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GM to pay Fiat $2 billion to resolve dispute

/ Source: The Associated Press

Fiat SpA faced the challenge of managing its troubled auto division on its own Monday — but it will have the help of $2 billion from General Motors Corp. to be paid in a deal that releases the U.S. auto giant from an obligation of buying Fiat’s car unit.

In an agreement announced Sunday, the two companies dissolved a 2000 partnership pact including an option that could have forced GM to buy the 90 percent of Fiat Auto SpA that it did not already own.

Fiat shares opened up 7.6 percent at 6.38 euros ($8.20) on the Milan stock exchange Monday, a sign that investors believe the cash infusion will boost the carmaker’s chances of putting its house in order.

At Fiat headquarters in Turin, Chairman Luca Cordero di Montezemolo praised the agreement Sunday as a “a positive and excellent sign for the future.”

Montezemolo told RAI state radio Monday that the deal was important “especially for avoiding a long legal battle that would have greatly disconcerted not only all of Fiat’s workers and collaborators, but also the car markets and our customers.”

Montezemolo said the money received from GM will be used “first of all to bring (Fiat’s) financial situation within acceptable limits, but then to look ahead.”

But Carlo Scarpa, professor of industrial economics at Brescia’s university, raised doubts about how much the cash could help.

“Fiat’s problems have two origins, financial and industrial,” Scarpa told RAI state radio. “It’s excellent news from a financial point of view. But from the industrial point of view the problems that we thought we solved five years ago are now once again exactly the same.”

The deal does not entail a complete separation. Two-thirds of the payment covers the legal dispute, while a third covers GM’s purchase of assets from Fiat, GM’s Chief Financial Officer John Devine said.

GM will return its 10 percent stake in Fiat’s auto division and the two carmakers will dismantle their joint venture that manufactures engines and transmissions. However, the companies will continue to cooperate on engine production, development of vehicle programs and in other fields.

Fiat said 1 billion euros ($1.29 billion) will be paid immediately and the rest was expected to be paid over 90 days.

“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.

Montezemolo said Fiat’s threats to force GM to buy out the auto division had been real — and imminent.

“If we had not reached the agreement we would have had a long legal battle, because this week we would have started the processes to exercise the put option,” Montezemolo said.

Wagoner said the deal lets GM “avoid a likely protracted and acrimonious legal solution to the case.” He said it was “a good way to resolve the matter.”

“We felt we had a very strong legal case,” Wagoner said. But “one never knows for sure when one enters the legal arena.”

Fiat CEO Sergio Marchionne said Fiat sees no change to its 2005 financial targets after receiving the payment. Fiat is forecasting a small operating loss at its auto unit in 2005, as well as a group loss.

Having to honor the put option would have been deeply damaging for GM, which announced plans last year to cut about 12,000 jobs in Europe in a bid to save about $600 million a year. For Italians, Fiat is a national icon and was for decades the source of enormous pride, so the prospect of selling it off to foreigners would have been a severe psychological blow.

A mediation period that began Dec. 16 ended this month without an agreement. Fiat claimed the option was valid and rejected GM’s claim 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. The impasse had raised the prospect of GM mounting a legal challenge.

Fiat Auto, which accounts for 40 percent of the Fiat group’s revenues, has about $10.4 billion in debt. The company aims to post a group net profit of more than 500 million euros ($651 million) by 2006. As part of its efforts to return to profitability, Fiat shuffled management at its auto unit last year and is launching new models.