Crunch Time for Fiat and GM Deal

Fiat and General Motors have given no hint of a last-minute deal in their long dispute but investors have stuck to their bets that GM will pay Fiat to drop an option to sell its car unit to its U.S. partner.

The two groups have until midnight on Tuesday to reach a deal over the contested put option. People close to both companies said they had not heard any whisper of an agreement although they did not rule out an 11th-hour settlement.

If there is no settlement, GM and Ferrari owners Fiat will be free to take their argument to court and Fiat can start exercising the put by calling for valuations of loss-making Fiat Auto.

Fiat Chief Executive Sergio Marchionne has said exercising the put does not necessarily mean he would sell Fiat Auto, which makes up about 43 percent of group revenues, but rather could force an end to a spat that has rumbled on for more than a year.

"If there is no deal, (Fiat CEO Sergio) Marchionne will have to exercise the put on Wednesday," said a source close to Fiat. "There's been so much posturing by now that it's the only way to save face".

GM argues the put is no longer valid after restructuring moves changed the look of Fiat Auto. Analysts say it would have a tough time proving that in court and will instead pay Fiat to annul the option. GM's board is due to meet on Tuesday.

Fiat stock has risen 7 percent in the last month on hopes of a cash settlement of about 1.5 billion to 1.8 billion euros (1 billion to 1.3 billion pounds) and a deal to give Fiat a better share of joint ventures it has with GM.

"The market has bet on a cash deal of 1.5 to 2 billion euros. Now the speculative appeal of the stock is waning and people are starting to look at Fiat's structural problems again," said one trader.

Pay-Off

Analysts have said GM would have to pay Fiat about 3 billion euros to make it worthwhile for Fiat to give up the put and face the cost of fixing Fiat Auto instead.

"We believe accepting a payment of less than 2 billion euros is insufficient relief for an ailing auto business, while sacrificing the group's best chance of divesting the cash-burning business," Morgan Stanley said in a report on Tuesday.

For GM, paying 1 billion euros to kill the put would be a small victory, Morgan Stanley said, while two to three billion would be painful, consuming most of this year's free cash flow at a time when GM is battling European losses and high U.S. health costs.

Even 1.8 billion euros - the number most strongly floated in the market - would cover little more than a year's cash burn at Fiat Auto.

GM agreed to the put when it bought 20 percent of Fiat Auto in 2000 and set up cost-saving joint ventures, winning the deal at the expense of rival DaimlerChrysler which wanted 100 percent of Fiat Auto.

Fiat patriarch Gianni Agnelli, who died in 2003, did not want to sell out but agreed the put to secure a future exit.

GM's stake in Fiat Auto was diluted to 10 percent in a recapitalisation, one of the moves GM argues ran against the 2000 deal and so voided the put option.