GM-Chrysler merger talks advance

GM-Chrysler merger talks advance http://tinyurl.com/5sbvqg
October 18, 2008: 1:41 PM ET
DETROIT (AP) -- In the doomsday scenario raising anxiety around the
Motor City, General Motors Corp. makes a deal for Chrysler, keeps Jeep and the minivans, and vaporizes the rest of the company.
Tens of thousands of Chrysler's 66,409 employees lose their jobs as cash-desperate GM swiftly cuts redundant operations and sheds unprofitable models. Factories and dealerships are closed, and the lights go out at Chrysler's gleaming corporate headquarters campus in the northern suburb of Auburn Hills.
It's not something Andre Thibodeaux wants to think about. The general manager of Lelli's, an upscale steakhouse and Italian restaurant near Chrysler's 15-story tower, gets about half his lunch business from the automaker and related businesses.
The eatery, with roots in downtown Detroit and family owned for three generations, already has lost business as Chrysler and parts suppliers have downsized and people eat out less due to economic worries. The loss of Chrysler's corporate headquarters is almost unthinkable.
"I can't imagine moving the building or changing or selling or anything like that," said Thibodeaux. "Auburn Hills in general is built all around that building."
Although it may be unimaginable, industry analysts say GM (GM, Fortune 500) would have no choice but to slash costs if it acquires struggling Chrysler from its current owner, New York private equity firm Cerberus Capital Management.
Both sides have been talking for months, but the pace recently has increased. Cerberus wants out of the auto business, and as the credit markets have dried up, GM, worried about running too low on cash before the U.S. auto market rebounds, wants Chrysler's currency stockpile.
A person familiar with the negotiations said Friday that the talks have advanced to the point where top executives of both companies have looked at a deal and asked for refinements. The person spoke on condition of anonymity because the talks are secret. Deal still a long way off
In August, Chrysler said it had accumulated $11.7 billion in cash and marketable securities as of June 30. That figure remains around $11 billion, the person said, despite Chrysler's U.S. sales being down 25 percent through September, the largest decline of any major automaker.
Detroit-based GM is burning up more than $1 billion per month, with several analysts predicting it will reach its minimum operating cash level of $14 billion sometime next year. GM's sales are down 18 percent, and the company has lost $57.5 billion in the past 18 months, although much of that comes from noncash tax accounting changes.
Chrysler's money pile would help solve GM's cash problem if credit remains unavailable.
Both automakers have had to deny bankruptcy rumors in recent weeks, saying people who won't buy cars from a company that looks like it could go out of business.
According to the person familiar with the negotiations, the deal being discussed thus far calls for Cerberus to hand over Chrysler in exchange for GM's 49 percent stake in GMAC Financial Services. GM sold a 51 percent stake in its finance arm to Cerberus in 2006.
Cerberus also would get an equity stake in GM, hoping to get a good return should GM recover when U.S. auto sales bounce back from a serious slump.
Other automakers, including the allied companies of Renault and Nissan Motor (NSANY), also are in discussions about Chrysler, the person said. Simultaneously, Cerberus, which bought 80.1 percent of Chrysler from Daimler (DAI) in a $7.4 billion deal last year, is negotiating to acquire Daimler's 19.9 percent stake.
GM and Cerberus are still a long way from a deal, according to the person, and GM's board reportedly is cool to the idea.
All that GM, Chrysler and Cerberus have said about the negotiations is that automakers meet all the time. Chrysler Chief Executive Bob Nardelli said Thursday the auto sales drop has created an environment that favors consolidation. The upside of a Detroit Two
It's the uncertainty of consolidation that worries many in Michigan, which has lost more than 400,000 jobs since 2000. Its unemployment rate in September was 8.7 percent, the highest in the nation, as GM, Chrysler and Ford (F, Fortune 500) continued to make cuts.
"Mergers usually represent job loss," Gov. Jennifer Granholm said Friday on the Public Broadcasting Service's Nightly Business Report. "We are fearful that a merger would mean more job loss, and that is the last thing we need."
Among the fearful are Chrysler workers and its roughly 3,600 dealers, who already are under pressure from the company to merge with other dealers and scale back their ranks.
"If you end up going from the Detroit Three to the Detroit Two, you don't need as many dealers representing those nameplates," said Dale Early, owner of a Chrysler-Jeep dealer in the Houston suburb of Kingwood, Texas. "With the market the way it is today, you don't necessarily have a need for three major manufacturers," he said.
The upside of an acquisition, industry analysts say, is that it would almost certainly shrink the U.S. auto industry to where it needs to be so the survivors can thrive. Many analysts are predicting that the U.S. auto market will shrink to sales of about 13 million vehicles this year. That's a drop of about 3 million from 2007, and the decline is more than Toyota's (TM) U.S. sales last year.
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Civis Romanus Sum

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Jim Higgins wrote:

Chrysler announced recently they were laying off 1 or maybe 2 shifts at their minivan plant in Windsor.

So how is GM supposed to get their hands on Chrysler? By borrowing money to buy Chrysler?
Please explain the logic where you borrow money to get your hands on Chrysler's money. Where the hell is the logic in that? How does that add up?

I was wondering about that.
I wonder if that's going to be a deal breaker if Daimler plays hardball. Maybe Daimler will end up with a share of the new GM. I'm sure they'd like that - they'd find a way to have their old E-class suspension and drive train parts end up in the next generation of GM vehicles, just like what handicapped Chrysler for the past 5 years.
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MoPar Man wrote:

By trading stock for the remainder share of GMAC.
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As I understand it, they trade what they still own of GMAC to Cerberus, who owns slightly over half of GMAC now, for Chrysler. No money changes hands.
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Joe Pfeiffer wrote:

Any ideas what Chrysler is worth (assets minus liabilities) - with and without taking their $12 billion cash-in-the-bank into account?

