GM wants $10 billion in aid to buy Chrysler
10-29-2008, 08:47 AM
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GM wants $10 billion in aid to buy Chrysler
In the latest development of The Incomprehensible Union, General Motors is reportedly asking the U.S. government for $10 billion — on top of the $25 billion loan approved recently — to help it merge with Chrysler. The supplemental infusion would give the government, i.e. you and me, a stake in the merged company in the form of preferred stock, would see the government taking over pension obligations and provide a credit line for operations.
The government is weighing the request since it’s likely that no federal official wants to be on the watch that saw the instantaneous vaporizing of two American icons and hundreds of thousands of jobs. The government has asked that as many jobs as possible be spared, and GM said “Sure!” Yet for a merger where cost savings and redundancy elimination have been the headlines, we don’t know why anyone believes GM-Chrysler wouldn’t jettison a whole bunch of the 11 brands, 10,000 dealers, and 100,000 union jobs. And that’s just for starters.
Which is one of the (many) reasons we still don’t understand the GM-Chrysler union. The additional $10 billion we can swallow — after all, the government spends much more than that on projects that could be considered far more dubious than trying to save an astronomical number of jobs and businesses. And we know what Cerberus gets from the deal. We’d like to find out what the GM guys see that makes this merger attractive… other than the fact that Chrysler has $11 billion in cash.
The government is weighing the request since it’s likely that no federal official wants to be on the watch that saw the instantaneous vaporizing of two American icons and hundreds of thousands of jobs. The government has asked that as many jobs as possible be spared, and GM said “Sure!” Yet for a merger where cost savings and redundancy elimination have been the headlines, we don’t know why anyone believes GM-Chrysler wouldn’t jettison a whole bunch of the 11 brands, 10,000 dealers, and 100,000 union jobs. And that’s just for starters.
Which is one of the (many) reasons we still don’t understand the GM-Chrysler union. The additional $10 billion we can swallow — after all, the government spends much more than that on projects that could be considered far more dubious than trying to save an astronomical number of jobs and businesses. And we know what Cerberus gets from the deal. We’d like to find out what the GM guys see that makes this merger attractive… other than the fact that Chrysler has $11 billion in cash.
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: Quote, Profile, Research, Stock Buzz) 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: Quote, Profile, Research, Stock Buzz) and Renault SA (RENA.PA: Quote, Profile, Research, Stock Buzz), 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: Quote, Profile, Research, Stock Buzz), 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.
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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: Quote, Profile, Research, Stock Buzz) 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: Quote, Profile, Research, Stock Buzz) and Renault SA (RENA.PA: Quote, Profile, Research, Stock Buzz), 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: Quote, Profile, Research, Stock Buzz), 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.
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