Fiat 500
Keith Srakocic  /  AP
Italian automaker Fiat is closing in on its goal of taking a majority stake and full control of Chrysler LLC by the end of the year.
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updated 4/21/2011 11:10:24 AM ET 2011-04-21T15:10:24

Italian automaker Fiat is closing in on its goal of taking a majority stake and full control of Chrysler LLC by the end of the year, announcing a deal Thursday to buy another 16 percent share sooner than expected at a price of $1.3 billion.

Fiat SpA will exercise an equity call option, bringing its stake to 46 percent, once Chrysler has repaid $6.6 billion in outstanding loans to the U.S. and Canadian governments, which Fiat said would happen in the second quarter of 2011.

Fiat expects to gain another 5 percent, for a majority 51 percent share, by the end of the year.

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"This is a fundamental step toward the 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," Fiat and Chrysler CEO Sergio Marchionne said in a statement.

Chrysler is making progress with several banks in an effort to refinance the U.S. and Canadian government loans, which Marchionne has said carry high interest rates that average 11 to 12 percent per year.

But the refinancing agreement is still being negotiated and won't be announced Thursday, said a person briefed on the talks.

The company is working to get all parties on board, including the banks, governments and the United Auto Workers health care trust, which now is Chrysler's largest stakeholder at 59 percent, said the person, who did not want to be identified because the negotiations are private.

Chrysler was initially handed $9.4 billion in loans from the U.S. government Canadian governments, which own 8.6 percent and 2.2 percent of the company, respectively.

Fiat has had operational control of Chrysler since taking a 20 percent stake in June 2009 in exchange for small car and more fuel-efficient engine technology, along with management know-how. But further integration is expected as Fiat's stake increases and Chrysler launches a public offering, which could come as early as this year.

Marchionne said the company accelerated the exercise the call option "to bring about, in the shortest possible time, the birth of a single group capable of fully leveraging the joint development of the respective international activities."

Marchionne told analysts Wednesday that integration was well under way, with significant synergies on the purchasing level where the carmaking units Fiat SpA and Chrysler LLC combine forces with the newly formed Fiat Industrial, which makes farm, construction and truck units.

Analysts had expected Fiat to exercise the call option before Chrysler launches an IPO in order to get a better price.

"The timing was a little bit faster than we were expected. The amount was in line with our expectation," Morgan Stanley analyst Stuart Pearson said.

The call option marks the first time that Fiat is putting up cash for Chrysler.

Fiat's initial 20 percent stake was in exchange for technology and management prowess — _ 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.

"To the extent the deal was designed to allow us to get 51 percent, that defines happiness for Fiat," Marchionne told analysts Wednesday. "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 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 59 percent Chrysler stake, which is diluted each time Fiat raises its share.

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.

Investors welcomed Thursday's deal and pushed Fiat shares up 3.35 percent at euro6.80 ($9.87).

However, union leaders in Italy expressed concern that the moves were a sign that Fiat, which is based in the northern industrial city of Turin, is moving closer to the United States, and away from its native Italy.

"It's a confirmation of a repositioning of Fiat's orientation," the head of Italy's powerful CGIL union confederation Susanna Camusso was quoted as saying by the news agency ANSA. "Nearly all of Fiat's attention is focused on the Chrysler project, in part due to the commitments it made to the U.S. government and in part thinking that this will be the future of this group."

Marchionne has been struggling to get Italian unions to accept more flexible work rules in exchange for investments to increase production in Italy, where it is the country's biggest employer. It won deals at two plants, including the flagship Mirafiori plant in Turin, where it will build Alfa Romeo and Jeeps. It is facing a showdown over a planned investment in another smaller plant near Turin.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Photos: New York auto show

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  1. A model stands next to a Chrysler 300 S on display at the 2011 New York auto show in New York City. Held at the Jacob Javits Convention Center in Manhattan, the show is open to the public from Friday, April 22 through Sunday, May 1. (Mike Segar / Reuters) Back to slideshow navigation
  2. Gene Simmons (right), Eric Singer (center) and Tommy Thayer of the band Kiss appear on stage at the Mini news conference at the 2011 New York auto show. (Mike Segar / Reuters) Back to slideshow navigation
  3. Saab PhoeniX concept car is displayed during the 2011 New York auto show. The vehicle showcases design features and technologies which will shape the next generation of cars from Saab, the automaker says. (Timothy A. Clary / AFP - Getty Images) Back to slideshow navigation
  4. Scion Vice President Jack Hollis walks around the Scion FRS-S concept car at the 2011 New York auto show. Toyota is taking its youth-oriented Scion division — known for the boxy xB — in a new direction with the sexy, rear-wheel-drive sports car. (Mike Segar / Reuters) Back to slideshow navigation
  5. The 2012 Hyundai Veloster is polished as it sits on display at the 2011 New York auto show. (Spencer Platt / Getty Images) Back to slideshow navigation
  6. The new Volkswagen Bulli on display at the 2011 New York auto show. VW has resurrected its iconic microbus, which debuted in 1950 and became a favorite of hippies for its unique styling and copious space for travelers. (Spencer Platt / Getty Images) Back to slideshow navigation
  7. The Toyota Prius c concept car is shown during the press preview to the 2011 New York auto show. (Andrew Gombert / EPA) Back to slideshow navigation
  8. Members of the press gather around the 2011 Mini Cooper Countryman during the 2011 New York auto show. (Timothy A. Clary / AFP - Getty Images) Back to slideshow navigation
  9. The Lexus LF-Gh hybrid concept car is unveiled at a press event on the eve of the 2011 New York auto show. (Andrew Gombert / EPA) Back to slideshow navigation
  10. The 2012 Ford Focus, which boasts 40 mpg, is shown on the floor of the 2011 New York auto show. (Andrew Gombert / EPA) Back to slideshow navigation
  11. The front light of a Boxster S Porsche is shown at the 2011 New York auto show. (Timothy A. Clary / AFP - Getty Images) Back to slideshow navigation
  12. The 2012 Honda Civic Si Coupe makes its official debut at the 2011 New York auto show. (Andrew Gombert / EPA) Back to slideshow navigation
  13. Honda Executive Vice President John Mendel introduces the 2012 Honda Civic lineup at the 2011 New York show. (Mike Segar / Reuters) Back to slideshow navigation
  14. The Mercedes-Benz A Class concept car is seen on display at the 2011 New York auto show. (Jessica Rinaldi / Reuters) Back to slideshow navigation
  15. The Nissan Leaf Nismo RC is shown at the 2011 New York auto show. The car uses a production Nisan LEAF electric powertrain wrapped in a unique two-door carbon fiber body with removable front and rear sections and a large adjustable rear wing. (Mary Altaffer / AP) Back to slideshow navigation
  16. Members of the automotive press inspect the new 2012 Honda Civic Si at a press event during the 2011 New York auto show. (Mike Segar / Reuters) Back to slideshow navigation
  17. The 2011 Suzuki Kizashi on display during the 2011 New York auto show. (Timothy A. Clary / AFP - Getty Images) Back to slideshow navigation
  18. A worker cleans the mirrors covering a Smart Electric Drive -- a battery-electric version of the Smart Fortwo micro car -- during the 2011 New York auto show. (Timothy A. Clary / AFP - Getty Images) Back to slideshow navigation
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  1. Image: Model next to Chrysler 300 S on display at New York International Auto Show
    Mike Segar / Reuters
    Above: Slideshow (18) Cars that rocked the Big Apple - New York auto show
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    Slideshow (23) Cars that rocked the Big Apple - Shanghai auto show

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