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Chrysler returns the favor to Fiat

SAN FRANCISCO (MarketWatch) -- Fiat S.p.A. took a huge gamble when it agreed to help rescue Chrysler.

Skeptics gave it zero chance of succeeding. What good could possibly come from combining a broken car company on federally funded life support with an Italian car company that had abandoned the U.S. market three decades earlier?

But that was three years ago. Fiat's (FIATY) (F) crazy gamble has since paid off brilliantly -- and probably far better than it dared dream.

Chrysler on Tuesday reported a 20% jump in June U.S. car sales, its best June in five years. Read the latest on U.S. car sales.

There are plenty of reasons for that, including a massive overhaul of the company and its product line under the herculean efforts of Fiat Chief Executive Sergio Marchionne.

Earlier in the day, Fiat announced that it will exercise an option to add another 3% to its Chrysler stake, bringing its overall ownership in the once-bankrupt car company to 61.8%. According to the deal signed three years ago, Fiat lined up options to incrementally raise its stake in Chrysler to 75% by June 2016. The way things are going, it will likely do just that.

One reason Fiat coveted the Detroit company was because Chrysler's dealerships reopened the door to the U.S. market, and Fiat had big plans to bring the namesake brand back to North America. Last year. it started shipping the diminutive Fiat 500 to the United States, a car that screams cute and affordable to a generation untainted by Fiat's earlier flops.

Fiat sold 3,849 Fiat 500s in the United States in June, more than three times as many as a year ago, with each one chalked up to Chrysler's sales tally. This has given Fiat confidence that Americans might be ready for more. According to Marchionne, a U.S. relaunch of the Alfa Romeo is on his to-do list, perhaps as early as next year.

But the Italian invasion is a sidebar to the big story. What really matters to Marchionne and Fiat shareholders is how Chrysler, a broken relic of old Detroit, is now pumping profits back into Fiat. That money is very welcome given the economic crisis in Europe and the steep toll it's taken on Fiat's home turf, where car sales overall are in a five-year slump.

There's no way Marchionne could have anticipated just how dire the situation in Europe would become. But holding a majority stake in the fastest-growing American car company is huge insurance for Fiat's future, and returns the favor it extended to Chrysler in 2009.

Sometimes those big, crazy bets pay off, and twist the term "turnaround" in unexpected ways.