Fiat Merger Cash Exit rights – Short term “high yield deposit” ?

Thanks to the reader who sent me this idea. Althought the stock price has risen in between, I still think it is interesting to look at this country specific “special situation”.

The Italian stock market is always worth a look as things are definitely different south of the Alps. I have documented a couple of cass where minority shareholders were the victims, but sometimes, Italian stockmarket laws actually seem to protect minority shareholders.

The FIAT merger

FIAT Spa is currently in the process to merge its Italian operations with a Dutch Holding company which holds Fiat’s interest in Chrysler.

In order to do so, FIAT is holding an Extraordinary shareholder meeting on August 1th. Now comes the interesting part: Under Italian law, any FIAT shareholder can vote against the merger (or not vote for it) and is then entitled for a so called “cash exit right”, which gives him the right to sell the shares back to the company. Normally, this compensation is a 6 month average, but in Fiat’s case the cash compensation has been fixed at 7.727 EUR per share.

Details about the cash exit rights can be found in the official prospectus.

Q: Are Fiat shareholders entitled to exercise dissenters’, appraisal, cash exit or similar rights?
A: Under Italian law, Fiat shareholders are entitled to cash exit rights because, as a result of the Merger, the
registered office of the surviving company in the Merger, FCA, will be outside of Italy, Fiat ordinary shares will
be delisted from the MTA, and FCA will be governed by the laws of a country other than Italy. Cash exit rights
may be exercised by Fiat shareholders that did not concur in the approval of the merger plan at the extraordinary
general meeting. The exercise of such cash exit rights will be effective subject to completion of the Merger. A
Fiat shareholder that has voted shares in favor of the Merger may not exercise any cash exit right in relation to
those shares. A Fiat shareholder that properly exercises cash exit rights will be entitled to receive an amount of
cash equal to the average closing price per Fiat ordinary share for the six-month period prior to the publication of
the notice of call of the extraordinary general meeting which is equal to €7.727 per share. If the aggregate
amount of cash to be paid to Fiat shareholders in connection with the exercise by such shareholders of cash exit
rights under Italian law and to creditors pursuant to creditor opposition rights proceedings under Italian law and
Dutch law, respectively, exceeds €500 million, a condition to closing of the Merger will not be satisfied.

Exercise period Timeline:

This is from the prospectus:

In accordance with Article 2437-bis of the ICC, Qualifying Shareholders may exercise their cash exit rights, in relation to some or all of their shares, by sending notice via registered mail to the registered offices of FIAT no later than 15 days following registration with the Companies’ Register of Turin of the minutes of the FIAT Extraordinary Meeting of Shareholders. Notice of the registration will be published in the daily newspaper La Stampa and on the FIAT corporate website.

If I read this correctly, this will at the earliest start with the day of the annual shareholder’s meeting, if they manage to register on the very same day. I asume that it is then 15 calender days. The money will be received on the “effective date of the merger” (A-15), which after reading the

The 500 mn EUR threshold

If more than 500 mn EUR “cash exit rights” are exercised, the merger will not take place and the cash exit rights are not valid. How big is the risk ? Fiat did the same structure with Fiat International and there, only 25 mn EUR rights were exerecised. In my opinion, FIAT will want to make this merger happen IN ANY CASE so I consider this as a very remote risk.

Stock chart

Last week, when I first looked at this, Fiat was still trading at around 7,35 EUR which would have meant a 5% upside (or 10% annualised) for this relatively riskless trade. At the current price of almost 7,60 EUR and considering transaction costs, it looks less compelling.

Nevertheless it is worth watching the FIAT stock in the next few days i there is a potential entry point if we see weakness in the overall market.

Summary:

Although at the moment, the Fiat Merger Cash Exit Rights do not look that interesting, in general this looks like an interesting short term “high yield” opportunity. I could imagine that also other Italian companies are trying this sort of cross border merger to escape onerous Italian provisions so it will be worth keeping an eye on similar situations.

16 comments

  • FIAT REPORTEDLY CONSIDERING WAIVING THE E500M RECESSO LIMIT: Acc to La Repubblica, Fiat would be considering increasing the recesso amount on which its merger with Chrysler is conditional (max amount currently set at Euro 500 mn of shares that request to withdraw) and that an EGM could be called to change the limit.

  • Huitzilopochtli

    http://europe.autonews.com/article/20140806/ANE/140809875/fiat-shares-fall-to-yearly-low-on-chrysler-merger-concerns

    Would be funny, if this kills the merger. I have one question:
    “Fiat issued a statement on Tuesday saying no shareholders had declared an intention to exercise the exit right at that stage.” Can this statement be real(alstic)?

    • Good question, I do not have an answer. I guess that people will rather exercise toward the end of the period. The price decline is however quite dramatic…..

    • Is anyone else here going to excersise her/his cash exit rights?
      I already drafted the letter I wil send to the Investor Relation department mentioned in the prospectus.
      Called two times -however no skilled reply available – many calls..
      Best
      Jo

  • There’s still possibility of owning this right? If stock goes 7.72 EUR before 15th August?

    If one does end up buying…Is 15th Aug the last day to submit the tender instruction ?

  • Danke ersteinmal für die immer sehr gut durchdachten Analysen.
    Da der Fiat-Preis momentan wieder etwas fällt, wird die Idee wieder interessanter…

    Was ist denn nun das letzte mögliche Kaufdatum, um die cash exit rights zu erhalten. Es gibt ja einerseits die “voting rights” für die der letzte Tag Mittwoch oder Donnerstag diese Woche sein müsste:

    (2) of the Italian Unified Financial Act, all persons for which Fiat has received a communication from a relevant
    authorized intermediary, on the basis of records at the close of business on the seventh trading day prior to the
    date of the meeting, shall be entitled to attend the shareholders’ meeting. Changes in shareholdings after this
    deadline are not considered for the purpose of determining voting rights at the relevant shareholders’ meeting
    and, therefore, any person becoming a shareholder of Fiat after the above deadline will not be entitled to attend
    the extraordinary general meeting and vote.

    Es scheint jedoch so zu sein, dass auch ein Tag vor dem extraordinary meeting reichen könnte, da an anderer Stelle die Bedingung steht, dass man die Aktien unnterbrochen ab dem extraordinary meeting gehalten haben muss – d.h. man also am 1. August gar nicht aktiv dagegen stimmen müsste, sondern nur die Aktien besitzen muss.

  • du und dein glück mit VW. ich bin mir sicher dein nächstes auto wird eine Golf 😉

  • The trade was better than you thought since you get not only the right but also the upside. It’s like a zero bond with an call option.

    • #Joe,

      technically what you get is a free 15 day put option on your stock. Or to be more precise you get an option on an option (compound option).

      At 7,60, this would have been worth approx. 25 cents, at 7,90 it is ~ 14 cents.

      mmi

      mmi

      • Right: underlying + put = call because of put/call parity. + Zerobond because it was trading at a discount when you wrote. I really like free calls: no downside but potential upside. If you do it on margin you don’t need much of a discount to do the trade. Either profit or no loss. Of course now it’s too expensive.

  • vermutlich ist der Zug abgefahren.
    Der Kurs wird durch Übernahme-Gerüchte druch VW in die Höhe getrieben.

    http://www.n-tv.de/wirtschaft/VW-Fiat-Uebernahme-und-Zerschlagung-article13229316.html

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