Fiat, GM Agree to Delay Fiat Auto Option

An option allowing Italian automaker Fiat to force General Motors to buy its loss-making car unit has been put back a year while the two groups settle a disagreement over whether it is still valid, they said on Sunday.

Top Fiat managers have regularly said they have no intention of selling Fiat Auto but the "put" option is key to the group's debt ratings and value, while it is an on-going headache for GM, which is still trying to squeeze profit from its European unit.

In a statement, the groups said GM believed the "put" has been rendered invalid by moves Fiat took to keep the carmaker afloat, selling its consumer credit arm Fidis and recapitalizing Fiat Auto Holding, diluting GM's stake to 10 percent from 20 percent.

But GM spokeswoman Toni Simonetti told Reuters "This does not waive any of our legal rights." She noted that the so-called standstill agreement extending the put option for one year did not mean GM won't pursue any legal remedy.

"We believe they have breached the master agreement," she said, citing Fiat's recent recapitalization and the sale of some assets of its finance arm.

Fiat said its actions were "wholly proper" and did not violate the Master Agreement of 2000 when GM bought 20 percent of Fiat Auto for $2.4 billion in stock and set up money-saving joint ventures to build powertrains and buy car parts with Fiat.

At that stage, GM agreed to buy the rest of Fiat Auto from January 2004 if Fiat decided to sell. Sunday's agreement shifts the put forward by a year and the option period will now run from Jan. 24, 2005, to July 24, 2010. The two companies also agreed they would not start legal proceedings against each other in relation to the Master Agreement until Dec. 15, 2004.

"We now have a year to renegotiate our agreement with GM," Fiat Chief Executive Giuseppe Morchio said in a statement.

Fiat said it believed the put option was still "effective and exercisable."

Keeping Fiat On the Road

Since GM bought into the maker of the Punto city car and Alfa Romeo Spider, sales have slumped, dragging Fiat Auto deep into loss and forcing Fiat to sell profitable assets and raise money to keep the former icon of Italian industry alive.

As part of that plan, Fiat sold 51 percent of Fiat Auto's European and Latin American customer credit unit Fidis to a group of Italian banks, easing its debt burden by 6 billion euros. Fiat has an option to buy the stake back from 2006.

Fiat also decided to recapitalize Fiat Auto by 5 billion euros and put up 3 billion earlier this year by canceling debts owed to other parts of its components-to-robotics empire. GM refused to put up its 1 billion euro share of the recapitalization, diluting its stake to 10 percent.

Since then, GM has said in official filings the "put" option could be "unenforceable by reason of actions Fiat has taken or may take."

But while lawyers battle over the "put," GM has little to gain from antagonizing Fiat as their joint ventures are due to save both groups 1 billion euros a year, money GM desperately needs as it struggles to pull its European unit into the black.

Under the joint ventures, mirror models like the Opel and Vauxhall Corsa and the Fiat Punto should share most of their development costs and parts, creating economies of scale.

"General Motors and Fiat continue to believe that the joint ventures ... are working well, generating synergies and that both parties would like to see expanded cooperation," they said on Sunday, reiterating comments from GM last week.