GM pays Fiat Euro 1.55bn to escape from deal

The US automotive giant General Motors has agreed to pay Fiat €1.55bn (£1.07bn) to extricate itself from a deal that could have forced it to buy the whole of the ailing Italian car maker.

The US automotive giant General Motors has agreed to pay Fiat €1.55bn (£1.07bn) to extricate itself from a deal that could have forced it to buy the whole of the ailing Italian car maker.

The two sides agreed yesterday to unwind a five-year-old deal that set up a series of joint ventures between the two and, from this month, allows Fiat to demand that GM buys the 90 per cent of its car manufacturing business that it does not currently own.

GM, which is in the throes of a restructuring that will cut 10,000 jobs, has been looking for a way out of the deal since last year. The put option could saddle it with another loss-making car business as it battles to return its own European arm to profit. It had claimed the option was invalidated by Fiat's asset disposals of recent years.

The US group said yesterday it would pay a lump sum to terminate the agreement and to secure access to a range of diesel engines jointly developed with Fiat Auto. It will also unwind purchasing and powertrain joint ventures, although the pair will continue to own a Polish powertrain business together.

GM's chairman, Rick Wagoner, said the company will return its 10 per cent equity stake in Fiat. "We believe that we have reached a fair and equitable agreement that enables both companies to maintain a high level of synergy savings, but in a more focused approach that gives each of us more freedom to act in today's competitive environment."

GM's profits in the final quarter of 2004 tumbled by 37 per cent after it wrote down the remaining value of the Fiat stake, helping drive its European business - where brands include Opel and Vauxhall - further into the red. Yesterday's deal will land GM with a further $840m (£450m) exceptional charge.

The agreement with Fiat came during a bout of international merger and acquisition activity in the car industry, and was negotiated by the Italian group's patriarchal chief executive, the late Gianni Agnelli.

Fiat said it would have exercised the put option this week if a deal with GM had not been reached. Sergio Marchionne, the chief executive, said: "We can now devote our full energies to the re-establishment and rationalisation of our brands."

The €1.55bn cash injection is barely enough to cover one year's cash burn at the company. Executives hope it will now be free to set up new joint ventures with other auto groups to share costs and achieve its target of pulling Fiat Auto back into profit in 2006, after a slump in sales and record losses in 2002.

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