GM may invest $1.1 billion to avoid buying Fiat

Detroit January 30, 2003; Andrew Davis writing for Bloomberg reports that General Motors Corp., the world's biggest carmaker, may invest as much as 1 billion euros ($1.1 billion) in Fiat SpA's auto unit to escape an obligation to buy the unprofitable business starting next year, investors said.

General Motors may contribute as much as one-fifth of a $5 billion refinancing package that banks are considering for Fiat Auto SpA, investors said. Fiat would drop an option to force the U.S. company to buy the 80 percent of Fiat Auto it doesn't already own. General Motors spokeswoman Toni Simonetti called expectations of such an investment "highly speculative."

"I'm sure they're going to renegotiate the put option," said Philip Corsano, who manages 225 million euros at Uniprof SIM, which owns Fiat stock and bonds. "Fiat will be looking for direct investment from GM in return for letting go of the option."

Fiat Auto lost about 1.3 billion euros last year and the Italian carmaker's share of its home market fell to a record. Detroit-based General Motors is trying to cut losses in Europe, where its Adam Opel, Saab and Vauxhall units lost $129 million in the fourth quarter.

"Combining Fiat and GM operations is going to be a significant time commitment and dollar commitment and I think they have enough problems with their core business right now," said Brian Bruce, director of global investments for PanAgora Asset Management, which manages $13 billion, including General Motors shares.

General Motors Chief Executive Officer Rick Wagoner has said the company plans to continue its relationship with Fiat Auto "for the long term."

Alliance

Fiat shares fell 5 cents to 7.8 euros. General Motors declined 37 cents to $37.03 at 2:30 p.m. in New York Stock Exchange composite trading. The yield on Fiat's 5.75 percent five-year bond maturing in 2006 rose 15 basis points to 7.29 percent.

Fiat Chairman Paolo Fresco negotiated the option as part of an alliance that includes joint ventures to build engines and buy parts. General Motors Chairman Jack Smith sought the link with Fiat to help strengthen General Motors' position in Europe and compete with Volkswagen AG and PSA Peugeot Citroen in their home markets.

The alliance has coincided with a decline in demand for cars in Europe that has particularly hurt Fiat, sending its losses and debt soaring.

Fiat's market share in Italy slipped to a record 27.8 percent at the end of last year from 34.9 percent at the end of 2001. Fiat ended 2002 with net debt of about 3 billion euros even after selling more than 5 billion in assets to raise cash. Moody's Investors Service in December cut Fiat's credit rating to below investment grade.

Spinoff

Fresco is considering a plan backed by Fiat's creditor banks to spin off the auto unit into a separately traded company and seek new financing to pay off debt and fund new investment. Banca Intesa SpA Chief Executive Officer Corrado Passera, who helped design the spinoff plan, has said Fiat needs 5 billion euros in financing.

Fresco met with Wagoner in New York this month to seek support for the plan. Industry Minister Antonio Marzano said yesterday General Motors was negotiating with Fiat about investing more money. Fiat declined to comment.

"GM could save itself hundreds of millions of dollars of losses and investment by purchasing the put from Fiat," said Efraim Levy, an analyst at Standard & Poor's, who rates Fiat a "hold/market performer."

Agnellis

The possibility of Fiat selling the auto business will increase with the appointment of Umberto Agnelli to replace Fresco in May. Agnelli, whose grandfather founded the company more than a century ago, has said the car business may no longer be strategic to his family, which still owns 30 percent.

Fiat Auto has lost money in four of the past five years and contributed to Fiat shares shedding more than half their value last year. The slide in Fiat prompted General Motors to write down its stake in Fiat Auto to $220 million. General Motors bought the holding for $2.4 billion less than three years ago.

Buying out of the put option may be a bargain compared with taking over Fiat Auto, even at the Italian carmaker's current low price, analysts said.

"It is the cost of fixing Fiat, not purchasing it, that is the huge cash consumer in our view," said Scott Hill, a Sanford C. Bernstein analyst who rates General Motors an "outperform" and doesn't own any shares.

Fiat Auto burned through more than 1 billion euros in cash flow last year. Management failed to achieve a goal of breaking even in the fourth quarter, missing targets for raising sales and cutting costs. Losses were about 200 million euros in the period.

The Turin, Italy-based company's car sales fell in the first 11 months of last year in its home market and there is little sign demand is recovering. Car sales for all manufacturers in Italy, which still accounts for more than half of Fiat's European sales, are expected to fall as much as 15 percent in 2003, according to Anfia, a trade association.