GM Ratings Affirmed By Fitch IBCA On Fiat Alliance
14 March 2000
GM Ratings Affirmed By Fitch IBCA On Fiat Alliance
NEW YORK--March 13, 2000--Fitch IBCA affirms GM's `F1' commercial paper, `A' senior debt and `A-' preference share. General Motors Acceptance Corporation's (GMAC) `F1' commercial paper and `A' senior debt ratings are also affirmed. At year-end 1999, GM s total manufacturing debt was $9.4 billion, including Hughes Electronics Corp. debt not guaranteed by GM; GMAC had $122.3 billion of senior debt, including commercial paper.Affirmations follow GM's announcement that it has formed a strategic alliance with the Fiat Group. Under the terms of the agreement, GM will acquire a 20% stake in Fiat Auto in exchange for $2.4 billion in GM $1 2/3 common stock. Fiat's holdings of GM will amount to approximately 5.1% of GM's outstanding $1 2/3 common shares. The partners will create three joint ventures covering their operations in Europe and Latin America: purchasing, powertrains, and common back office functions for their sales finance operations. Although the alliance initially focuses on cost takeouts and scale economies, Fiat has the right to put its 80% equity interest in Fiat Auto to GM at fair market value, and GM will have the right of first offer if Fiat decides to sell its interest.
The alliance brings cost reductions opportunities to both companies, addressing their respective underlying profitability in the hyper-competitive Western European markets. Both GM and Fiat have equivalent unit volumes in Europe and Latin America, and the ventures could realize substantial unit cost improvements on a larger common production base. The partners estimate they could capture $1.2 billion in pretax synergies annually by the third year, growing to $2 billion annually by the fifth year when they can develop common components for new platforms. The initial savings are anticipated in purchasing, where each company has a cost base of approximately $13 billion in the combined European and Latin American operations.
GM Europe made $423 million of net income on sales of $26.2 billion in 1999; achieving close to half of the total anticipated savings would meaningfully advance its return on sales from the 1.9% earned in 1999. This contribution would also move GM's enterprise profitability towards its target of a 5% return on sales.
GM, headquartered in Detroit, Michigan, is the world's largest car and truck producer.