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UPDATE 4-Fiat sees cars nudging to breakeven, forgives debts

(Releads, adds conference call)

By Jane Barrett

MILAN, Oct 31 (Reuters) - Italy's Fiat said on Thursday it would boost its struggling car unit's capital by up to 2.5 billion euros by cancelling internal loans but reiterated that Fiat Auto should break even in the fourth quarter.

Reporting worse-than-expected third-quarter losses, Fiat said the much-anticipated recapitalisation would not have any impact on its group debt levels, which the Italian industrial giant has promised creditor banks to slash.

Fiat Auto, which is cutting jobs and output, made an operating loss of 340 million euros in the third quarter, more than the 245 million euros expected by eight analysts polled by Reuters but down from 394 million euros in the second quarter.

Fiat said in a statement the car division, 20-percent owned by General Motors Corp. , had "begun to benefit from the plan to move back into profit, considerably reducing its losses (to 51 million euros) in September."

Fiat shares rose on the positive outlook, closing up 5.3 percent at 8.40 euros, outperforming a 2.4 percent rise in the DJ Stoxx index for European automakers and bouncing off new 17-year lows of 7.77 euros earlier in the day.

But analysts were more sceptical than traders who saw a light at the end of the tunnel for the stock that has lost more than half its value so far this year.

"It does seem there was some positive momentum but I am still sceptical that they will break even in the fourth quarter," said Patrick Juchemich, an analyst at Sal Oppenheim in Frankfurt who rates Fiat stock "underperform."

In an analysts conference call, Fiat Auto Chief Executive Giancarlo Boschetti said he would look to cut costs further by closing some unprofitable assembly lines around the world.

As part of a recovery plan, Fiat has cut thousands of jobs which Boschetti said would generate cost savings of 350 million euros. Another 200-220 Fiat Auto managers would lose their jobs in the coming weeks, he added.

Fiat CEO Gabriele Galateri said he fully expected the government to grant Fiat Auto and related companies "crisis status" which would allow it temporarily to lay off 7,500 staff.

Boschetti said about 1,000 white collar workers would be offered incentives not to come back to Fiat while another 1,500 would be offered early retirement.

Fiat said other workers would be given back their jobs gradually as demand and sales recovered with new products.

"(The outlook) remains difficult, but I think the targets are realistic," said Greg Melich, an analyst at Morgan Stanley.

"They know they have to cut costs aggressively and the new management is trying hard to come up with a decent plan."

GROUP LOSS

While things looked brighter at Fiat Auto, which plans to launch four new models next year, Fiat widened its full-year operating loss forecast to between 500 and 600 million euros from the 426 million euros estimated in July.

The insurance-to-energy group made an operating loss of 339 million euros in the third quarter, more than double analysts' forecasts. Revenues fell to 11.99 billion euros of which 4.66 billion were generated by the car unit.

Fiat said its keenly watched net debt was 5.8 billion euros at the end of September, unchanged from the end of June as a glut of asset sales balanced out a seasonal slow down in sales.

When it signed a three billion-euro rescue package with creditor banks in July, Fiat promised to cut net debt to three billion euros by early 2003, negotiating a 20 percent leeway. Gross debt must fall to 23.6 billion euros from 32.8 now.

Chief Financial Officer Ferruccio Luppi said another seven billion euros should be knocked off its gross debt when it sells a majority stake in its customer financing arm Fidis. Fiat is in talks with four of its creditors to sell 51 percent of Fidis.

"We expect to complete the Fidis sale by the end of the year. We don't expect to complete any other major transactions in the quarter. However, we are working on several smaller deals we should close before the end of the year," Luppi said.

Net debt should fall to 4.4 billion euros by the end of 2002 thanks to a reduction of car stocks and higher sales, Fiat said.

If Fiat failed to meet its debt targets, Luppi said Fiat would put more assets up for sale and that the banks could speed up a conversion of their loan into equity.

GM STAYS QUIET

The question that remained at the end of the day was why GM had not put any money into the Fiat Auto capital increase.

GM Chief Executive Rick Wagoner declined to answer any questions related to Fiat on Thursday following a visit in Madrid with Spanish government officals, but a spokesman for the U.S. group noted that Fiat's actions were "internal moves."

As the carmaker continues to lose money, analysts say it is ever more likely Fiat will exercise a put option which allows it to sell its 80 percent stake in Fiat Auto to GM, the world's biggest automaker, from 2004.

Fiat managers also said decisions would not be tainted by a sentimental attachment to any activity in its portfolio.

Many analysts argue GM, also trying to get its European operations back in the black, would gain little from taking on Fiat Auto. Earlier this month GM wrote down most of the original $2.4 billion value of its 20 percent stake in Fiat Auto.

Fiat also said media reports the company's problems could cost Chairman Paolo Fresco his job were "absolutely false." (Additional reporting by Madeline Chambers in Frankfurt)