TURIN – Last week, eight banks agreed to convert E3 billion in loans made to Fiat group into shares in the company.
The move, which is part of a May 2002 agreement between Fiat and the banks, appears to help Fiat group CEO Sergio Marchionne.
“Marchionne is getting stronger,” said Philippe Houchois, head of European auto research at JP Morgan in London. “He will soon have a larger number of weaker shareholders.”
Fiat group needed the loans to keep the Italian conglomerate from collapse, including the auto division, which continues to struggle.
Analysts say Fiat got the best of this deal. The debt-for-equity swap slashes E3 billion from Fiat’s net debt, which was E5.3 billion at the end of 2004. The swap also will reduce Fiat’s interest payments by about E190 million next year.
The conversion costs the banks almost E1.5 billion of their E3 billion in loans. Under the conversion formula, the banks will pay a little more than E10 a share, almost double the current market value of about E5.
“At the time of the agreement, surrendering a large part of Fiat ownership to the banks was seen as a negative for Fiat and the Agnellis,” said another London-based analyst. “As Fiat’s finances deteriorated, it became an opportunity for Fiat to refinance and a negative for the banks.”
The transaction, which takes place September 26, is expected to do two things:
1. Give the banks a combined 27 percent of Fiat
2. Dilute the Agnelli family’s controlling 30 percent equity to about 22 percent.
In theory, the banks could control Fiat group. But there already are signs that they will pursue individual strategies instead of working as one.
For starters, Turin-based San Paolo-IMI, which will be the fourth largest of the eight lenders (see box), will likely remain a close ally of the Agnelli family. The Agnellis just invested E260 million into San Paolo-IMI, increasing their shareholding to 6.3 percent.