So Much For Denial: Financial Times Reports - Fiat Sees Possible Auto Sale to GM

Jane Barrett reporting for Reuters said that Fiat Chairman Paolo Fresco on Tuesday gave the strongest signal yet that the once dominant carmaker is thinking seriously about selling its loss-making auto unit to U.S. partner General Motors Corp .

In an interview with the Financial Times, Fresco said Fiat was "fully committed" to turning Fiat Auto around by 2004, when an option to sell its 80 percent stake to GM starts, but added a sale might be inevitable.

"Unless we can straighten out Fiat Auto by 2004, we should not continue to do it," Fresco was quoted as saying.

"We have a number of options but the highest probability is that it will become a stronger member of this GM federation," added Fresco, also Fiat's co-chief executive.

Fiat Auto made an operating loss for three of the last four years and dragged the group to a 529 million euro ($520.2 million) net loss in the first quarter of 2002, forcing Fiat into a financial rescue package with banks who, sources say, favour the carmaker's sale.

GM, which also owns the Opel, Vauxhall and Saab brands in Europe, bought 20 percent of Fiat Auto in 2000 for $2.4 billion in stock. Fiat has a put option to sell the rest "at fair market value" from 2004-2009.

Fresco said Fiat Auto, long defended as Fiat's core business by Honorary Chairman Gianni Agnelli, could develop a deeper relationship with GM or have a switch of ownership.

"Although there was internal resistance to the GM put as a method of concluding the company restructuring, that seems to have gone," said John Lawson, a car sector analyst with Schroder Salomon Smith Barney.

"The GM deal is now seen as a reasonable course of action if Fiat fails to turn Fiat Auto around," he added.

"The banks are Fiat's lifeline and they are going to keep up the pressure for a massive turnaround (at Fiat Auto), which I don't think likely, or a sale. Even Agnelli has to bow to banks," said another analyst, who asked not to be named.

RESTRUCTURING ROUT

In the interview, Fresco also said a spate of stake sales and refinancing deals had boosted Fiat's liquidity by six billion euros. The refinancing deals include the banks' rescue package in the shape of a 3.0 billion euro loan that is convertible into equity if Fiat can't repay it.

As Fiat has thrashed through a restructuring plan, including a change of top management, its flagging share price has narrowed its market underperformance to 28 percent since the start of the year from nearly 40 percent at the end of May.

On Tuesday, Fiat was trading down 1.1 percent at 12.76 euros against a 2.1 percent fall in European auto stocks (Zurich:^SXAP - News).

Part of the restructuring was last week's sale of a 34 percent stake in sports car unit Ferrari to a Mediobanca-led (Milan:MDBI.MI - News) consortium, saving Fiat from having to list the stake on current shaky markets.

Last month, Fiat also cut its stake in energy holding Italenergia to raise cash and cut debt, but a series of options kept the door open for Fiat to buy back control in 2005 if it has the cash.

"The impressive thing is that Fiat is getting a long way towards where it wanted to go without touching its original list of assets up for disposal," said SSSB's Lawson. "It's showing that Fiat still has arrows in its quiver."

In May, Fiat earmarked 11 mostly industrial assets to sell to help cut net debt to three billion euros by the end of the year from 6.6 billion at the end of March.

So far, none of them has been sold. Fresco said Fiat would proceed with the disposals, valued at 2.8 billion euros, but not at "fire-sale prices."

The paper also quoted Fresco as saying that in the longer term, Fiat would consider selling stakes in core units including its Iveco truck arm and Fiat Avio aerospace division.