GM seeks $10 bln gov't aid for merger-sources

• Reuters
• , Tuesday October 28 2008

(Adds details on Chrysler buyouts, GMAC action)

By Jui Chakravorty Das and Kevin Krolicki

NEW YORK/DETROIT, Oct 28 (Reuters) - General Motors Corp 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, 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, a person familiar with the matter said on Tuesday. The automaker's chief executive, Rick Wagoner, has been in Washington in recent days to lobby administration officials.

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 rapidly declining, 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 Standard & Poor's rating agency.

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 and potentially risky stake in the turnaround of a struggling auto industry that employs more than 350,000 American workers.

Analysts say GM, Chrysler and Ford Motor Co have been 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 be reached for comment. Cerberus and Chrysler had no comment.

Chrysler said separately on Tuesday that it was offering white-collar workers up to $75,000 cash and vehicle vouchers valued at $25,000 as part of its effort to slash 5,000 jobs.

TOO BIG TO FAIL?

A combined GM-Chrysler would control roughly a third of the U.S. auto market 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.

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.

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.

In a step it said was triggered by the pressure on credit markets, GM's affiliated finance company GMAC said it was curtailing auto financing in Europe. GMAC, 51 percent owned by Cerberus and 49 percent by GM, had already taken similar steps to limit its risk from auto financing in North America.

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, 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. (Reporting by Jui Chakravorty Das and Kevin Krolicki, additional reporting by David Bailey in Detroit, editing by Ian Geoghegan and Matthew Lewis)