Chrysler Deal Threatened by Financing

NEW YORK/DETROIT (Reuters) – General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) has detailed a plan to slash costs at Chrysler LLC but initial attempts to secure financing for the controversial merger have been rebuffed, raising new doubts about whether it can be completed without government aid.

GM Chief Operating Officer Fritz Henderson and the executive team leading talks with Chrysler’s majority owner Cerberus Capital Management [CBS.UL] believe GM can strike a deal to pick up Chrysler’s most valuable assets and shore up its own cash position in the process, according to people familiar with the talks who were not authorized to discuss the negotiations.

But an acquisition would be expensive, and finding financing in current markets for a merger between companies that have been losing billions and burning through cash rapidly is proving to be a tall order.

Chrysler has $9 billion in debt that, under a change of control, would have to be paid off if it cannot be refinanced.

Additionally, a cash-strapped GM needs between $4 billion and $5 billion for payouts for the estimated 30,000 to 40,000 jobs that would be cut through a merger and to close most of Chrysler’s 14 assembly plants, the sources said.

To put that additional funding in perspective, GM’s market capitalization was only $3.7 billion as of Monday.

GM had about $21 billion in cash at the end of the second quarter, but it was burning through more than $1 billion a month. The automaker has counted on its ability to raise up to $5 billion through a combination of borrowing and asset sales to make it through 2009, but the recent churn in credit markets has threatened that goal, analysts say.

GM wants access to Chrysler’s cash — about $11.7 billion at the end of June — in the event of a merger, sources have said. But some of that cash would have to be used to pay down Chrysler’s borrowing if it cannot be restructured.

The risk associated with such a deal amid collapsing demand for autos in key markets in Europe and the United States has scared off potential investors already, sources said.

And the United Auto Workers union, which has already loaned GM $1.7 billion at 9 percent, is seen as a long shot to fund a deal that could cut Chrysler’s factory work force in half.

Ultimately, whether the deal gets done or not could come down to whether the U.S. government steps in as lender and investor of last resort, one banker said.

“It’s like a Kabuki dance,” another person familiar with the talks said. “Everyone already knows the outcome. They are going to have to go to the Fed for money.”

Executives on both sides worry that the window to seek U.S. government aid for the merger could close after the presidential election on Nov. 4, a race that has seen both Democrat Barack Obama and Republican John McCain express support for the the troubled auto industry.

“There’s a feeling that if this is not done in the next two weeks, it won’t get done at all,” said one person briefed on the ongoing talks.


Representatives of GM and Cerberus have approached at least one major investor with a pitch to invest in the deal, a source briefed on the matter told Reuters.

The pitch for a capital injection for a merged automaker that would control about a third of the U.S. light-vehicle market was met with “a great degree of apprehension,” the person said.

The result has been a volatile set of negotiations between Cerberus and GM with both sides looking closer to a deal and then seeing it in danger of falling apart, one person involved in the talks said.

Cerberus has also had talks with Renault-Nissan, the joint venture of the French (RENA.PA: Quote, Profile, Research, Stock Buzz) and Japanese (7201.T: Quote, Profile, Research, Stock Buzz) carmakers, on its interest in Chrysler, sources have said.

U.S. auto sales have slid to 15-year lows this year and are expected to drop further in October as credit tightens for consumers. GM’s sales were off 18 percent through September. Chrysler’s sales fell 25 percent.

There are no clear alternative sources for funding and both Cerberus and GM have been hit by the extraordinary pressure on credit markets since late summer.

Existing Cerberus creditors are also wary of restructuring the $7 billion bank term loan due in 2013, a person briefed on the financing effort said.

Banks including JP Morgan, Citigroup, Morgan Stanley and Goldman Sachs underwrote that loan, now trading at 36-40 cents on the dollar. Those lenders are eager to see a deal done but are balking at helping finance what is looked at as a risky investment, one source said.

Analysts have been deeply skeptical of the benefits of the merger, arguing that it presents high costs upfront and uncertain prospects that enough savings can be wrung out of the combined company fast enough.

JP Morgan analyst Himanshu Patel said a GM-Chrysler merger would represent a “high-risk transaction,” but could also position the combined automaker to extract more concessions from the UAW and secure new financing.

The key, he said in a note for clients, would be if GM is seen as “saving Chrysler from insolvency.”

By Jui Chakravorty Das and Kevin Krolicki