GM's $2 Billion Lifeline Still Won't Rescue Fiat: Matthew Lynn
By Matthew Lynn Feb. 21 (Bloomberg) --
Nobody should say that Fiat SpA doesn't know how to end a conversation. The Italian auto companyhas just managed to exit its relationship with U.S. giant GeneralMotors Corp. with its pockets $2 billion heavier. Last week, Fiat said it was ending a five-year partnershipwith GM that included an option with the power to force the U.S.company to take full control of the Turin, Italy-based automaker.At a cost of $2 billion, GM was allowed to walk away from that. Fiat's deal with GM is one of the sharpest pieces ofcommercial footwork seen in the past few years. Since Fiat CEOSergio Marchionne was smart enough to do that, can he save a carbrand that appears to have a dismal future? Probably not -- something that will sadden the hearts of autoenthusiasts everywhere. As the GM deal crumbles, the question is: ``Who else can Fiatpartner with?'' Because it is hard to see Fiat as a company withan independent future. For GM, the world's largest automaker, the deal wasn't great.Its bonds dropped after Moody's Investors Service said GM's creditrating was more likely to be cut after the company agreed to payFiat to exit the alliance. Still, the transaction price was``benign relative to market expectations,'' according to JPMorganChase & Co. analysts. For Fiat, the questions posed by the announcement are muchtougher. After all, when a company is willing to pay to avoidtaking control of a competitor, it says something unflattering.
European Car Sales
You might think that collecting $2 billion from GM would helpFiat's share price. And indeed it might have done, were it not forthe European car sales figures released the same week.Overall, Western European car sales dropped 0.2 percent inJanuary, according to the Brussels-based European AutomobileManufacturers Association. Fiat led the decline with a fall of 17percent to 84,905 vehicles and had just 7.3 percent of theEuropean car market, compared with 8.7 percent a year earlier. Itis, in effect, now just a niche producer without the cost base orpricing power that such a manufacturer needs to survive. Fiat is a weak player in a declining market, not acomfortable position for any company to be in. And the situation isn't about to get better. Later thismonth, Fiat's carmaking unit will probably report an operatingloss of 97 million euros ($126 million) for the fourth quarter,according to the median estimate of eight analysts surveyed byBloomberg. After 12 consecutive quarterly losses, it's no greatsurprise that Fiat's shares have tumbled to less than 6 euros from26 euros in 2000.
`Still Look as Ugly'
``With GM out of the equation, Fiat's investment story willnow be re-driven by its fundamentals, which still look as ugly asthey were before the hype about the put option started more than ayear ago,'' said Nesche Yazgan, an analyst at New York-basedCreditSights Inc., in a note to investors last week. So what can Fiat CEO Marchionne do now? Last week, HerbertDemel, the head of the auto division, was ousted and Marchionnetook personal control of the unit. True, there are new models coming up. The Alfa Romeo Breraand the Fiat Croma and Punto are due to be delivered this year.Automakers can come up with new formats that reinvigorate themarket: Think of Volkswagen AG with the early hatchbacks, RenaultSA with its family-friendly people carriers, or Land Rover, now aunit of Ford Motor Co., with those suburb-friendly off-road carsthat spawned the boom in sport-utility vehicles. Yet, nothing Fiat is planning looks capable of galvanizingthe market in that way.
BMW, Ford Niches
Meanwhile, the market segments that Fiat, given its 106-yearhistory, should have owned have been taken by others. The nichefor small, cool cars has been taken by Munich-based BayerischeMotoren Werke AG's successful new Mini. Ford has taken a big chunkof the luxury market with its Jaguar and Volvo brands. Are there any other potential partners out there? One of the big three in Europe might be an option. The dealcould be spun as creating a new European champion. Still,Wolfsburg, Germany-based Volkswagen has too many problems of itsown right now. And France's Renault and PSA Peugeot Citroen aretied up with their Japanese collaborations. How about China? Shanghai Automotive Industry Corp. may invest 1 billionpounds ($1.9 billion) in a venture with Britain's MG Rover GroupLtd., the South China Morning Post reported last week. Even Fiatis a far healthier company than the rapidly shrinking Rover.Could that be the way forward for Fiat? In a country where Bank ofItaly Governor Antonio Fazio objected to Spanish ownership of anItalian bank, Chinese ownership of Fiat sounds implausible. The money collected from GM gives Fiat some breathing space.It now has one more shot to get back into the game. Yet, the wallit has to climb is probably too steep. Ending the relationshipwith GM marks one more step in the company's decline -- not the beginning of its revival.
