Fiat, GM settle on $2 billion divorce

ROME, Feb. 14 (UPI) -- General Motors Corp. agreed to pay Fiat SpA more than $2 billion on Sunday to allow the Detroit-based giant to dissolve the disputed option that could have forced it to take over its troubled Italian partner. But the agreement preserved the profitable cooperation agreements the companies established nearly five years ago.

The unexpected announcement came ten days after talks aimed at resolving the dispute between the two companies ended in a stalemate. At that point, the problem seemed destined to be sorted out in court. But the companies said afterwards that they kept lines of communication open behind the scenes in hopes of avoiding a prolonged battle that could have hurt both sides.

With the deal, GM will pay Fiat 1.55 billion euro (around $2.03 billion) in order to cancel the controversial put option that could have allowed Fiat to force GM to buy the 90 percent of Fiat's money-losing automobile unit that it does not already own. Under the terms of the deal, GM will return its 10 percent stake in Fiat Auto, and the worldwide joint purchasing agreement the companies established in 2000 will be discontinued.

But the companies each took a 50 percent stake in a new joint venture that will produce power trains used in both Fiat and GM cars produced in Poland, and they said they would continue to cooperate in the development of some vehicle programs, including the joint development program for diesel engines that has proved lucrative for both firms.

As a result of the agreement, GM will take a $840 million charge against its earnings this year, while Fiat will use the 1.55 billion euro to trim its estimated 8 billion euro ($10.5 billion) in debt.

Both companies said they were pleased with the outcome.

"We believe that we have reached a fair and equitable agreement that enables both companies to maintain a high level of synergy savings, but in a more focused approach that gives each of us more freedom to act in today's competitive environment," GM Chairman and Chief Executive Rick Wagoner said in a statement published on the company's web site.

A spokesman for Fiat agreed, telling United Press International on Monday that the agreement reached "preserved what was best about the companies' history together ... while adding cash to Fiat's accounts." Similarly, Fiat Chairman Luca Cordero di Montezemolo issued a statement calling the deal "a positive and excellent sign for the future."

Italian media treated the agreement as a big victory for Fiat, which would have probably suffered the most if the negotiations between the companies dragged on for months or years.

But it is also clear that the deal will not solve Fiat's problems. The company is suffering from dwindling market share in almost all of its major markets; a lack of popular models in showrooms, growing competition from Asian, French and German rivals; factories that run far under capacity; and a growing mountain of debt.

"The cash is nice, but the problems Fiat Auto had before the talks with General Motors began still exist," Reynaldo Cinzano, who publishes an automobile sector newsletter from Turin, told UPI. "The money from GM will buy some time, but for Fiat Auto to become healthy, many more things will have to happen such as the streamlining of Fiat's divisions, the development of new models, and probably another round or two of layoffs."

In his statement, Cordero di Montezemolo reiterated the company's plans to reduce costs and trim debt this year and to return to profitability starting in 2006. But analysts are not so sure.

"So far, nothing has indicated that the company is headed in the right direction, and at the rate that Fiat is burning through cash this money will not last long," Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar told UPI.

The partnership between the two companies started in 2000, when Fiat received a 5.1 percent stake in GM in return for a 20 percent stake in Fiat Auto (that stake was cut in half after Fiat issued new shares to raise cash in 2002).

The terms of the deal also included a clause that would require GM to buy the part of Fiat it did not own between 2005 and 2010, a term GM insisted on to make Fiat a less attractive target for Germany's Daimler-Chrysler or other rivals. As 2005 drew closer, GM said the so-called put option was not valid because of Fiat's 2002 share placement. Fiat, meanwhile, threatened to call GM's bluff.

When the talks stalled earlier this month, GM was said to be offering around 1 billion euro ($1.31 billion) to dissolve the put option, which Fiat was reported to demand 2.7 billion euro ($3.5 billion).

If it had been forced to honor the put option, GM would have suffered greatly: it would have forced the company to take on Fiat's massive debt and expand its operations and staff at a time when it plans to slash around 12,000 jobs in Europe as part of a cost-saving strategy.