10th Round of Struggle Between GM and Fiat

ROME February 1, 2004; Aidan Lewis writing for the AP reported that with postponed deadlines and secret meetings, Fiat SpA and General Motors Corp. have kept everyone guessing about the Italian group's option to force the U.S. carmaker to buy its troubled auto division.

The moment of truth appeared near as a period of mediation was to expire Tuesday, with speculation focusing on how much the Detroit-based company might be willing to pay to avoid a legal battle with Fiat over the 90 percent of Fiat Auto it does not already own.

"I think the current negotiations are just on the amount of the cash payment," said Patrick Juchemich, senior auto analyst for the Sal. Oppenheim bank.

Fiat stock dropped slightly in early trading Tuesday, falling 1.4 percent to 6.26 euros ($8.16) on the Milan stock market. On Monday rumors of an imminent deal with GM had helped boost Fiat shares by 4.3 percent to 6.36 euros ($8.29).

Fiat said Tuesday it had no meetings scheduled to discuss the put option.

The date from which Fiat can exercise the option -- part of a 2000 agreement that says the Italian company has the right to sell its car business to GM -- had already been put off by a year in 2003.

When the new deadline was about to strike, the companies decided on mediation, with top executives holding secret talks. Last week the mediation period was extended, with analysts saying a cash settlement from GM was looking increasingly likely. The other scenario is that the case goes to court.

GM's board was scheduled to meet Tuesday as well. A GM spokesman had no comment on that meeting or the Fiat situation.

Gabriele Gambarova, a broker at Rasbank in Milan, put the figure GM would probably have to pay to buy its way out of the clause at about 1.7 billion euros ($2.2 billion), based on how much debt GM would avoid taking on if the put option were canceled.

But Fiat might be able to push that sum higher. "Anything below 1.8 billion euros to 2 billion euros ($2.3 billion to$2.6 billion) should be seen as not sufficient for Fiat, i.e. as a disappointment," Juchemich said.

Fiat has maintained that the put option is valid, rejecting claims by GM that the Italian company might have breached the agreement through a recapitalization of Fiat Auto Holding BV and the sale of a 51 percent stake in Fiat Auto's consumer finance division.

However, several factors were pointing toward a settlement rather than a legal battle.

GM is already struggling with its European Opel division, announcing plans last year to cut about 12,000 jobs in Europe in hopes of saving about $600 million (460 million euros) a year.

"The last thing they need is additional production capacity in Europe," Juchemich said. If GM were forced to take on Fiat Auto they would also risk having their credit rating downgraded.

"Above all there is this possibility of a downgrade that hangs over GM like a sword of Damocles," Gambarova said.

A long legal battle, which could cause confusion and uncertainty in the stock markets, would not bode well for Fiat either.

Gambarova noted protests by Fiat workers last week, who walked off the job twice, warning that the company's plans to make cars in Iran will trigger job losses in Italy.

With talk of GM closing down all Fiat's auto factories in Italy if forced to take them over, Gambarova raised the possibility of serious industrial unrest. "I think the 60,000 employees of Fiat Auto would have something to say," Gambarova said.

In contrast, Fiat would welcome a cash payment as it aims to turn its fortunes around and post a group net profit of more than 500 million euros ($654 million) by 2006, increasing that to above 1.4 billion euros ($1.8 billion) in 2007.

Much will depend on efforts to revive Fiat Auto SpA -- which accounts for about 40 percent of the group's revenues -- through new car models, and so far these efforts have met with limited success.

In October, Fiat CEO Sergio Marchionne said new models were not boosting revenues as much as hoped, highlighting a fiercely competitive European car market. He said he hopes for better results for the auto division from 2004's fourth-quarter results, expected on Feb. 28.

"Any cash injection would be highly appreciated to bring back the auto business" and provide funding for the development of new models, Juchemich said.