Nobody should say that Fiat SpA doesn't know how to end a conversation. The Italian auto companyhas just managed to exit its relationship with U.S. giant GeneralMotors Corp. with its pockets $2 billion heavier. Last week, Fiat said it was ending a five-year partnershipwith GM that included an option with the power to force the U.S.company to take full control of the Turin, Italy-based automaker.At a cost of $2 billion, GM was allowed to walk away from that. Fiat's deal with GM is one of the sharpest pieces ofcommercial footwork seen in the past few years. Since Fiat CEOSergio Marchionne was smart enough to do that, can he save a carbrand that appears to have a dismal future? Probably not -- something that will sadden the hearts of autoenthusiasts everywhere. As the GM deal crumbles, the question is: ``Who else can Fiatpartner with?'' Because it is hard to see Fiat as a company withan independent future. For GM, the world's largest automaker, the deal wasn't great.Its bonds dropped after Moody's Investors Service said GM's creditrating was more likely to be cut after the company agreed to payFiat to exit the alliance. Still, the transaction price was``benign relative to market expectations,'' according to JPMorganChase & Co. analysts. For Fiat, the questions posed by the announcement are muchtougher. After all, when a company is willing to pay to avoidtaking control of a competitor, it says something unflattering.
European Car Sales
You might think that collecting $2 billion from GM would helpFiat's share price. And indeed it might have done, were it not forthe European car sales figures released the same week.Overall, Western European car sales dropped 0.2 percent inJanuary, according to the Brussels-based European AutomobileManufacturers Association. Fiat led the decline with a fall of 17percent to 84,905 vehicles and had just 7.3 percent of theEuropean car market, compared with 8.7 percent a year earlier. Itis, in effect, now just a niche producer without the cost base orpricing power that such a manufacturer needs to survive. Fiat is a weak player in a declining market, not acomfortable position for any company to be in. And the situation isn't about to get better. Later thismonth, Fiat's carmaking unit will probably report an operatingloss of 97 million euros ($126 million) for the fourth quarter,according to the median estimate of eight analysts surveyed byBloomberg. After 12 consecutive quarterly losses, it's no greatsurprise that Fiat's shares have tumbled to less than 6 euros from26 euros in 2000.
`Still Look as Ugly'
``With GM out of the equation, Fiat's investment story willnow be re-driven by its fundamentals, which still look as ugly asthey were before the hype about the put option started more than ayear ago,'' said Nesche Yazgan, an analyst at New York-basedCreditSights Inc., in a note to investors last week. So what can Fiat CEO Marchionne do now? Last week, HerbertDemel, the head of the auto division, was ousted and Marchionnetook personal control of the unit. True, there are new models coming up. The Alfa Romeo Breraand the Fiat Croma and Punto are due to be delivered this year.Automakers can come up with new formats that reinvigorate themarket: Think of Volkswagen AG with the early hatchbacks, RenaultSA with its family-friendly people carriers, or Land Rover, now aunit of Ford Motor Co., with those suburb-friendly off-road carsthat spawned the boom in sport-utility vehicles. Yet, nothing Fiat is planning looks capable of galvanizingthe market in that way.
BMW, Ford Niches
Meanwhile, the market segments that Fiat, given its 106-yearhistory, should have owned have been taken by others. The nichefor small, cool cars has been taken by Munich-based BayerischeMotoren Werke AG's successful new Mini. Ford has taken a big chunkof the luxury market with its Jaguar and Volvo brands. Are there any other potential partners out there? One of the big three in Europe might be an option. The dealcould be spun as creating a new European champion. Still,Wolfsburg, Germany-based Volkswagen has too many problems of itsown right now. And France's Renault and PSA Peugeot Citroen aretied up with their Japanese collaborations. How about China? Shanghai Automotive Industry Corp. may invest 1 billionpounds ($1.9 billion) in a venture with Britain's MG Rover GroupLtd., the South China Morning Post reported last week. Even Fiatis a far healthier company than the rapidly shrinking Rover.Could that be the way forward for Fiat? In a country where Bank ofItaly Governor Antonio Fazio objected to Spanish ownership of anItalian bank, Chinese ownership of Fiat sounds implausible. The money collected from GM gives Fiat some breathing space.It now has one more shot to get back into the game. Yet, the wallit has to climb is probably too steep. Ending the relationshipwith GM marks one more step in the company's decline -- not the beginning of its revival.
