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Fiat shares plunge over merger worries as Chrysler reports 22 per cent 2Q profit rise

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DETROIT - Chrysler remained on the comeback trail with a 22 per cent second-quarter profit increase, but U.S. investors may not get a chance to buy shares of the company if a planned merger with Fiat gets scuttled.

Shareholders of Fiat, the majority owner of Chrysler, overwhelmingly voted last week to merge the two companies. But on Wednesday, Fiat shares fell 5.5 per cent in Italy due to concerns that the merger could be derailed by investor flight.

The merger would move the new company's tax headquarters to London and list its shares on the New York Stock Exchange. It could be completed by mid-October.

But one important hurdle remains. Italian law gives dissenting shareholders the right to cash out. If they require the company to buy back stock worth more than 500 million euros, the merger is off.

The Italian market drop reflects concerns that the payout, which has been set at 7.727 euros a share, or 16 per cent above Wednesday's close, will exceed Fiat's ceiling.

Sergio Marchionne, CEO of both companies, said Wednesday that fear of the merger being scuttled is overblown. If it doesn't happen, joint operations would continue, and Fiat would return with another proposal when conditions are more favourable, he said.

"I am absolutely unfazed by all of this," said Marchionne.

Marchionne's comments came after Chrysler reported a relatively strong performance for the quarter, with profits fueled by rising U.S. sales. The company made $619 million, compared with $507 million a year ago. Revenue rose 14 per cent to $20.5 billion.

But Marchionne also said he was not satisfied with the results, indicating that the next phase of Chrysler's revival would be to improve its profit margin — the per cent of revenue that it gets to keep.

Chrysler's margin lags its Detroit competitors and parts supply companies. Some parts makers are reporting double-digit margins, while Chrysler is around 4 per cent.

Marchionne said Chrysler will seek cost reductions from suppliers. But he cautioned against squeezing them too much because that can hurt quality and cause financial troubles.

The company also expects to make more money as it replaces older products, which it had to discount sharply to sell.

Marchionne also said Chrysler has passed up Jeep sales in the U.S. in order to send vehicles overseas to build the brand. But that will end because it's hurting margins, he said.

Chrysler reported that worldwide sales grew 12 per cent to 723,000 vehicles, with much of the increase in sales of the new Jeep Cherokee SUV and Ram pickup. The company raised its full-year forecast for worldwide shipments by 100,000 vehicles to 2.8 million cars and trucks.

The merger would create the new Fiat Chrysler Automobiles. It's been in the works for five years since Fiat took a 20 per cent share of Chrysler as it emerged from bankruptcy.

As of Tuesday, Fiat had not received any requests to buy back shares, but such requests can be postmarked as late as Aug. 20.

____

Barry reported from Milan, Italy.

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