(Adds reaction from S&P in para 9, no comment in para 17)
By Christian Plumb
MILAN, March 24 (Reuters) - Fiat's founding family on Monday approved a 250 million euro ($265.8 million) capital investment in the industrial group as the latest in a series of measures to pump cash into its money-losing auto business.
The capital hike by the Agnelli family holding company, Giovanni Agnelli & C., is part of Fiat's broader efforts to raise money to fund a turnaround at Europe's once-largest automaker, which has seen sales and market share plunge even in its home market.
Fiat closed a deal over the weekend to sell insurance unit Toro for 2.4 billion euros to publisher De Agostini. Now it is expected to focus on the sale of its profitable aviation unit, Fiat Avio, which has attracted a bid of about 1.8 billion euros, according to press reports.
By 1230 GMT, Fiat shares were down 1.6 percent at 5.98 euros, outperforming a 3.3 percent decline in the DJ Stoxx European automakers index . But Fiat was still down about 23 percent this year, among the sector's worst performers.
The Fiat Avio and Toro sales will raise pressure on the company to extract results from the car business, said Adam Jonas, an analyst at Morgan Stanley. Both units were once cornerstones of Fiat's effort to lessen its dependence on the cyclical auto business.
"They can make these financial changes through divestiture, but that doesn't change the long-term economic risk of the company, which is their ability to turn around the cash flow situation at the auto business," Jonas said.
BRACING FOR CAPITAL INCREASE
Fiat, which posted a record 4.26 billion euro net loss in 2002, put the profitable divisions up for sale at the urging of its creditor banks, who are worried about the automaker's debt.
Fiat said the Toro sale would cut its net debt -- 3.8 billion euros as of end-2002 -- by about 1.4 billion euros and increase its capital by about 350 million euros.
Credit agency Standard & Poor's, which along with rival Moody's has lowered Fiat's debt rating to "junk" status, said the Toro deal would not change its negative outlook on Fiat.
Investors also remain concerned about dilution from a wider capital increase at the group, an analyst for Rasbank said.
Earlier this year, Fiat announced a recapitalisation of up to five billion euros for Fiat Auto, three billion euros of which would come from the cancellation of inter-group loans.
"People are still bracing for the wider capital hike," the analyst said.
The role of General Motors , which owns 20 percent of Fiat Auto, remained unresolved after the Agnelli family meeting.
Fiat has an option to sell the rest of the auto division to GM starting next year, but there has been speculation it would contribute to Fiat's capital increase now to escape the possible obligation to buy the auto unit later.
Separately, U.S. fund K Capital Partners raised its stake in Ifil , the traded holding controlled by the Agnellis, to 5.3 percent from two percent, regulator Consob said.
As for Fiat Avio, newspaper Il Sole 24 Ore said on Saturday that UK private equity fund Doughty Hanson together with an Italian maker of executive planes, Piaggio Aero Industries, had bid about 1.8 billion euros for the aviation unit.
Both companies declined to comment on the report.
Other bidders may include U.S. private equity firm The Carlyle Group, French aviation company Snecma and Italian state defence firm Finmeccanica .