Thursday, February 3, 2005

Mediation talks fail between GM, Fiat

Italian firm may still force No. 1 automaker to buy its ailing car unit.

By Aidan Lewis / Associated Press

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ROME -- Fiat SpA said Wednesday it failed to settle with General Motors Corp. over an option to force the U.S. giant to buy its ailing auto unit, raising the prospect of a legal battle and sending Fiat's shares tumbling.

The announcement came at the end of a period of mediation that began Dec. 16, with Fiat stating that it can now force GM to buy Fiat SpA -- a contention GM disputes.

It was bad news for Fiat, analysts say, as it creates uncertainty and blocks the company from moving ahead with turnaround plans.

Fiat shares dropped as much as 6 percent to 5.82 euros ($7.58) in early trading Wednesday, following the news. Later they recovered slightly to close at 5.86 euros ($7.64), down 5.5 percent.

In a statement, the Turin-based automaker said that the option -- part of a 2000 agreement that says the Italian company has the right to sell its car business to GM -- could be exercised from Wednesday until July 24, 2010.

Asked Wednesday when it might exercise the clause, Fiat declined to comment.

Fiat rejected 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.

But GM spokesman Tony Cervone reiterated the company's position that Fiat committed "material breaches" of the five-year-old master agreement.

Under that agreement, Fiat can force the Detroit-based automaker to buy the 90 percent of Fiat Auto it does not already own.

The statement came after days of speculation that GM would pay Fiat a cash settlement to cancel the put option.

But after prolonged negotiations between the two companies, neither side appears to be willing to budge, and the prospect of GM mounting a legal challenge in a U.S. court now looms.

News that the mediation period had ended without an agreement fueled speculation that Fiat is pushing for more money, with estimates on a possible sum around 1.5 billion euros to 2 billion euros ($2 billion-$2.6 billion).

"This is a game of chicken," David Lee, a bond fund manager at Gestnord in Milan, said Wednesday. "But I think everybody knows that underneath Fiat holds the best cards."

Fiat Auto, which accounts for 40 percent of the Fiat group's revenues, has 8 billion euros ($10.42 billion) in debt.

It would welcome a cash payment as it aims to post a group net profit of more than 500 million euros ($651.35 million) by 2006.