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Italy: Hapless Fiat wants to force GM hand

By
ERIC J. LYMAN, United Press International

ROME, Dec. 15 (UPI) -- Troubled Italian carmaker Fiat SpA and its U.S. partner General Motors Corp. have started a period of mediation that will decide the fate of Italy's largest industrial group.

The talks, held in an undisclosed location in Switzerland, formerly started on Wednesday -- the exact end of a one-year truce during which the two companies agreed not to take legal action against the other regarding a disputed option that could force GM to buy Fiat's auto unit outright.

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The mediation period will include dialogue between the chief executives of each company and is "designed to allow the parties to resolve their dispute before resorting to other means, including litigation," Fiat said in a statement.

The talks come as both companies face increasing pressure from Japanese, German, and French automakers. Both GM and Fiat Auto have failed to turn a profit in Europe in recent years, though GM remains profitable overall thanks to its robust North American unit.

At the crux of the controversy is the partnership agreement between the two companies signed in 2000. That deal, which was engineered by the late Gianni Agnelli, the grandson of Fiat's founder and then the company's president, gave GM a 20-percent stake in Fiat Auto in return for a cash investment and 5 percent of GM stock. But a clause in the contract also allowed for an option that could force GM to buy the part of the company it did not already own at a price to be determined later -- an option GM agreed to in order to prevent rivals DaimlerChrysler AG or Ford Motor Co. from buying Fiat.

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At the time, it seemed the option was unlikely to be exercised, with Agnelli at the company's helm. But he died in nearly two years ago, and was succeeded by his brother Umberto, who died in May. That left Fiat under the control of Chief Executive Sergio Marchionne and Chairman Luca Cordero di Montezemolo, who immediately started thinking of ways to help stem Fiat's losses, which at times has topped $3 million per day.

Meanwhile, GM is arguing that the price it is willing to pay for a bigger stake in Fiat Auto should be based on the current troubled state of the Italian company and not on what it paid back in 2000. Furthermore, some have argued that a capital increase Fiat carried out earlier this that reduced GM's stake in Fiat Auto to 10 percent may have rendered the 2000 agreement null and void.

There remains a possibility that if the price is right that GM could decide to invest more money in Fiat Auto and up its stake, though a full takeover seems unlikely. But the most probable option, according to Italian media, is a divorce that will allow GM to walk away from Fiat -- and a big alimony payment that will give the Italian company capital to limp ahead for another year or two.

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According to the Italian financial daily newspaper, GM has unofficially offered Fiat $200 million -- the amount it carries on its books as the value of its 10 percent stake in Fiat Auto -- though the newspaper reports that GM is open to upping that amount to as much as $500 million. But that's far short of the $3 billion figure Fiat is reportedly asking for. If a settlement is not reached, Fiat could force GM to buy the shares it does not own on the five-year anniversary of the original deal, or Jan. 24, 2005.

Whatever happens, experts say that the troubles for the company that was once Europe's largest automaker and the crown jewel of Italian industry will not be solved. Extra capital will help Fiat buy time, but the lack of a hot-selling vehicle in recent years has led to dwindling market share in all of its major markets and losses of $1.3 billion in 2003 and estimated losses of $1.1 billion in 2004.

"It's tough to see how simply adding cash to a money losing company is any kind of a solution," Rebecca Wright, auto industry analyst at World Markets Research Center, told United Press International. "And selling the company outright would not be popular in Italy, even if Fiat could force that move. The only way for Fiat to fix things is to completely revamp and focus on the niches where it is still competitive, and that kind of move would be much easier if GM is still on board, though it's hard to see what GM would get out of sticking with Fiat at this point."

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The best case scenario for both companies is probably that GM pays Fiat an undisclosed amount in order to cancel the buy-out option and Marchionne, a turn-around specialist, and Cordero di Montezemolo, the former head of Fiat's Ferrari unit, use the cash to pull off a miracle and turn the struggling company around. That would increase the value of GM's percent stake in the company and end the uncertainty about Fiat's future.

"Fiat does have some attractive models in the pipeline, but nobody is betting on a turnaround just yet," Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar, told UPI. "Events would really have to break Fiat's way (for that to happen) and it has been a long time since events have done that."

Officials from Fiat and GM declined to be interviewed for this story.

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