Speculation is rife over how General Motors and Fiat will resolve their long-standing ‘put option’ dispute after a number of postponed deadlines and secret meetings has kept industry observers guessing about the Italian group’s option to force the US car maker to buy its troubled car division.
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The Associated Press (AP) said that the moment of truth appeared near as a period of mediation was to expire on Tuesday, with speculation focusing on how much the Detroit-based company might be willing to pay to avoid a legal battle with Fiat over the 90% of Fiat Auto it does not already own.
Neither GM nor Fiat would comment on Tuesday, AP said.
“I think the current negotiations are just on the amount of the cash payment,” Patrick Juchemich, senior auto analyst for the Sal. Oppenheim bank, told the news agency.
AP noted that Fiat stock dropped slightly in early trading on Tuesday, falling 1.4% to €6.26 ($US8.16) on the Milan stock market – it added that, on Monday, rumours of an imminent deal with GM had helped boost Fiat shares by 4.3% to €6.36 ($8.29).
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By GlobalDataFiat reportedly said on Tuesday it had no meetings scheduled to discuss the put option.
The Associated Press noted that the date from which Fiat can exercise the option – part of a 2000 agreement that says the Italian company has the right to sell its car business to GM – had already been put off by a year in 2003.
When the new deadline was about to strike, the companies decided on mediation, with top executives holding secret talks, AP said, adding that, last week, the mediation period was extended, with analysts reportedly saying a cash settlement from GM was looking increasingly likely.
GM’s board was scheduled to meet on Tuesday as well, the Associated Press noted.
Gabriele Gambarova, a broker at Rasbank in Milan, told AP he thought the figure GM would probably have to pay to buy its way out of the clause was about €1.7 billion ($2.2 billion), based on how much debt GM would avoid taking on if the put option were cancelled.
But Fiat might be able to push that sum higher, AP added. “Anything below €1.8 billion-€2 billion ($2.3 billion-$2.6 billion) should be seen as not sufficient for Fiat, i.e. as a disappointment,” Juchemich reportedly said.
The report said that Fiat has maintained that the put option is valid, rejecting claims by GM that the Italian company might have breached the agreement through a recapitalisation of Fiat Auto Holding BV and the sale of a 51% stake in Fiat Auto’s consumer finance division.
But the Associated Press said several factors were pointing toward a settlement rather than a legal battle.
It noted that GM is already struggling with its European Opel division, announcing plans last year to cut about 12,000 jobs in Europe in hopes of saving about $600 million (€460 million) a year.
“The last thing they need is additional production capacity in Europe,” Juchemich told AP. If GM were forced to take on Fiat Auto they would also risk having the returns on their bonds downgraded.
“Above all there is this possibility of a downgrade that hangs over GM like a sword of Damocles,” Gambarova told the news agency, which noted that a long legal battle, which could cause confusion and uncertainty in the stock markets, would not bode well for Fiat either.
Gambarova reportedly noted protests by Fiat workers last week, who walked off the job twice, warning that the company’s plans to make cars in Iran will trigger job losses in Italy.
With talk of GM closing down all Fiat’s auto factories in Italy if forced to take them over, Gambarova reportedly raised the possibility of serious industrial unrest. “I think the 60,000 employees of Fiat Auto would have something to say,” he told the Associated Press.
In contrast, AP said, Fiat would welcome a cash payment as it aims to turn its fortunes around and post a group net profit of more than €500 million ($654 million) by 2006, increasing that to above €1.4 billion ($1.8 billion) in 2007.
Much will depend on efforts to revive Fiat Auto SpA – which accounts for about 40 percent of the group’s revenues – through new car models, and so far these efforts have met with limited success, the news agency added.
“Any cash injection would be highly appreciated to bring back the auto business” and provide funding for the development of new models, Juchemich told the Associated Press.
However, according to the report, it’s also possible that an announcement could be put off once again. AP said Italian financial daily Il Sole-24 Ore – published by the Confindustria lobby of industrialists, whose president is also the Fiat chairman – reported on Tuesday that signals from GM indicated there was still some distance between the parties.
Yet such a decision would still point toward a settlement, the Associated Press said. “This message would be interpreted as a sign of conciliation to talk and find a solution that does not involve litigation,” Gambarova told the news agency.
