Can Berlusconi Tow Fiat to Safety?


Italian Prime Minister Silvio Berlusconi is putting the best face on the disastrous situation at the country's largest manufacturer, Fiat Auto, which is 20% owned by General Motors (GM). In a Dec. 30 speech, Berlusconi said he hopes an Italian entrepreneur will step forward to help bail out Fiat Auto, which is plagued by declining market share and is expected to report a huge loss for 2002.

However, Berlusconi also hinted that government intervention may not be far off. He urged the controlling shareholder family of Gianni Agnelli, the 82-year-old grandson of Fiat founder Giovanni Agnelli, to help pump more capital into the beleaguered carmaker. If need be, the media mogul-turned-politician assured Italians that the state would step in -- within the bounds of European Union competition rules -- to help steer Fiat back to health.

RUNNING ON EMPTY? Unquestionably, something has to change at Fiat, and fast. With a weak model lineup and fierce competition from more profitable rivals invading its key home market, Fiat has little prospect of boosting sales in 2003. Its market share in Italy fell to 28.2% in November from 38.6% a year ago. Analysts are forecasting operating losses at Fiat Auto of $600 million in the coming year and negative cash flow of some $2 billion for Fiat Group (FIA), which includes insurance, energy, truck, and farm-equipment businesses.

The gloomy outlook prompted Moody's to cut Fiat's debt rating to junk status on Dec. 24. Standard & Poor's (like BusinessWeek Online, a unit of The McGraw-Hill Companies) will issue its verdict in January. With Fiat's stock trading at a near 20-year low, the company has a market capitalization of just $3.5 billion. The shares have lost 80% of their value since March, 2000, when GM bought its stake.

Fiat's rapid decline in the past six months has cast doubt over the viability of a put option that would allow Fiat starting in January, 2004, to sell the remaining 80% of Fiat Auto to GM for a "fair market price." Many analysts believe the market value of Fiat Auto is already negative and that the political fallout in Italy of a fire sale to GM would be disastrous.

REVERSE GEAR. GM is increasingly eager to avoid the merger. It may have an out because any change in Fiat's ownership structure would void the June, 2000, agreement. It appears likely that the Agnellis, strapped for cash and reluctant to sell assets to save Fiat, will cede control and change the group's ownership structure in the coming months. "Having fudged its debt-reduction target for yearend 2002, Fiat faces 2003 with a near-vertical hill to climb," says Stephen Cheetham, auto analyst for Sanford Bernstein.

To replenish the group's capital base, the Agnelli clan would have to sell prized assets such as the insurer Toro and avionics unit FiatAvio. To meet debt-reduction promises to its creditor banks for 2002, Fiat has already sold a 34% share of its Ferrari holding, 100% of its profitable financing arm Fidis, and a 5.6% stake in GM.

But to jump-start a lasting revival, Fiat's future owners will have to invest billions more in research and development for new models to compete with the hot-selling competition from Volkswagen (VLKAY), Renault (RNSDY), Peugeot (PEUGY), and Toyota (TM). With Gianni Agnelli ill with prostate cancer, the family's will to struggle on and bet heavily in autos is rapidly dissipating.

SAINT ROBERTO? Can Italy Inc. come to the rescue? Many Italians believe Berlusconi hopes to recruit Roberto Colaninno as Fiat's savior. The former chief executive of Telecom Italia (TI) was ousted 18 months ago for racking up debilitating debt through acquisitions. But Colaninno is also cash-rich, thanks to a golden parachute, and many speculate that he was behind the purchase of a 2.1% packet of Fiat shares that changed hands on Dec. 30.

Regardless, the job of turning around Fiat probably exceeds the talents and deep pockets of Colaninno and his coterie of wealthy Northern Italian investors. Given years of underinvestment and poor management, a real turarnound will take at least three or four years and considerable auto-industry savvy, auto experts say.

To stem losses in the meantime, Fiat will have to shrink capacity by as much as half -- something that would be a major political challenge, to say the least. Fiat's autumn restructuring plan, which temporarily laid off 8,100 employees and closed two plants, resulted in furious worker protests. Ports, rails, and highways were blocked for weeks. "Even the cuts leave Fiat with 30% overcapacity," says one auto-industry analyst. Given the gravity of Fiat's problems, state intervention is looking more and more likely. By Gail Edmondson in Rome


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