GM in deep s*it on its stupid Fiat deal
If GM is forced to pay a hefty settlement to wriggle out of the put option -- or worse, has to acquire the Italian auto maker and its $10 billion in debt -- it could weigh heavily on an already burdened balance sheet.
Analysts believe GM will offer Fiat a cash settlement to get out of the deal, but the price will be high. Under the terms of the original 2000 agreement, GM would have to pay off in cash immediately all Fiat Auto intra-company debt, estimated at about $6 billion. And the two companies have set up purchasing and engine-manufacturing divisions, which would probably have to be broken up, despite the fact that these operations are saving the companies millions of dollars a year.
GM has already written off the $2.4 billion it has spent on Fiat, and it will have to pay another $2 billion to get Fiat to cancel the "put option," analysts claim.
Why did GM get into such a bad deal? It wanted to block a $12 billion cash offer for Fiat Auto from DaimlerChrysler, part of a plan to unseat GM as the world's biggest automaker. GM blocked the DCX move by offering Fiat a strategic alliance. It has turned out to be a costly decision.
edmunds.com
Fiat Auto has 8 billion euros ($10.4 billion) of debt, which Detroit-based GM might be forced to assume in a takeover. That could trigger a rating downgrade, as could an agreement by GM to make a "large payment" to resolve the conflict, Standard & Poor's analyst Scott Sprinzen wrote last month.
freep.com
But what's another $10B on top of $290B of debt they already have? I think the worse part might be adding all those new losses,
Fiat Auto's operating losses for 2004 are expected to total around $1.3 billion. With Fiat Auto burning through cash rapidly, the put option has emerged as a potential lifesaver for Mr. Marchionne, a turnaround specialist who arrived at the Italian auto maker in June following a management shakeup. He has made resolving the issue his top priority and forced GM into a tense set of negotiations.
money.cnn.com
GM has already written down the value of its 10% stake in Fiat to zero, and zero is probably generous. If not for political reasons, I don't see why Fiat should settle for a $2B payment, unless they have doubts about their legal claims. Seems it would be better just to dump. |
