"NEW YORK/DETROIT (Reuters) General Motors Corp (GM.N) has asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support its acquisition of Chrysler LLC from Cerberus Capital Management (CBS.UL), sources familiar with the talks said.
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 authorized to discuss the matter publicly.
The U.S. 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 on Monday.
The request for federal aid is being led by GM. The automaker's chief executive, Rick Wagoner, was in Washington in recent days to lobby administration officials.
Cerberus has not been involved in any of the lobbying efforts, a source familiar with the matter said.
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 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 U.S. automaker.
It would also give U.S. taxpayers a large stake in the turnaround of a struggling auto industry that employs more than 350,000 American workers and is credited with supporting employment for another 4.5 million in related fields.
Analysts perceive GM, Chrysler and rival Ford Motor Co (F.N) as 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 U.S. 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 U.S. government purchases of commercial paper to relieve short-term pressure on liquidity, the person said.
GM could not immediately be reached for comment. Cerberus and Chrysler had no comment.
TOO BIG TO FAIL?
A combined GM-Chrysler would control roughly a third of the U.S. 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 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 U.S. 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 (7201.T) and Renault SA (RENA.PA), told a business seminar in Tokyo, adding the worst is yet to come.
Ghosn predicted U.S. auto sales would stay at an annualized rate of 12.5 million vehicles through March. U.S. car sales slumped by 26 percent last month to that level.
Moody's Investors Service cut its GM rating on Monday 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 capitalization 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 (DAIGn.DE), which holds the 19.9 percent of the struggling automaker not owned by Cerberus.
Chrysler's U.S. sales have tumbled by 25 percent this year, almost twice the rate of decline for the overall market. GM's sales had dropped almost 18 percent through September.
GM's shares have slumped nearly 80 percent this year and its market value has dropped below what it was in 1929."
The Detroit 3 already got $25 billion, now GM wants another $10 billion, what will Ford want next week? "GM has a market capitalization of just over $3 billion based on Monday's close and roughly $10 billion of outstanding debt." Think about that, does it make any sense to be lending that kind of money to a business that has GM's track record? Would any bank lend you $1 million based on the fact you own a house worth $300,000 (that used to be worth $1.5 million) that already has a $1 million mortgage on it? That is essentially what GM is asking the US government to do.
-- Edited by Astro Jet at 18:54, 2008-10-28
-- Edited by Astro Jet at 19:50, 2008-10-28
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Hillar
1970 LS4 (eventually an LS5) Laurentian 2dr hdtp -and a bunch of other muscle cars...
That is a nice looking logo. It's hard to say how the US Government will handle this one and like it says in the article what will Ford want next week? It's hard to say how this will affect the auto industry as well. With the government having a "stake" in the company will there be legislation to limit the age of cars on the road? Take Japan for example; three years old and the cars are gone. It keeps pollution down but also keeps new sales up. That sounds like two problems we are facing as well.
"Analysts perceive GM, Chrysler and rival Ford Motor Co (F.N) as driven to the brink of failure by a combination of management missteps, slowing global growth and problems in credit markets". Big 3 management is totally to blame for the problems they are in.This is capitalist corporation. Run by CEO's, Board of directors, Company presidents, etc. They were asleep at the wheel for last 25 years
Actually the comment about what will Ford want next week was mine Brad. I've high-lighted the original article.
With the government having a major stake in the automakers and maybe even controlling votes at the board table, does anyone think this will be a good thing? I'm afraid performance oriented cars would all but disappear. Can you imagine anyone being able to convince the US government, especially if you have a bunch left leaning greenie Democrats in control, that we need a car like the ZR1? What we will get are a bunch of Prius type knock offs with speed limiters and black boxes that record our every move, whether it is attempted speeding, going too fast around a corner or braking too hard, which obviously means you were going too fast in the first place!
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Hillar
1970 LS4 (eventually an LS5) Laurentian 2dr hdtp -and a bunch of other muscle cars...
Well no matter how distasteful a government bailout yet again may seem, the reality here in Ontario is that for each auto manufacturing job there are 6 to 8 jobs supporting that one job. The North American auto industry carries so much of the economy that if it melts down, we have not seen anything on the TSX or Dow to compare yet. Good reasons why we need good people in office not the bozos we have on both sides of the border. I'll borrow a page from Sarah Palin and place the blame on the mainstream media. Nobody with half a brain would run for office and be subjected to the pernicious attacks razed on politicians.
