S. market and the global marketplace.”

“As the U.S. auto industry undergoes a restructuring process, this alliance has the potential to preserve a wide range of choices for U.S. consumers, as well as good-paying manufacturing jobs for our communities,” said Gettelfinger.

UAW Vice President General Holiefield, who heads the union’s negotiations with Chrysler, said the union would work with both Chrysler and Fiat in the coming weeks.

“UAW members will have a voice as this new alliance takes shape,” he said.

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CreditSights analyst Brian Studioso said Fiat, which has its own challenges this year from continued drops in car and truck production, isn't in a position to part with cash.

"For Fiat, the non-cash transaction would limit downside exposure while giving the company a foothold in the North American market," Studioso wrote in a note to investors.

For Chrysler, based in Auburn Hills, Michigan, the deal would mean breaking out of the North American market and gaining access to more competitive products.

"A Chrysler-Fiat partnership is a great fit as it creates the potential for a powerful, new global competitor, offering Chrysler a number of strategic benefits, including access to products that complement our current portfolio (and) a distribution network outside North America," said Bob Nardelli, Chairman and CEO of Chrysler LLC.

Under the deal, Chrysler will be able to manufacture and market in the United States new models based on Fiat platforms as well as the Italian company's own products.

The alliance is subject to a review of company finances and regulatory approvals, including by the U.S. Treasury Department, which last week announced an emergency bridge loan for Chrysler.

"The agreement will offer both companies opportunities to gain access to most relevant automotive markets with innovative and environmentally friendly product offering, a field in which Fiat is a recognized world leader, while benefiting from additional cost synergies," said Fiat CEO Sergio Marchionne.

Fiat shares on the Milan stock exchange surged more than 4 percent to euro4.66 ($6.03). Economy Minister Giulio Tremonti hailed the deal as "a sign of vitality."

The deal is the latest coup for Marchionne, who returned the once-struggling Fiat to profitability after taking the helm in 2004.

As part of his strategy, the turnaround expert dissolved in 2005 an alliance with General Motors Corp. that could have forced the U.S. company to buy the 90 percent of Fiat it did not already own. GM agreed to pay the Italian automaker $2 billion, mostly in exchange for canceling the clause.

However, Marchionne had recently warned that independence was no longer sustainable amid the financial crisis, indicating Fiat was looking for new partners.

In December, the drop in demand in its key Italian market forced Fiat to shut most of its plants in the country for a month, laying off nearly 50,000 workers for an extended holiday.

Fiat announces its fourth-quarter results on Thursday. In October, it reported a 1.8 percent increase in its third-quarter profit but also outlined a worst-case forecast that said sales could drop up to 20 percent in 2009.

Chrysler, best known for its Jeep and minivan models, has been hurt by its reliance upon slow-selling trucks and sport utility vehicles and analysts have said it may not survive the year as an independent company despite receiving a $4 billion government loan late last year.

The company was hit especially hard by last year's industrywide drop in North American auto sales. Its sales plunged 53 percent in December and it posted a 30 percent drop for 2008.

Nardelli said the partnership would provide a return for taxpayers on the loan, "securing long-term viability of Chrysler brands," boosting consumer confidence and "preserving American jobs."

Chrysler is 80.1 percent owned by Cerberus Capital Management LLP, which acquired its stake for $7.4 billion in 2007 as Germany's Daimler AG dissolved a "merger of equals" made in 1998 between Daimler-Benz and Chrysler Corp.

It is likely that part of Fiat's stake will come from Daimler's remaining share in the company.

"Daimler welcomes any initiative which enables Chrysler to stabilize its situation and to secure jobs in the company," spokesman Thomas Froehlich said.

"It is still our intention to dispose of our 19.9 percent stake in Chrysler," Froehlich said, declining to comment further.

More on Chrysler   |  automotive industry

The Associated Press and Reuters contributed to this report.

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