Thursday, October 30, 2008

Latest From The Detroit News-Investors Are Warming Up To The GM Chrysler Merger

Securing fed aid could pave way for private financing of complex deal.

Christine Tierney and David Shepardson / The Detroit News

Private investors have shown interest in General Motors Corp.'s proposed acquisition of Chrysler LLC and may help finance the deal if the U.S. government agrees to provide funds, sources close to the negotiations said Wednesday.

GM and Cerberus Capital Management LP, Chrysler's majority owner, seek as much as $10 billion in federal loans and other aid to finance a deal.

Outside investors have expressed interest in the deal, but Cerberus is focusing on lining up crucial government aid, said one source familiar with the situation.

In addition to lobbying top Bush administration officials, GM and Cerberus executives have reached out to both presidential candidates to seek support for a deal, sources say.

The government signaled its responsiveness this week, with the U.S. Energy Department moving to speed up the release of $25 billion in low-cost loans that Congress authorized earlier this year for the auto industry.

While a GM-Chrysler combination would lead to thousands more job cuts, the deal is increasingly being presented as the best alternative to the possible collapse of one or more of Detroit's automakers in a rapidly deteriorating environment.

Industry analysts say the U.S. auto market's slump to its weakest levels since the 1980s is forcing the industry to consolidate.

"A merger of some type is likely to occur because the economics now are not sustainable for three separate Detroit automakers," Patrick Anderson, CEO of the consulting firm Anderson Economic Group, said Wednesday.

GM and Cerberus negotiators have made progress in the talks, reaching agreement on some key issues, said sources familiar with the situation.

Cerberus also is in talks with the Renault-Nissan alliance, but the two sides have been unable to agree on a valuation for Chrysler.

Carlos Ghosn, CEO of Renault SA and Nissan Motor Co., has said publicly that automakers are unlikely to take part in deals requiring cash investments during the global credit crunch.

Last week, Daimler AG said it had written down the book value of its remaining 19.9 percent stake in Chrysler to zero.

Cerberus purchased 80.1 percent of Chrysler in August 2007 from Daimler for $7.4 billion, with most of that money going into Chrysler.

But within months, the industry spiraled into a downturn that has grown increasingly perilous for Detroit's automakers. With credit hard to obtain and U.S. consumer confidence at historic lows, some analysts estimate the selling pace slowed this month to its lowest level since 1983.

GM Chairman and CEO Rick Wagoner was in Washington on Friday and Monday warning policymakers of the dire state of the automaker's finances.

GM has lost $18.8 billion in the first six months of the year -- and nearly $70 billion since 2004.

On Wednesday, the biggest U.S. automaker found itself denying rumors that it was seeking help from Japan's Toyota Motor Corp.

Detroit's automakers are asking Washington to double the $25 billion in low-cost loans that were intended to help the auto industry produce more fuel-efficient cars.

They also are trying to position their auto loan financing operations to benefit from the $700 billion bank bailout.

Cerberus owns 51 percent of GMAC Financial Services, which it acquired from GM in 2006, and wants to obtain at least half of GM's 49 percent stake in the lending firm as part of a deal. That would allow GMAC to become a bank holding company eligible for a capital infusion under the bailout plan.

In addition to the difficulties lining up financing in the volatile environment, the deal faces another big hurdle, a GM official said -- winning the backing of the United Auto Workers union.

Without the UAW's support, congressional Democrats might not support a deal.

A source familiar with the situation said GM and other officials have spoken with the presidential candidates, Republican Sen. John McCain and Democrat Sen. Barack Obama, as part of their effort to line up support in the capital.

A spokesman for Cerberus, Peter Duda, said no meetings or conversations involving Cerberus officials took place.

A top adviser to McCain, Doug Holtz-Eakin, told The Detroit News on Wednesday that McCain had not decided whether to support significant government assistance for a GM-Chrysler merger.

The Obama campaign's key auto adviser, Jason Furman, didn't return messages.

"Our priority is to get the $25 billion out the door and make them available," Holtz-Eakin said of the low-cost loans.

Another thorny issue is whether GM will be able to finance a trust fund to be managed by the UAW that was agreed to during last year's labor contract talks to take over retiree health care in 2010. Such a move would save GM $3 billion a year, but requires payments of more than $30 billion to fund it. Some reports have suggested that GM has sought help with its pension obligations from the U.S. Treasury Department.

In addition, Chrysler's estimated $10 billion bank debt must be refinanced in the event of a deal.

Analysts say GM would get access to Chrysler's cash on hand, which totaled $11.7 billion at the end of June.

But the deal has critics who question whether it resolves the big challenges facing GM.

"We do not view the potential for any eventual transaction involving GM and Chrysler -- or any other automaker -- even in combination with government support, as a panacea for these companies' credit concerns," S&P analyst Robert Schulz wrote in a report Wednesday.

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