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US: GM-Chrysler merger talks continue

By just-auto.com editorial team | 21 October 2008

Talks over a possible deal between General Motors and Chrysler continued on Monday, but an agreement wasn't close, sources told a Detroit newspaper.

The talks resumed after discussions in New York at the weekend and included a group of banks led by JPMorgan Chase, which holds about US$10bn in Chrysler debt after the banks failed to sell it to other investors last year, the Detroit News reported.

Analysts reportedly said the banks' role could prove crucial, especially given that a combined GM-Chrysler would need to shed tens of thousands of jobs and spend billions on restructuring.

Earlier reports suggested a merger could lead to the axing of another 10,000 jobs (the Wall Street Journal on Monday said 40,000), on top of the 100,000 automaker posts already gone in Michigan.

Sources told the Detroit news GM could gain billions in cost savings from Chrysler by blending in most of its operations in rather than running Chrysler as a separate company. Earlier reports suggested GM would be interested only in a limited number of Chrysler facilities, including a light truck plant in Mexico.

It could also benefit from access to Chrysler's estimated $11bn in cash as GM continues to burn through an estimated $1 billion a month.

"While a GM-Chrysler tie-up would clearly be a high risk transaction from an operational perspective, such a transaction may give GM leverage over two key stakeholders: the UAW and banks," JP Morgan auto analyst Himanshu Patel wrote in a research note cited by the paper. "By saving Chrysler from a liquidity event, GM may also be able to get itself much needed secured bank financing from the same banks that are currently holding Chrysler debt."

Earlier US media reports - again citing anonymous sources because so far there has been no official comment from any party - that both Chrysler owner Cerberus Capital Management and GM would like to conclude talks by 4 November, the date of the US presidential election. On the campaign trail, both candidates have visted auto and components plants in strong auto-producing states such as Michigan and Ohio.

The Renault-Nissan alliance is still in talks with Cerberus about acquiring Chrysler, the Detroit News said.

The report noted that barriers to any deal include whether the US government would provide any financing to help a merger. Analysts reportedly said GM could have problems securing the funding for severance packages needed to significantly cut the merged company's work force.

It has already spent at least $4.7bn on restructuring in 2008 alone - on top of the $13bn outlaid between 2005 and 2007 on restructuring and workforce reduction, the paper said.

David Cole, chairman of the Center for Automotive Research, told the Detroit News he thought a GM-Chrysler deal was a "90 percent certainty", adding that the federal government was likely to financially support a tie-up.

"The cost of a cleanup would be a lot of more than preventative measures," he told the Detroit News. "The banks are pushing hard. They want to see a consolidation. A combined GM-Chrysler becomes too big to fail from a policy standpoint."