Fiat: The Facts

[mgescuro]

Go to http://yahoo.reuters.com/financeQuot...1656253_newsml
for the full article.

FACTBOX-Fiat's option to sell its car arm to GM
Tue Feb 1, 2005 05:01 AM ET

MILAN, Feb 1 (Reuters) - Fiat on Tuesday entered the last day of a mediation period to find an out-of-court settlement to their dispute over Fiat's option to sell its car arm to GM. Fiat has said it may exercise the option from Wednesday, raising the prospect of a long legal battle.

Here are some key facts about the put option:

WHAT IS THE PUT OPTION?

-- The put is part of a deal signed in 2000 when GM bought 20 percent of Fiat Auto in exchange for 6 percent of GM's shares, then worth $2.4 billion. Fiat has since sold the GM shares and GM has written down its stake in Fiat Auto to zero.

-- The terms of the deal said Fiat could sell its stake in Fiat Auto to GM between Jan. 24, 2004 and July 24, 2009. In 2003, Fiat and GM shifted the exercise period back by one year. On Jan. 24, Fiat said it would wait at least until Feb. 2, 2005 to exercise the put.

-- The 2000 Master Agreement established joint ventures between Fiat and GM in purchasing and powertrain development.

-- GM won the Fiat Auto deal at the expense of rival DaimlerChrysler which wanted to buy 100 percent of the Italian carmaker. Fiat patriarch Gianni Agnelli, who died in 2003, did not want to cede control.

WHAT IS THE PROBLEM?

-- GM argues that Fiat breached the terms of the Master Agreement by changing the parameters of Fiat Auto when it sold 51 percent of its financing arm Fidis and pumped 3 billion euros ($3.9 billion) into Fiat Auto. GM refused to take part in the recapitalisation, and its stake in Fiat Auto was diluted to 10 percent.

-- Fiat says the recapitalisation was required by law and that a call option to buy back Fidis means that the parameters have not changed and the put is valid.

-- Fiat Chief Executive Sergio Marchionne says the possibility of selling Fiat Auto to GM was the reason Fiat agreed to restrictions on forging other partnerships. He wants to strike new deals to help Fiat Auto out of crisis.

-- GM is loath to take on another unprofitable carmaker when it is still struggling to drag its European arm into the black and it battles high U.S. healthcare and pension costs.

-- Fiat is Italy's largest private employer. The government and unions fear GM would shut factories and cut jobs. It would be a psychological blow for Italy to lose the icon of its post-war industrial boom and economic revival.

WHAT IS THE MEDIATION PROCESS?

-- Under the Master Agreement, any dispute must be presented to the CEOs of GM and Fiat, who must meet within 20 business days to defuse the problem. They then have 10 working days to settle the spat, after which they can take the issue to court.

-- A mediation phase agreed by both companies to seek an out-of-court settlement is due to end on Feb. 1.

-- The Master Agreement is governed by New York State laws. Any case would be heard by the U.S. District Court in Manhattan.



HOW WOULD THE PUT WORK?

-- Fiat informs GM it is exercising the put. The groups have 10 days to agree the value of Fiat Auto between themselves.

-- If they cannot agree, four investment banks -- two appointed banks and two independent banks -- have 20 days to value the company.

-- If the appointed banks' estimates are within 15 percent of each other, the put price is set by averaging them out.

-- If they are not close enough, the one furthest from the average of the two independent estimates is discarded. The remaining three are averaged out to set the price.

-- Once the price is set, Fiat can decide not to exercise the put. It has two chances to use the option.

-- If GM pays for Fiat Auto in shares, it pays the whole sum at closing. If GM pays in cash, it pays 25 percent up front, with the rest covered by a freely transferable promissory note with interest. It can also pay with a mixture of cash and stock.

-- Analysts have said Fiat Auto has no equity value so GM would not have to pay cash or stock but simply assume its debt of about 8.5 billion euros.

-- GM has said that if it paid cash, it could pay in four instalments over three years and would finance the deal from operating cash flow or financing activities.

-- GM would have to consolidate Fiat Auto's financial statements unless it was liquidated or declared insolvent.



WHAT WOULD HAPPEN THEN?

-- An appendix to the Master Agreement shows Fiat would still have a say in Fiat Auto and would continue to benefit from its business after any sale.

-- For five years GM would have to consult Fiat's CEO over the appointment of Fiat Auto's CEO. Fiat Auto executives would sit on GM's global, European and Latin American strategy boards.

-- GM would have to keep Fiat Auto's headquarters, brand management centres and a major research and development centre in Turin for five years after buying the company.

-- Fiat Auto would have a say in its own restructuring for two years after the sale.

-- Fiat would decide the terms of leasing its name to Fiat Auto and whether the licence would bear royalties or not.

-- Fiat Auto would have to continue buying the same types and quantities of components and equipment from Fiat-owned Magnetti Marelli, Teksid and Comau for five years after the put is closed. GM will also have to consider using the Fiat firms for its own business.

[mgescuro]

After reading this article, I hope GM just pays Fiat off. The whole "What Would Happen Then" section really left a bad taste in my mouth.

This is exactly what has kept the Italian economy in reverse for the past 25 years!!! A total lack of common sense and using more expensive domestic parts and keeping redundant sections of the company.

Fiat deserves to die. It should have died 5 years ago. Even the cash infusion of GM's $2B will not be enough to save it.

[EGG]

Sounds like you should have invaded Italy instead of Iraq, is there a good way out of this for GM?

[citric acid]

IIRC, the reason FIAT Auto is debt laden is that their main business comes from small cars with little profit, and they don't have enough bigger models. So, the clear option is that, if the put option is used, to make a FIAT, Alfa, and Lancia Trailblazer

[fan]

How come GM agreed to these terms? So, they have to save Magnetti Marelli too or arrange a joint-venture between Delphi and Magnetti Mareli? What if the Agnelli family doesn't want to sell Magneti and just live along with Fiat even if it doesn' t post profits?
Also GM must buy the same amount of parts for the next five years...That means keeping the production levels for another 5 years. What if they can't sell anything at the worst...They must keep building cars. ..That's insane
I thought that they can start reorganizing from the first day. This would have been a totaly different matter.
GM did well with Daewoo, wich had more than 15 bn in dept (as I remember).
But seems like Daewoo didn't had this kind of 5 years warranties.(GM didn't bought the production facillities of Daewoo in Europe, slashing production capacity).
Looks like GM needs good management in the next years with these requirements.

Though I believe there will be a happy end to the Fiat and health - care issues even if Fiat is bought.
The cash reserve is there, GM still posts profits and the new products are warmly welcomed to the market.
GM's profits are low only compared to Toyota. If GM won't be able to compete, nobody else will be(Ford, DCX, VW, PSA...). I don't think everybody will sit and watch their "domestics" go bankrupt with Toyota having 50% market share. Also the unions will cooperate if it gets too tough, in order to release the pressure a little bit( I would cooperate if I were the unions )