- The Washington Times - Sunday, February 13, 2005

ROME (AP) — General Motors Corp. agreed yesterday to pay Fiat SpA $2 billion to resolve a contract dispute, allowing the U.S. carmaker to divest its stake in Fiat’s troubled auto unit and revise the companies’ business relationship.

The agreement dissolves a five-year partnership between Fiat and GM, but does not entail a complete separation, they said.

Detroit-based GM will return its 10 percent stake in Fiat’s auto division, and the carmakers will dismantle their joint venture that manufactures engines and transmissions. However, the companies will continue to cooperate on engine production, development of vehicle programs and other fields.

The dispute centered on a “put option” included in the 2000 agreement, which gave Fiat the right to demand that GM buy the rest of the car unit.

At Fiat headquarters in Turin, Italy, Chairman Luca Cordero di Montezemolo said the agreement was “a positive and excellent sign for the future.”

He said Fiat’s threats to force GM to buy out the auto division had been real — and imminent.

“If we had not reached the agreement, we would have had a long legal battle, because this week we would have started the processes to exercise the put option,” Mr. Montezemolo said.

In a conference call yesterday, GM Chairman and Chief Executive Officer Rick Wagoner called the deal “a fair and equitable agreement” that “gives each of us more freedom to act in today’s competitive environment.”

He also said the deal lets GM “avoid a likely protracted and acrimonious legal solution to the case.”

“We felt we had a very strong legal case,” Mr. Wagoner said, but “one never knows for sure when one enters the legal arena.”

GM Chief Financial Officer John Devine said in the conference call that two-thirds of the settlement would be to cancel the put option and that one-third covers GM’s purchase of assets.

The company plans to take an $840 million charge, or $1.49 per share, to cover the payments.

Fiat CEO Sergio Marchionne detailed the proposal — negotiated with GM officials in Detroit — at a Fiat board meeting earlier yesterday.

He said Fiat sees no change to its financial targets for the year after receiving the payment. Fiat is forecasting a small operating loss at its auto unit this year, as well as a group loss.

Fiat said $1.29 billion will be paid immediately and the rest is expected to be paid over 90 days.

Having to honor the option would have been deeply damaging for GM, which announced plans last year to cut about 12,000 jobs in Europe in a bid to save about $600 million a year. For Italians, Fiat is a national icon and was for decades the source of enormous pride, so the prospect of selling it off to foreigners would have been a severe psychological blow.

Mr. Montezemolo said he consulted Prime Minister Silvio Berlusconi, who he said was “very satisfied” with the deal.

Analysts were casting the clash as a poker game in which the struggling Fiat was using the threat of the option as pressure to extract a hefty cash settlement from GM. Analysts had estimated the value of any agreement to be as much as $2.6 billion. The impasse also had raised the prospect of GM mounting a legal challenge in a U.S. court.

GM is struggling with its European Opel division, and announced plans last year to cut about 12,000 jobs in Europe in a bid to save about $600 million annually.

A period of mediation that began Dec. 16 ended this month without an agreement, prompting speculation that Fiat was pushing for more money than GM was willing to pay. The companies also have a joint venture in parts purchasing.

Fiat said the option was valid and rejected GM’s contention that the Italian company might have breached the agreement through a recapitalization of Fiat Auto Holding BV and the sale of a 51 percent stake in Fiat Auto’s consumer finance division.

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