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GM, Chrysler seek $10bn govt aid

2008-10-28 07:05

New York/Detroit - General Motors Corp and Cerberus Capital Management have asked the US government for around $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler LLC, two sources with direct knowledge of the talks said on Monday.

The government funding would include roughly $3 billion in exchange for preferred stock in a merged automaker, according to one of the sources, who was not authorised to discuss the matter publicly.

The US Treasury Department is considering a request for direct aid to facilitate the merger and a decision could come this week, sources familiar with the still-developing government response said earlier on Monday.

GM has been in talks with Cerberus about buying Chrysler since last month but the discussions have been snagged by difficulty in securing investment or financing for a deal at a time when credit is tight and global auto sales are in rapid retreat, others close to the talks have said.

A decision by the Bush administration to provide the government's first funding for the auto sector since the $1.5 billion bailout of Chrysler in 1980 has been widely seen as the merger's best chance for success.

"The automakers are facing a maelstrom and that's why I think an unprecedented government infusion could happen," said Efraim Levy, an automotive equity analyst with S&P.

An injection of $3 billion in equity to support a GM acquisition of Chrysler would be roughly equivalent to the current, depressed value of the top US automaker.

It would also give US taxpayers a large stake in the turnaround of a struggling auto industry that employs over 350 000 American workers and is credited with supporting employment for another 4.5 million in related fields.

Analysts see GM, Chrysler and rival Ford Motor having been driven to the brink of failure by a combination of management missteps, slowing global growth and problems in credit markets.

Now, in addition to taking a stake in what would be the world's largest automaker by volume, the US government is also being asked to provide support by taking over some $3 billion in pension obligations, the first source said.

The final component of the proposed support would be a credit line that could include US government purchases of commercial paper to relieve short-term pressure on liquidity, the person said.

GM could not be immediately reached for comment. Cerberus and Chrysler had no comment.

Too big to fail?

A combined GM-Chrysler would control roughly a third of the US auto market by sales and would face immediate pressure to cut costs stemming from excess capacity in almost every facet of its business. Those would include a stable of 11 brands, some 10 000 dealers and 97 000 union-represented factory workers.

But one of the conditions of a merger would be that GM-Chrysler would spare as many jobs as possible to win broad political support for the government funding, people familiar with the merger discussions said.

Many analysts are skeptical that balance can be struck.

"I still think they need to make deep cuts to survive," said IHS Global Insight analyst Aaron Bragman.

The roughly $10 billion in government funds to support a merger would be in addition to whatever funds would be allocated under an already approved $25 billion program to provide low-interest loans to the auto industry for retooling to make more fuel-efficient cars.

A government rescue package would come at a time when investors and creditors are increasingly concerned about the ability of US automakers to survive a punishing downturn in sales now expected to continue into 2010.

"Nobody reasonable is going to tell you that next year we're going to be out (of this crisis)," Carlos Ghosn, head of Nissan Motor Co and Renault SA, told a business seminar in Tokyo, adding the worst is yet to come.

Ghosn predicted US auto sales would stay at an annualised rate of 12.5 million vehicles through March. US car sales slumped 26% last month to that level.

Moody's Investors Service on Monday cut its rating on GM deeper into junk territory on the view that GM's liquidity would continue to erode into 2009. The ratings agency also cut Chrysler for similar reasons and said it might cut Ford.

GM has a market capitalisation of just over $3 billion based on Monday's close and roughly $10 billion of outstanding debt. Chrysler's privately held auto operations were valued at zero last week by Daimler AG, which holds the 19.9% of the struggling automaker not owned by Cerberus.

Chrysler's US sales have tumbled 25% this year, almost twice the rate of decline for the overall market. GM's sales had dropped almost 18% through September.

GM's shares have slumped nearly 80% this year and its market value has dropped below what it was in 1929.


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