CANTARELLA’S DEMISE, HAEMORRHAGING FIAT SALES POINT TO EARLY GM TAKEOVER

Fiat Auto, in desperate straits as car sales plunge and losses mount, may succumb to an early takeover from General Motors.

That is the main conclusion to be taken from the decision to fire Fiat Group chief executive Paolo Cantarella on June 10.

Fiat’s car subsidiary lost more than 400 million euros in the first quarter, and has lost almost one billion euros in the last three quarters. Analysts fear losses of up to 900 million euros in 2002.

Fiat also fired Roberto Testore as chief executive of Fiat Auto last December and announced a radical restructuring to try and staunch the flood of red ink. Giancarlo Boschetti was promoted from truck subsidiary Iveco to Fiat Auto CEO.

But Fiat has stumbled into deeper trouble since then, with sales by all of its brands slumping and overall market share under pressure.

This has led to speculation that GM may seek an accelerated deal to buy the 80 per cent of Fiat Auto it doesn’t currently own.

WHAT WILL BE LEFT IF GM WAITS?

GM bought 20 per of Fiat Auto in 2000. Fiat has an option to sell the rest to GM between 2004 and 2009. But the rate of Fiat’s descent raises the question – if GM waits until 2004, what will be left?

According to AID provisional estimates, Fiat’s overall European sales in May dropped 22.7 per cent to 106,400 with market share down to 8.2 per cent from 9.8 per cent in the same month last year. More worrying for Fiat investors and workers was the spread of the decline across all brands. Fiat’s bodged launch of its Golf sector competitor, the Stilo, has been well documented. But in May Fiat’s BMW wannabe Alfa Romeo brand sales dropped 21.4 percent, while luxury pretender Lancia sales dived 26.4 per cent.

In the first five months, Fiat group sales slid 19.0 per cent, according to AID data.

The malaise that has brought Fiat to its knees is apparently now spreading to Alfa Romeo and Lancia. GM’s interest in buying Fiat was primarily because of its impressive Europe-wide market share. If it waits until 2004 to buy Fiat Auto it runs the risk of being lumbered with a substantially devalued asset.

STOCK MARKET HAPPY

The stock market reaction to Fiat’s latest turmoil appeared to back the theory that GM may move quickly to buy Fiat Auto. On the morning after Cantarella’s demise, Fiat Group shares rose 4 per cent, suggesting that shareholders expect some early action, rather than a slow slither to disaster under the old regime.

The share price has a way to go though. It has under performed other European auto stocks by about 30 per cent so far this year, and has lost 63 per cent since the announcement of the deal with GM in March 2000.

Investment bankers were sanguine about the developments at Fiat, probably reassured by the fact that former GE chief Paolo Fresco would take on the job of CEO, as well as chairman.

“Fresco is taking on more active management of the businesses. Investors hoping for faster industrial and financial restructuring and/or the divestiture of under performing assets could be positively surprised, in our view,” said Morgan Stanley.

UNIONS AGONIZE

But attempting to fire a warning shot across the bows of a possible early GM takeover bid, union leaders representing more than 100,000 European car workers at Fiat and GM Europe said a precipitate takeover would be a mistake. Both companies are in the midst of radical restructuring including plant closures and firings.

“In a situation characterised by increasing pressure on restructuring plants and employment, it would be wrong to pursue a strategy of combining ailing and weak structures when the homework has not yet been done,” union leaders said in a statement after a meeting in Brussels.

Neil Winton June 11, 2002

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