Detroit - General Motors Corp shares closed up 33%on Monday on signs that the number one US carmaker had explored options ranging from a merger with Ford Motor Co or Chrysler to federal funding in order to ride out a brutal downturn in sales.
But despite the rally, signs of distress in the auto market mounted with analysts seeing no signs of a rebound in US vehicle sales in October.
GM plans to close two plants, including its oldest and largest assembly plant in Wisconsin, by the end of the year and a stamping plant in Grand, Rapids, Michigan, by the end of 2009.
Its affiliated finance arm GMAC also announced that it is tightening its consumer auto lending standards.
Forecasting service CSM Worldwide on Monday said it expected auto production in North America in 2009 to drop 9% from the output levels of this year to an 18-year low of 11.8 million units.
US industrywide sales this month is expected to be down as much as 30%, according to Citigroup analyst Itay Michaeli.
Ford strongest of Big Three
Analysts said the latest industry developments, including the more recent merger talks between GM and Chrysler, underscored Ford's position as the strongest of the three US-based automakers, with the most time to complete its own turnaround plan. Ford shares closed up 20%.
But even after the rally, GM and Ford shares remain at near-historic lows. Ford shares have declined 65% since the start of the year, while GM shares have lost 74% of their value.
Privately-held Chrysler LLC Chief Executive Bob Nardelli said the automaker was talking with third parties to explore tie-ups amid a global credit crunch that he said presented a more serious challenge than high gasoline prices.
GM has ruled out a bankruptcy filing, but faces scrutiny over whether it has the cash to survive a downturn that began in the United States and is spreading to Europe and Asia.
"I think they will do everything possible to avoid a bankruptcy," Crowe Horwath analyst Erich Merkle said. "A bankruptcy won't help GM or any other automaker. That would be unthinkable."
Analysts said a merger might allow the top US automaker to boost its cash holdings and give it bargaining power to seek new concessions from the United Auto Workers union.
GM shares, which traded near 60-year lows last week, jumped as high as $8.03 on Monday before falling back to end at $6.51. Ford closed up at $2.39 after rising as high as $2.95.
The gains came amid a rebound in the broader market tied to steps by the government to stabilise the banking system and after news of the merger talks surfaced over the weekend.
A GM, Chrysler tie-up?
People familiar with the situation said GM was discussing a combination with Chrysler, which is controlled by private equity firm Cerberus Capital Management.
Those talks hit a snag over the question of how to value Chrysler, the sources said. Cerberus bought an 80% stake in the company for about $7.4 billion from Daimler AG in 2007, but auto sales have dropped sharply since.
In addition, GM and Ford had earlier explored a potential merger, but those discussions broke off without a deal, according to a person familiar with those talks.
GM is also seeking expedited access to its share of $25 billion in low-cost federal loans approved by the Bush administration last month and has not ruled out seeking an emergency loan from the US Federal Reserve.
Deal or no deal
JPMorgan analyst Himanshu Patel said the benefits for GM would be greater from a deal with Ford, but said there could also be some gains from a merger with Chrysler.
Cerberus had proposed swapping Chrysler's auto operations for the 49% stake in finance company GMAC still owned by GM. The firm already owns 51% of GMAC after it bought the stake from the automaker in 2006.
Patel said GM's stake in GMAC could be worth $3 billion, while Chrysler's auto business was "arguably nearly worthless on a stand-alone basis."
If GM received $3 billion in a swap with Cerberus and got access to the estimated $10 billion remaining on Chrysler's books, it could mean an important boost in the company's cash position.
"There might be something to be had here in terms of cash," Merkle said. "That's the real issue."
Any Chrysler deal hinges on Cerberus buying Daimler's 19.9% stake in the company. Cerberus has approached Daimler to buy out its remaining interest, but a Daimler spokesman said on Monday that there was no timetable for those talks.
Restricting car loans
In another sign of the pressure for GM, GMAC said it would restrict car loans to US consumers with credit scores of 700 or above and has increased the rate it charges car dealers for providing standard auto financing by 75 basis points.
Standard & Poor's kept its ratings on the automaker and GMAC on review for a possible downgrade, saying that despite potential cost savings, a GM-Chrysler combination could carry massive risks.
Calyon Securities analyst Mark Warnsman said the winners from any deal to combine GM and Chrysler could be suppliers such as Johnson Controls Inc and Gentex Corp , rather than the merged auto companies.
"We are skeptical of major incremental savings resulting from a combination," Warnsman said.