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. Last Updated: 07/27/2016

GM Pays $2Bln to Set Fiat Free

ROME -- Fiat was free to try to turn around its fortunes on its own Monday, helped by the injection of $2 billion from General Motors to be paid in a deal that releases the U.S. auto giant from an obligation to buy Fiat's ailing car unit.

In an agreement announced Sunday, the two companies dissolved a 2000 partnership pact, including an option that could have forced GM to buy the 90 percent of Fiat Auto that it did not already own.

Fiat shares rose 4 percent to $7.93 in late-morning trading in Milan, a sign that investors believe the cash infusion will boost the carmaker's chances of putting its house in order.

At Fiat headquarters in Turin, chairman Luca Cordero di Montezemolo praised the agreement Sunday as "a positive and excellent sign for the future."

Montezemolo told RAI state radio Monday that the deal was important, "especially for avoiding a long legal battle that would have greatly disconcerted not only all of Fiat's workers and collaborators, but also the car markets and our customers."

Montezemolo said the money from GM would be used "first of all to bring [Fiat's] financial situation within acceptable limits, but then to look ahead."

But analysts raised doubts about how much the cash could help.

"The overall picture has not changed dramatically," said Patrick Juchemich, senior auto analyst for the Sal. Oppenheim bank. "It has not taken any burden away from [Fiat]. They are still beseeched to come up with successful new models."

Juchemich said the deal could have more advantages for GM, since the Detroit-based company will not be forced to take over Fiat Auto's extra capacity, or its $10.4 billion in debt -- "and at the same time has future access to diesel technology that GM had been lacking for quite some time," he said.

"Fiat's problems have two origins: financial and industrial," said Carlo Scarpa, professor of industrial economics at Brescia's university.

"It's excellent news from a financial point of view. But from the industrial point of view, the problems that we thought we solved five years ago are now once again exactly the same," he told RAI state radio.

The deal does not entail a complete separation. GM will return its 10 percent stake in Fiat's auto division and the two carmakers will dismantle their joint venture that manufactures engines and transmissions. However, the companies will continue to cooperate on engine production, on development of vehicle programs and in other fields.

Two-thirds of the payment covers the legal dispute, while a third covers GM's purchase of assets from Fiat, GM's chief financial officer John Devine said.

"We believe that we have reached a fair and equitable agreement that enables both companies to maintain a high level of synergy savings, but in a more focused approach that gives each of us more freedom to act in today's competitive environment," GM chairman and chief executive Rick Wagoner said.

A mediation period over the put option that began Dec. 16 ended this month without an agreement. Fiat claimed the option was valid and rejected GM's claim that the Italian company might have breached the agreement through a recapitalization of Fiat Auto Holding BV and the sale of a 51 percent stake in Fiat Auto's consumer finance division. The impasse had raised the prospect of GM mounting a legal challenge.

Montezemolo said Fiat's threats to force GM to buy out the auto division had been real.

"If we had not reached the agreement, we would have had a long legal battle, because this week we would have started the processes to exercise the put option," he said.