MILAN: Fiat took a giant step on Thursday to becoming one of the biggest automakers in the world with a $1.3 billion (889 million euro) deal to boost its stake in US unit Chrysler to 46 percent.
The deal -- part of a strategy by Fiat to use the effective rescue of Chrysler as a route to a global presence -- was cheered by investors but trade unions said it meant Fiat management was turning away from Italy.
Fitch ratings agency also warned it could downgrade Fiat's credit rating because of "the potential increase in net debt in relation to the transaction."
But Fitch added that it thought the price was "reasonable" and that a fusion with Chrysler would bring "medium- to long-term benefits to Fiat."
Fiat said the deal would be completed during the second quarter of this year and would involve billions of dollars in loans given to Chrysler by the US and Canadian governments during the global economic crisis being "fully repaid."
"This is a fundamental step toward completion of the momentous integration of Fiat and Chrysler initiated less than two years ago," Fiat chief executive Sergio Marchionne, who also heads up Chrysler, said in a statement.
The deal "will result in the creation of a global automaker," he said.
The Italian automaker also said on Thursday it expected to increase its stake by a further five percent to 51 percent "before year end."
But Marchionne later told analysts he believed a full merger with Chrysler was some way off. "We will not address the question of governance of these businesses until much later," he said.
"A lot depends on market conditions and the performance of Chrysler," he said. In the current shake-up of the global auto industry, "we want to be one of the guys surviving," he added.
Fiat took over management of the iconic US company after it emerged from bankruptcy in 2009 and currently owns a 30-percent stake. Chrysler suffered from an implosion of sales for the auto sector in the United States.
Fiat gave Chrysler access to much-needed small-car technology and Chrysler offered dealership networks which Fiat lacked, notably in the United States.
Investors welcomed the news, with Fiat's share price on the Milan stock exchange rocketing up 4.49 percent to close at 6.87 euros.
But Italy's Fiom trade union said the deal was "bad news" for Italy.
"Everything will be sacrificed in Italy to find money for the takeover and this will signal the end of independent auto production in the country," Giorgio Cremaschi, head of the powerful Fiom union, told reporters.
Susanna Camusso, leader of Italy's biggest union, CGIL, said the announcement "confirms the change of orientation for Fiat towards the US."
The news came a day after Fiat unveiled results that showed net profit tripled to 37 million euros (54 million dollars) in the first quarter from the same period last year but still came in far below analyst expectations.
The earnings report showed the Brazilian market and Ferrari sales gave Fiat a boost but Marchionne warned that the earthquake in Japan would set trading profits back 100 million euros this year because of a lack of car parts.
Chrysler confirmed Thursday's deal, saying "Fiat has agreed with Chrysler Group's other members that it will exercise its option" to increase the stake.
The other shareholders are the US and Canadian governments and the pension fund of the AUW union based in Detroit at the heart of the US auto industry.
At the end of 2010, Chrysler owed the US government $5.8 billion and $1.7 billion to the Canadian government and the province of Ontario.
Chrysler is set to raise around seven billion euros in debt on the markets.
Fiat and Chrysler combined have a production volume of about four million vehicles a year, which should be increased to six million by 2014 -- putting the combined company among the top auto makers in the world.
The two companies "are still far from six million. How are they going to get there? Definitely thanks to this new alliance," said Giuseppe Berta, a professor at Milan's Bocconi university and an expert on Fiat.
Toyota was the world's biggest car maker last year with total sales of 8.418 million vehicles, just ahead of General Motors with 8.39 million.
"The transaction that we are announcing today represents a historic step for Fiat and Chrysler," Fiat chairman John Elkann said in a statement.
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