I guess for that to happen, Cerberus will have to buy out Daimler's 20% share of Chrysler first.
------------ Is Chrysler really worth GMAC + $3 billion ???
No mention of what might happen to the Chrysler 300 vehicle line in this story:
http://www.tennessean.com/apps/pbcs.dll/article?AID=/20081019/BUSINESS01/810190390/1003/NEWS01
Under a potential deal widely reported by the financial media, Cerberus would trade Chrysler and $3 billion in cash for the remaining 49 percent stake that GM still holds in the GMAC finance unit. Cerberus bought the other 51 percent of GMAC from GM last year.
GM's real interest in Chrysler might lie with the Jeep sport utility vehicle brand, as well as the minivan line, which includes the Chrysler Town & Country and Dodge Grand Caravan.
GM has no minivans in its current lineup, although it does sell a line of crossover utility vehicles, including the new Chevrolet Traverse made in Spring Hill, that compete against minivans.
"Some of this makes sense, but not all of it," auto analyst George Magliano with Global Insight said of a possible Chrysler-GM merger.
"Initially when Chrysler was put into play, GM wanted the Jeep brand and the minivans," he said. "Beyond that, the other stuff probably would be up for grabs. In an ideal world, GM would keep Jeep and the minivans, and sell off the rest."
With a breakup of Chrysler, the other potentially valuable pieces that could find separate buyers include its Mopar parts operation and Chrysler Financial, its captive finance unit.
In almost any merger or breakup scenario, Dodge and Chrysler's midsize cars and truck-based sport utility vehicles would be eliminated, analysts said. That includes the Dodge Avenger and Chrysler Sebring sedans, as well as the Dodge Durango and Chrysler Aspen SUVs.
GM has a strong line of midsize sedans, led by the award-winning Chevrolet Malibu and Saturn Aura. And it has a popular line of SUVs, including the Chevy Tahoe and Suburban, GMC Yukon and Cadillac Escalade.
Also in doubt would be the Dodge Ram pickup line, Anwyl said. The Ram — with just a 20 percent market share — is a relatively small player.
GM already has the industry's best-selling full-size pickups — the Chevrolet Silverado and GMC Sierra — whose combined sales totaled nearly 1 million units last year, although sales are off significantly this year.
If GM bought Chrysler, "would you stop making Ram and hope those buyers like the Silverado?" Anwyl said. "Or would you try to differentiate them enough in the marketplace to keep from losing share? Throw another vehicle into the mix, and it gets complicated."
GM also might have to do away with some brands, as well, analysts said. Chrysler is considered to be the most vulnerable, because Dodge and Jeep are more popular.
But some GM brands could be on a hit list, too. During GM's recent financial upheaval, some critics suggested axing the Pontiac, Buick and Saturn lines, leaving only Chevrolet, GMC and Cadillac in the GM fold. GM already has the Hummer SUV brand on the auction block.
Jeep could fill the void left by Hummer, several analysts said.
While Hummer has just premium-priced vehicles in its lineup, both of which are regarded as gas-guzzlers, Jeep has a full range of sport utilities, with prices starting around a modest $16,000.
It also has the iconic Wrangler off-road vehicle that has been the key Jeep product since the brand's inception after the end of World War II.
"Jeep is strong," Anwyl said, even with this past year's downturn in SUV sales. "It's something that GM or any other automaker might want."
The most economical Jeeps have fuel economy similar to that of some compact cars. The five-passenger Patriot, for instance, has EPA ratings as high as 23 miles per gallon in the city and 28 on the highway.
For Renault, the acquisition of Jeep would allow it to slip back into the U.S. market, which it abandoned completely with the sale of Jeep and American Motors. The company has said in recent years that it would like to return to the United States. But startup costs have been prohibitive, considering that without an alliance with an automaker already here, Renault would have to establish an entirely new dealer network.
With the purchase of Jeep, it would have an established dealer network that could also be used to sell some of Renault's fuel-efficient small cars that are popular in Europe.
Renault's chief executive is Carlos Ghosn, who also is the CEO of Japan's Nissan. Nissan North America is based in Franklin.
Renault holds a 44.3 percent stake in Nissan, while Nissan owns 15 percent of Renault. The French government also is a Renault stockholder.
In a recent memoir, former Renault Chairman Louis Schweitzer said that he regretted selling Jeep and AMC to Chrysler. At the time, though, the two brands were languishing.
"Renault buying Jeep could make sense," Magliano said. "It would be a quick way to get back into the U.S. market."
Ghosn made it clear during a visit to Nashville in July that Nissan wasn't interested in acquiring Chrysler. But the two companies do have agreements to manufacture vehicles for each other over the next few years, and Nissan is not expecting those deals to be affected by any changes in Chrysler ownership.
"As you know, we have three recently announced vehicle agreements in place with Chrysler —two small cars and a truck," Nissan spokesman Fred Standish said.
"Other than that, we're just keeping the lines of communication open."
Nissan will build the two cars for Chrysler, and Chrysler will provide Nissan with a full-size pickup.
The cash that Chrysler would bring to GM might make an all-in-one sale the best option for Cerberus and GM, Magliano said, although he believes it's more likely that Chrysler would be broken up.
But either way, Cerberus probably wants to get out of the auto business, he said. "The timing for them just turned out to be wrong," he said.
"When the deal was made for Chrysler last year, I don't think anybody counted on the credit crisis and the market going this way. It's been tough for Cerberus." -------------
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No.
I thought I saw that that was also being negotiated. Though, of course, the deal could end up being 49% of GMAC for 80% of Chrysler.
<scary story snipped>
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