Strong U.S. sales for Chrysler and growth in Brazil will help offset a weak European car market for Fiat SpA
Fiat will report second-quarter results on Tuesday, incorporating Chrysler for the first time after raising its stake in the company past the 50 percent mark last month.
Fiat had taken an initial 20 percent of Chrysler two years ago under a bailout deal with the U.S. government.
Fiat CEO Sergio Marchionne, who also runs Chrysler, is expected to announce a unified management structure of 25 top executives for both companies, paving the way for a merger while making a Chrysler initial public offering less likely.
In his mind, Marchionne already thinks of the two companies as a single entity, said a source close to the situation.
Marchionne, who has made Fiat one of Europe's top turnaround stories, wants to elevate the Italian carmaker to a global player through a revamped Chrysler. A merger would reduce costs and improve integration, helping to achieve a target of around 100 billion euros ($143.8 billion) in combined revenue by 2014.
With the business strategies of Fiat and Chrysler irrevocably linked, we believe a merger is a logical next step, said Goldman Sachs in a research note this week, reinstating Fiat as a conviction buy with a price target of 12.9 euros.
Second-quarter results consolidating Chrysler from May 24 are expected to show a trading profit of 485 million euros, according to an survey of analyst expectations distributed by Fiat.
Excluding Fiat's luxury brands Ferrari and Maserati, Fiat will contribute 175 million euros of that total for the three months to June, compared with 155 million euros for Chrysler in the month of June alone.
Fiat is known for its relatively low-cost small cars, where profit margins are narrower, while Chrysler earns more money per unit from its sedans and SUVs.
Chrysler will generate a lot more cashflow and growth than Fiat very soon, said Bruno Lapierre, an analyst with brokerage Cheuvreux, explaining why Marchionne would want to take over all of the U.S.-based group.
Chrysler's U.S. sales rose 21 percent in the first half of 2011, while Fiat's European sales fell 12.7 percent in the same period.
Fiat is doing much better in Brazil, where it is the leader of a market that hit record sales in the first half of 2011 and is a key target for auto makers struggling with stagnating European sales.
The decision to hold Tuesday's board meeting there highlights the growing importance of the area for Fiat.
Marchionne boosted Fiat's stake in Chrysler cheaply and more quickly than expected. It has 53.5 percent after buying the U.S. Treasury's and Canadian government's stakes. [ID:nN1E76K14Y]
By the end of this year its holding will have risen to 58.5 percent -- an increase linked to Chrysler developing a car that gets 40 miles per gallon of gasoline.
But he needs to decide what to do with the 41.5 percent of Chrysler that is owned by VEBA, the United Auto Workers' healthcare trust.
After initially planning an IPO that would allow VEBA to cash in on its stake, Marchionne now seems to be aiming to buy it -- although he says he is not in talks with VEBA yet.
If he goes for a full takeover of Chrysler, Marchionne will need to convince ratings agencies Moody's and Fitch -- which have already warned they may downgrade Fiat's debt -- that Fiat's finances are solid enough.
That has led to speculation Fiat may float Ferrari, although Ferrari's chairman said this week there was no plan to do so.
(Additional reporting by Gianni Montani in Turin; Editing by David Holmes)