Consider Passing on a Chrysler IPO

NEW YORK ( TheStreet) -- There has been a lot of hype surrounding auto stocks this year, but investors should think twice about trying to get shares of Chrysler in an IPO.

This week Chrysler and the United Automobile Workers' Voluntary Employee Beneficiary Association filed to sell shares to the public.

I first became publicly bullish about rival automaker Ford ( F) roughly 10 months ago, when shares were trading at about $10. Since then, the stock has appreciated more than 40%, not accounting for dividends.

I'm not saying this to boast. I'm just pointing out the sizable returns enjoyed by Ford investors recently. And my investment was "late" if you think about all the folks who bought shares at $2 or $4.

Even investors buying at $12 and $13 per share have made decent returns in a relatively short period of time.

But the entry points are irrelevant. Investors who have made big money in Ford and in General Motors ( GM) may now be looking to book profits while staying in the auto sector.

One method they may be considering is selling stakes in Ford and GM and buying shares of Chrysler, if in fact it carries out an IPO.

But I'd urge caution for one simple reason: Chrysler has an unusual motive for its IPO.

The typical company goes public to raise capital to expand and/or pay down debt.

But that's not why Chrysler is coming back as a public company. Instead, it's trying to solve a conflict between Sergio Marchionne, the CEO of Fiat and Chrysler, and the UAW VEBA.

Let me back up a bit here. In 2008, as the financial crisis was exploding, automakers found themselves in deep trouble. The federal government engineered bailouts of both GM and Chrysler.

In Chrysler's case, it filed for bankruptcy protection in April 2009. Less than two months later, it emerged from Chapter 11 owned by the UAW VEBA, Fiat and the U.S. and Canadian governments. Over time, Fiat bought shares from the other owners, eventually winding up with a majority 58.5% stake in Chrysler.

Now Fiat wants to buy the remaining minority stake from VEBA. The only problem is, VEBA believes its chunk is worth significantly more than Marchionne is willing to pay.

VEBA wants roughly $5 billion for its 41.5% stake, while Fiat was hoping to pay less than half of that. So of course the only logical way to resolve the dispute is through an IPO!

Sarcasm aside, it just makes me a little leery when a company is using an IPO to a solve an internal issue. Is VEBA's stake worth more than $2 billion? Probably. But since the two parties can't agree, they're trying to use the market to decide.

The move could backfire for both groups, but my guess is that it could hurt Fiat more.

Given that investor sentiment for automakers is very optimistic these days, the market may give Chrysler a higher valuation than Marchionne would like to see.

It could backfire for VEBA though, if the market picks up the negative internal environment and decides that it doesn't want much to do with the deal, giving Chrysler a smaller valuation.

In the end, the planned IPO may not matter that much to the general investor, because it may not come to market. Marchionne could pony up more cash and reach a deal with VEBA beforehand. Honestly, that would probably be the best result.

I have no doubts that Chrysler will be successful as a company. I mean, last quarter the company posted a profit of $507 million. It's got heavy exposure to North America, which is good for the time being.

But personally, I'd rather own shares of Ford. With a dividend yield close to 2.5%, improving sales and international growth, Ford's picture looks even brighter. Europe is nearing a bottom, and sales in China have been exploding.

Chrysler could very well do fine; there's no arguing that. I just don't want to sell shares of a perfectly successful company that is far from its pinnacle, in order to buy new shares in a company to settle an internal dispute.

At the time of publication, the author was long shares of F.

-- Written by Bret Kenwell in Petoskey, Mich.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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