Contrary to a common market prediction, last month Fiat Auto walked away from an agreement signed in 2000 that allowed it to put the company to General Motors, with €1.55 billion in its pocket.
The pay-off is to terminate GM's 10% stake in Fiat Auto. Fiat will receive €1 billion from GM immediately and another €550 million within 90 days of the break-up of the two companies' power-train and purchasing joint ventures. GM will also have to take an after-tax charge of $840 million to account for the agreement.
This is not just a bitter pill to swallow for GM but also a major disappointment for its advisory banks. The master agreement Fiat signed with GM in 2000, which stated the put conditions, said the price that GM should pay should be determined through the average of three of the closest of four valuations prepared by four investment banks at the time the put was exercised. This is without the added fees GM's bankers could have taken home for providing the financing for GM to bail out Fiat.
The settlement struck by GM eliminates the risk that the company would have had to bail out Fiat, be embroiled in a court battle with Fiat over the issue or fork out even more cash for its bankers.