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Thursday, October 30, 2008

GM Chrysler merger Edges Closer

DETROIT — General Motors may be inching closer to a merger with Chrysler, as it appears to have resolved most major issues with Chrysler's private-equity parent, Cerberus Capital Management. However, at least one major stumbling block remains: how to finance the deal.

The outcome could hinge on a loan or a handout from the federal government, since major banks and lending institutions have shied away from extending more credit to any of the debt-ridden, Detroit-based automakers.

GM and Cerberus have been holding private talks for nearly a month on a potential GM takeover of Chrysler. Both sides have agreed that GM's Chief Executive Rick Wagoner and his management team would lead the combined companies, according to reports Wednesday from Reuters and the Associated Press.

Less certain are the benefits of such a combination. The only clear upside for GM would be access to Chrysler's modest stockpile of money, said to total more than $10 billion. At its current "burn" rate of more than $1 billion a month, that might buy GM another nine months of survival, barring any significant uptick in vehicle sales or additional outside funding.

As for Cerberus, it could cut its losses on the Chrysler deal. Sunk costs include an up-front investment of $7 billion spent to acquire an 80-percent stake from Germany's Daimler, plus additional funds required to service Chrysler's bulging debt. Sources close to Chrysler say the company continues to bleed cash as vehicle sales remain locked in a downward spiral.

Cerberus also had been negotiating to acquire GM's remaining 49-percent interest in its financing arm, GMAC, but it is not clear if GM has agreed to put up that stake as part of the Chrysler takeover deal.

Yet to be publicly resolved — or even clarified — are how the two automakers intend to rationalize their overstuffed brand portfolios, their overlapping product lines, their idle and underused factories and their redundant white-collar staffs and blue-collar workforces, not to mention surplus dealerships and overlapping design, engineering and product development organizations.

News reports have speculated that a combined GM-Chrysler would be the world's largest automaker, controlling one-third of U.S. vehicle sales. But those reports don't take into account the savage pruning of products and people that will almost certainly be required to restore profitability in Detroit's war-torn auto industry.

Another major sticking point is the tens of millions of dollars in combined debt between GM and Chrysler — debt that requires huge interest payments and which has become almost impossible to refinance, given the companies' rock-bottom credit ratings and dismal financial outlook.

Cerberus reportedly is trying to negotiate a refinancing package for Chrysler, with a lending consortium that includes such Wall Street giants as JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.

GM, meanwhile, is said to be seeking $10 billion to $15 billion in immediate financing from the federal government, in part to help fund the Chrysler takeover. Analysts said GM may even offer to give the government an equity stake in the automaker to help secure financing.