GM Pays Up to Dissolve Fiat Alliance

Fiat and General Motors have dissolved their five-year partnership, with the U.S. motor giant paying the Italian group 1.55 billion euros (830 million pounds) in cash to avoid having to buy loss-making Fiat Auto.

The two groups had long disputed whether the put option was valid and the bad blood spilled into the broader alliance, with Fiat arguing GM was holding it back from other partnerships that would help it cut costs and return to profit.

"We now have absolute freedom to design our own future," Fiat CEO Sergio Marchionne told a news conference on Sunday, saying he wanted focused partnerships in specific business areas but not another GM-style equity-and-industrial alliance.

Under the divorce deal, GM and Fiat said they will dissolve their two joint ventures in powertrains and purchasing, although Fiat will continue to provide GM with diesel engines and will have access to GM's global purchasing team and its economies of scale.

GM will pay Fiat 1 billion euros on Monday and another 550 million euros when the joint ventures are dissolved, within 90 days, Marchionne said.

Investors had expected Fiat to get about 1.8 billion euros to annul the put option, but on Sunday said the deal was good for Fiat.

Corrado Passera, CEO of top Fiat creditor Banca Intesa, said the deal was "in line with our highest hopes."

"This is real David and Goliath stuff," said a London fund manager. "If they hadn't got the money, they'd have had serious problems repaying debt. Now repayment is on track, they're still in the auto business and they still have strength with preferred supplier status on diesel with GM."

A source at Fiat said there were no concrete plans to raise new debt to repay bonds coming due this year although many banks had approached the trucks-to-publishing group to run an issue.

Headache Dissolved

For GM, the deal removes the threat of having to buy another unprofitable car maker while it battles to pull its European arm -- Opel, Vauxhall and Saab -- back to profit and deals with high U.S. healthcare costs and a possible downgrade of its debt rating to junk.

GM bought 20 percent of Fiat Auto in 2000 for $2.4 billion, but its stake was halved under a recapitalization which GM argued had invalidated the put. While another $2 billion makes Fiat a costly bet to dissolve, GM CEO Rick Wagoner said it was worth it.

"We needed scale in Europe to get costs down and we were able to do that working with Fiat," Wagoner told a conference call. "Frankly it's a fairly high return initiative for GM, admittedly not exactly the way we had foreseen it to play out."

The Fiat deal gave GM access to its family of diesel engines in Europe, where diesel accounts for 40 percent of car sales.

"Not only did we not have the facilities or the product development, we didn't even have diesel engineering capability," Wagoner said.

Under Sunday's deal, GM and Fiat will continue to co-own a factory in Poland which makes the 1.3 liter Multijet engine. The plant was owned by Fiat before the GM venture was set up.

The 770 million to 750 million euros of debt at Fiat-GM Powertrain will be split equally between the two groups, Marchionne said.

Fiat Chairman Luca di Montezemolo said if the groups had not reached a deal by the coming week, Fiat had planned to start exercising the put option on Fiat Auto, Italy's largest blue-collar employer and an icon of its industrial history.

Instead, Fiat will now focus on returning Fiat Auto to profit, including possibly linking its sporty Alfa Romeo brand with Maserati, currently part of Fiat's racing unit Ferrari. Under the GM partnership, that would have been impossible.

Fiat is pumping out a range of new models to revive sales and pull back into the black in 2006.