Moody's Investors Service confirmed the A2 long-term and Prime-1 short-term ratings of General Motors Corporation and GMAC and maintained a stable outlook. Moody's also confirmed the A3 long-term and Prime-2 short-term ratings of Fiat S.p.A. and maintained a negative outlook. These rating actions follow the announcement by GM and Fiat that they have agreed to form a strategic alliance outside of North America that should result in considerable operating synergies for each company's automobile operations. The principal sources of these synergies will be in the areas of materials purchasing, power train development, and cooperative undertakings by GMAC and Fiat Auto Fidis. Annual cost benefits are expected to be $1.2 billion by the third year of the agreement and $2.0 billion by the fifth year. About 1/3 of these benefits will accrue directly to GM and 2/3 to Fiat. As part of this agreement GM will acquire a 20% stake in the automotive operations of Fiat in exchange for about $2.4 billion in newly issued GM $1-2/3 common shares. This will give Fiat S.p.A. a 5.1% stake in GM. The agreement also affords Fiat with the right, at some point in the future, to put the remaining 80% of its automobile operations to GM. In addition, GM will have a right of first offer should Fiat opt to sell this 80% holding.MOODY'S CONFIRMS RATINGS OF GM, GMAC AND FIAT FOLLOWING ANNOUNCEMENT OF AUTOMOBILE ALLIANCE
The confirmation of the GM ratings reflects our expectation that the transaction will yield material cost reductions and operating efficiencies, and should also afford GM with the potential to achieve a larger and more competitive position in the European and Latin American car markets. However, GM will offset the issuance of $2.4 billion in new shares through additional share repurchases during 2000. Approximately $1.0 of billion this repurchase will be accomplished by increasing the size of a previously announced exchange offer whereby GM will use GM class H shares (representing an ownership in Hughes Electronics) to acquire GM $1-2/3 common shares; the exchange will rise from $8 billion to $9 billion. In addition, the company will undertake a $1.4 billion cash repurchase program. This cash repurchase will represent a sizable use of the company's liquidity and financial flexibility. Despite this cash repurchase, GM's debt protection measures and liquidity should remain supportive of the current rating level.
GM's stable rating outlook anticipates that the company's new-product introduction initiatives and cost reduction programs will enable it to strengthen its competitive position in the U.S. car and light truck market, and that the proposed alliance with Fiat will strengthen GM's position in European and Latin American markets. We expect that over the intermediate term the U.S. market will be characterized by increased pricing pressure and more intense competition in the high-growth/high-margin vehicle category segments. Strengthening the fundamental competitiveness of its domestic car and truck operations sufficiently to meet these challenges would more securely position GM within the A2 rating category. GM's remaining economic interest in Hughes Electronics (which has a market value of over $20 billion after planned exchange offers and pension plan contributions) could afford the company with adequate flexibility to fund future discretionary transactions in a financially prudent manner. These transactions could include: undertaking additional share repurchases, acquiring a larger stake in the Fiat automobile operations, pursuing other acquisitions that build GM's global automotive operations, and continuing expansion of GMAC. If GM undertakes large transactions in these areas it will be critical for the company to monetize an adequate level of the H shares in order to preserve appropriate levels of financial flexibility and avoid any potential pressure on its current rating.
The confirmation of the Fiat S.p.A ratings reflects our expectation that the cost position and operating efficiency of its automobile business will also improve as a result of the alliance with GM. In addition, the receipt of $2.4 billion in GM $1-2/3 common shares will help to mitigate the financial and operating risk associated with Fiat's agricultural and construction equipment operations. Fiat is expected to make a $1.4 billion capital contribution that will support the merger between New Holland N.V. - Fiat's 70%-owned subsidiary - and Case Corporation. The agricultural equipment markets served by these companies are extremely depressed, and the resulting operating performance and debt protection measures of the merged entity will be weak. However, there could be near term improvement in Fiat's negative rating outlook to the extent that: 1) there is material improvement in the near-term operating outlook for the company's automotive operations; 2) the operating challenges affecting the agricultural and construction equipment businesses do not pose the risk of a further drain on Fiat's financial resources; and 3) Fiat's intermediate-term strategy for managing its portfolio of diverse businesses is likely to strengthen its cash generating characteristics and overall competitive position. This strategy could entail material acquisitions and divestitures.
General Motors Corporation, headquartered in Detroit, Michigan, is the world's largest producer of cars and light trucks. GMAC, a wholly-owned subsidiary of GM, provides retail and wholesale financing in support of GM's automotive operations and is one of the worlds largest non-bank financial institutions.
Fiat S.p.A., headquartered in Turin, is one of the leading industrial groups in Italy and the third largest European-based automobile manufacturer. The company is also a leading European-based manufacturer of commercial vehicles and one of the leading producer of agricultural equipment in the world.
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