GM to pay Fiat $2 billion to resolve contract dispute, alter business alliance

By: AIDAN LEWIS - Associated Press Writer | Sunday, February 13, 2005 9:32 PM PST ∞

ROME (AP) -- General Motors Corp. agreed Sunday 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 two 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 so-called "put option" included in the 2000 agreement, which gave Fiat the right to demand GM buy the rest of the car unit.

At Fiat headquarters in Turin, Chairman Luca Cordero di Montezemolo praised the agreement as a "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," Montezemolo said.

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

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. Experts had estimated the value of any agreement to be as much as $2.6 billion. The impasse had also raised the prospect of GM mounting a legal challenge in a U.S. court.

Having to honor the option would be deeply damaging for GM. It 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 ventures in parts purchasing.

Fiat Auto, which accounts for 40 percent of the Fiat group's revenues, has $10.4 billion in debt. The company would welcome a cash payment as it aims to post a group net profit of more than $651 million by 2006.

Fiat claimed 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.