WASHINGTON, Feb 14 (AFP) - General Motors is paying a steep price to break off its alliance with Italian automaker Fiat, but the deal removes some uncertainty about the outlook for the world's biggest automaker, analysts said Monday.
GM agreed to pay 1.55 billion euros (two billion dollars) to settle a long-running dispute over an option for Fiat to sell Fiat Auto to GM.
The deal allows GM to unwind the alliances and cancel a put option, agreed on in 2000, that could have forced GM to purchase the 90 percent of Fiat Auto it does not own.
GM will return its 10 percent equity interest in Fiat but will acquire certain assets from the Italian group for diesel engine manufacturing. GM will get a 50 percent stake in a new joint venture in Poland, which produces a 1.3 liter diesel engine.
Deutsche Bank analysts said the payment amount was "at the high end of expectations, but we believe the overall the terms are not far out of line with expectations."
The analysts expect the downside for GM shares is relatively limited. "We believe that eliminating the Fiat overhang may ultimately be the best thing for GM's shares," they wrote.
Moody's Investors Service said the two billion dollars "does not represent a significant erosion in GM's automotive liquidity position of 23 billion dollars (but) this outflow comes as the company is facing increasing challenges in its competitive and operating environment."
Moody's said GM faces continued erosion in its North American market share high domestic inventory levels and "burdensome" health care costs, among others.
Standard and Poor's said the outlook for GM is not significantly changed by the deal but that it "will eliminate the considerable uncertainty that had stemmed from the option."
"GM continues to struggle in its two most important markets, North America and Europe," S and P said.
"GM has continued to lose market share in North America, even with aggressive discounting and higher sales to daily rental fleets. GM's earnings have been pressured by soaring health care costs."
But the deal "should not add to the considerable operating challenges GM faces in turning around its problem-plagued European operations," S and P added.
02/14/2005 18:09 GMT - AFP