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Fiat Eyes Possible Opel Deal

Is Fiat Chief Executive Sergio Marchionne overreaching? Even as he pushes for a deal to put Fiat (FIA.MI) in the driver's seat at No. 3 U.S. automaker Chrysler, Marchionne is talking with German officials about a possible deal for General Motors' (GM) troubled European unit. All this while Fiat faces a brutal drop in sales, posting a quarterly loss of $530 million on Apr. 23.

News of Marchionne's interest in GM's European Opel and Vauxhall brands emerged this week when German government officials and labor union spokesmen said Fiat had expressed interest in taking a stake in Opel, headquartered in the city of Rüsselsheim. Canadian auto supply group Magna International (MGA) also is interested, they said.

Chrysler Comes First

In a conference call with analysts on Apr. 23, Marchionne said he had "not had any direct conversations with Opel." But, he said, "If the opportunity were to arise, we would give it a hard look."

Marchionne said his "first and foremost objective" was to complete a deal with Chrysler before the Apr. 30 deadline imposed by the U.S. government. Such an arrangement is looking increasingly difficult, as Chrysler's lenders are digging in their heels for more generous terms. If the deadline passes without an agreement, Chrysler likely would be forced into bankruptcy. Under that scenario, Fiat still could pick up some big pieces of the company—but would likely have to pay more for them. Marchionne said on Apr. 23 that he far preferred getting "Chrysler in its totality."

All of Chrysler, plus a possible controlling stake in Opel? "Even if Marchionne is kind of a superman, he can't do all this at the same time," says Pierluigi Bellini, a Milan-based analyst with Global Insight (IHS), reflecting a widely held view among industry watchers.

Another scenario offered by an auto industry executive involved in mergers and acquisitions is that Marchionne may not really be interested in Opel and Vauxhall, but is posing the deal to pressure banks and labor unions to make concessions necessary to complete the Chrysler deal. "He may be signaling that he is ready to walk away from Chrysler, and that would really hurt the banks' leverage in the last week of negotiations," said the executive.

Bailout Financing

Yet with Opel and Chrysler, Fiat would gain the scale Marchionne has said it needs to weather a coming auto industry shakeout. Chrysler sells a little more than 2 million vehicles a year, and Opel sells 1.45 million. Along with the 2.2 million sold by Fiat last year, that would boost Fiat production to just over 5.5 million, the minimum Marchionne has said the company needs to remain competitive. Overnight, Fiat would leap from ninth place among the world's automakers to fifth, behind Toyota (TM), GM, Volkswagen (VOWG.DE), and Ford (F).

What's more, Marchionne might be able to pull off both deals at little or no cost to Fiat. If he concludes a deal with Chrysler, Fiat would get an injection of $6 billion in federal aid without putting up any cash of its own. (That's one reason Marchionne would rather do a deal with an intact Chrysler than wrangle with creditors over pieces of the company.) Likewise, the German government is considering more than $4 billion in aid to Opel.

And Fiat does have some money to put on the table: At the end of the first quarter it had $6.6 billion in cash, up from $5.1 billion at the end of 2008. Tying up with Opel could yield additional cost savings on a host of activities, from purchasing to product development.

Tie-Up Risks

But Opel would be almost as tricky a minefield as Chrysler. Like Fiat, it's saddled with excess production capacity: Opel has said it may need to close as many as three of its 10 factories across Europe, while Fiat could probably afford to shutter two of its nine European plants. Such downsizing is devilishly complicated and expensive in Europe—especially in Germany, where layoffs must be negotiated with workers. German labor union leaders are already speaking out against an Opel-Fiat tie-up, and if the company gets government aid, politicians would certainly weigh in as well. That may help explain why some other potential bidders, such as Japanese or Korean carmakers, don't appear to be interested in making a play for Opel.

Marchionne is clearly aware of those risks. He told analysts on Apr. 23 that there might be "other ways" to cut capacity besides plant closures. Although he didn't elaborate, some European companies have put employees on reduced workweeks or instituted furloughs. Yet even those measures could be costly and time-consuming to implement.

A Fiat-Opel tie-up also would pose marketing challenges, although analysts expect that each company would maintain its own brand lineup, including Fiat's Lancia and Alfa Romeo brands and GM's Vauxhall. The two companies compete directly in several market segments, with Opel's Astra model closely resembling the Fiat Bravo, while its Corsa subcompact competes with the Fiat Punto.

By contrast, Fiat and Chrysler have no such overlap. Chrysler mainly builds larger cars and SUVs, while Fiat specializes in small cars. Nor do they have geographic overlap: Chrysler sells almost entirely in North America, while Fiat sells mainly in Europe and Latin America.

Perhaps the greatest danger to Fiat is trying to rescue two troubled companies simultaneously, which could stretch Marchionne and his team to the breaking point. Indeed, one of his key accomplishments in turning around Fiat was streamlining its management by laying off hundreds of executives.

The risks are huge. But if Marchionne succeeds, he'll complete the transformation of Fiat from also-ran to global leader—and he'll go down in history as one of the auto industry's greatest visionaries and saviors.

Return to the Auto Bailout Special Report Table of Contents

With Jack Ewing in Frankfurt

Matlack is a Paris correspondent for Bloomberg Businessweek.

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