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Doomtime coming
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The GM-Fiat deal, signed long ago, is about to come apart, laid low by heavy debt Oliver Dixon looks at the potential fall-out for lveco.
hese are nervous times in Turin.The GMFiat saga is now entering its final phase . and while no half sensible bookmaker would be taking bets on the outcome, one thing is for certain, Of fallout, there will he a sufficiency. And fallout at Fiat is bound to impact upon its CV arm, Iveco.
This is an unholy mess, with its origins lying in a deal cut some five years ago between GM and the then Gianni Agnelli-run Fiat. At the time GM lir All at sea as Fiat Auto union threaten national strike paid $2.4bn, for a 10% stake in the Italian opera tion, but crucially — some would say bizarrely — it also granted Fiat a Put option', enabling the Italian manufacturer to demand that the Detroit behemoth take on the remaining 90%.
Fast-forward to 24 January 2005, and that option can now be exercised.
Oops.,. while acknowledging the 20/20 nature of hindsight,it would be hard to envisage a worse situation. In the Detroit corner, GM's stock has fallen by 50% since 2000 as its market share shrivelled and its pension liabilities rocketed. Big decisions are now being taken, with Hans Demant, GM Europe vice-president for engineering, suggesting that GM's North American capacity may be used to service its European operation, and telling transport journalists at the recent Detroit Motor Show: "I think we have some pretty good opportunities, and with today's exchange rate this might finally make a lot of sense."
And yes, he did mention Vauxhall.
Trouble in Turin
Meanwhile. 5.000 miles to the east, things don't look too clever in Turin either. Fiat Auto lost $1.7bn in the first nine months of 2004, and the relevant stock price has plummeted from $30 in 2000 to $6 at the time of writing. Add to this a serious level of debt and a junk bond rating, and one can understand the reluctance on the part of GM's CEO Richard Wagoner Jr to take calls from his Turin counterpart Sergio Marchionne.
The two companies have been negotiating since December in a bid to avoid the courts, but we are faced with a possibly unique situation in which the hostility element of a hostile takeover comes not from the bought, but from the buyer. As CM went to press talks had broken down and the auto workers' union in Italy is threatening a national strike.
So how does this affect Iveco? With gross sales in 2004 sitting around the €9bn mark, it's not been doing so badly of late. CEO Jose Maria Alapont had been in harness for some 16 months and had made some sweeping— and, at times,not altogether welcome —changes.Now he's"pursuing other interests" and is understood to have joined auto parts giant Federal Mogul.
Senior management apart, Iveco now has a product line that is the right side of new relative to its other EU competitors, and its operations in South America — centred around the Sete Lagoas plant in Brazil — is well to the fore in the increasingly important Mercosur markets.
Iveco now seems to have directed its attention on Ashok Leyland. in which Iveco and the Hin duja brothers own a majority stake, and seems to be shaking the tree with some verve. With the Indian CV market moving vertically and exports up by over 32% in the first nine months of the 2004 fiscal year, being well placed in these two territories is no had thing.
But however hard Iveco tries, it is being visited by the sins of its sibling,Fiat Auto. A recent story in the Milano Finanza weekly, subsequently confirmed by the Dow Jones newswire, indicates that Fiat is hawking Iveco's financial services unit with a view to a Put and Call deal — similar to that which saw the disposal of the financial divisions of both CNH and Hat Auto's consumer credit arm,Fidis.
But it is the analysis of Fiat's liquidity quoted by the Milano Finanza that causes a splutter: it suggests Fiat might become insolvent injust over a year if it fails to extend the repayment schedule for its bank debt.'The plan accordingly is to cap Fiat's debt until the end of 2005 at €10.5bn; it reached €14.2bn at the end of 2004. Given that estimates put a value of €150m on 51% of the Iveco finance operation, and that Fiat reckons to be cutting €160m in fixed costs this year, that target would seem to be some way off.
However, the proposed deal would allow Fiat to deconsolidate the debt inherent in a financing operation, but with the option to buy the business back at a later date.And this would help: in December 2003 Iveco Finance had more than 100,000 financing contracts outstanding, with a total net value of €2.3bn.
But this has to be seen as more of a palliative than a cure, and, increasingly questions are being raised as to how much longer Fiat can dance around its debt. Hence the urgency surrounding the GM deal.
The general consensus is that Fiat has a good leg to stand on if things go legal, and a figure of El bn is being touted as the likely cost of an escape route for GM.Which leads to the question, can GM afford €1bn more than Fiat can afford many months of labyrinthine litigation? The only rational conclusion to be drawn is that the great unravelling has begun, and bullets are likely to be bitten.
A cynical world
Five years ago Gianni Agnelli is said to have done the deal with GM because he wasn't minded to cede control of Fiat Auto to the other main suitor. DaimlerChrysler. Times have changed. Although emotions still run high, they are less intense than they were during the Agnelli era; in blunt terms, there is an increasing view among industry watchers that the dream of a cohesive automotive family is now giving way to a less cosy reality.
If GM's arm isn't twistedthe names Peugeot, Renault and, ironically,DaimlerChrysler (itself rumoured lobe about to take $770m from Mitsubishi in recompense for the defective vehicle debacle) enter the frame — as does Chinese manufacturer SAIC.
And, if it isn't Fiat Auto that's in the shop window, what price Iveco itself? When UK boss Giuseppe Franchi stood up in front of the UK media at a recent press conference, he detailed Iveco's activities in not just the truck and bus market, but also in terms of marine, gen set, fire trucks and earth movers. That could also be construed as a nascent share prospectus.
Whatever the outcome, the worst-case scenario for Iveco is the status quo. Arguably, with the money pit that is Fiat Auto off its back and its balance sheet.Iveco could begin to realise its potential, not just in Europe but further afield. Leaving aside any deal with Chinese manufacturer SAIC, an unencumbered Iveco could have a fair bit going for it. •