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Why Fiat's Slide Is GM's Problem


On May 31, Fiat's top brass flew to Rome for a frantic, three-day huddle with the company's three largest lenders. Moody's Investors Service and Standard & Poor's were weighing a downgrade to junk status of the top Italian industrial group, which has $33 billion in gross debt. That would have revealed the true extent of Fiat's (FIA) weakness and disarray and sent the European corporate debt markets into chaos.

Fiat Chairman Paolo Fresco returned to headquarters in Turin with a $2.8 billion debt restructuring and asset-sale plan. The deal with Banca di Roma, IntesaBci, and San Paolo IMI--to which Fiat owes $13 billion--may yet stave off the dreaded downgrade.

But Fiat's financial problems are hardly over. Many of them come from Fiat Auto--and those may soon belong to General Motors Corp. (GM) GM bought 20% of Fiat Auto in 2000 for $2.4 billion and granted Fiat a put option--the right to sell GM the rest--as of January, 2004. Now GM faces a big dilemma. It's short of cash, so a big acquisition would be a serious burden. But if GM waits until 2004, it could be stuck with an even bigger lemon.

Fiat Auto has been careening downhill since GM bought its stake. It lost $1.3 billion in 2001 and is expected to lose another $1 billion this year. Management forecasts breaking even in 2003 and making a slight profit in 2004. But analysts say it'll take three years and $3 billion to $5 billion to reverse its decline.

Will Fiat sell now or later? Much depends on how much GM would pay. Investment bankers say Fiat Auto would be worth nothing if a buyer had to take on its about $1.7 billion of debt. The put terms let Fiat and GM each name bankers to negotiate a "fair market price." But time isn't on Fiat's side. "Things will only get worse for Fiat," says a board member.

Fresco could sell healthy group assets--such as insurance, aviation, or energy businesses--and invest the cash in the car unit. If management can stem losses by 2004, Fiat might be able to command as much as $3 billion from GM, bankers say. But to get that much, Fiat needs to prove there are buyers for its cars instead of an ever-shrinking market. Trouble is, Fiat Auto CEO Giancarlo Boschetti is deferring investments in new models to stop the bleeding.

Fiat executives can't dither indefinitely. Under the June 2 accord with its banks, Fiat has to slash net debt to $2.8 billion by yearend, from $6 billion today. If Fresco fails, the banks can force an asset sale. The banks can also trigger a rights issue that would convert the just-restructured $2.8 billion debt into stock, giving them about 25% of Fiat's shares. "There is discipline," says one Italian banker involved, adding that Fiat has roughly $10 billion in salable assets.

The restructuring forces tough decisions on controlling shareholder Gianni Agnelli, 82, whose family owns 30.5% of Fiat. He has long opposed exiting autos, a 103-year-old family business. But faced with "losing everything," as one banker put it, the ailing patriarch recently gave the green light to Fresco to sound out GM. "If GM offers a good price, the deal is done," says one Milan investment banker. The risk of Fiat's fortunes sliding further might just get GM to the table. By Gail Edmondson in Rome


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