Business - GM eyes Chrysler cash,talk progressing

Kevin Krolicki

DETROIT (Reuters) - General Motors Corp is pushing ahead with talks to acquire Chrysler LLC in a deal that the automaker sees as a way to boost its cash position at a time when it has been shut out of debt markets and its own revenues are tumbling, sources said.

The negotiations involving Cerberus Capital Management, Chrysler's private equity owner, have intensified in recent days and are moving closer toward a conclusion, according to people briefed on the talks who asked not to be identified.

The prospect of merging Chrysler and GM has been viewed as a deal of desperation by most analysts since both automakers are losing money and are saddled with a cash-draining surplus of American dealers, workers and plants.

But GM executives believes the automaker could clinch a deal that would give it a share of Chrysler's remaining cash while allowing it to cut costs quickly, the sources said.

Although it does not report financial information, Cerberus has said Chrysler ended June with $11.7 billion.

Chrysler has 14 assembly plants and the expectation is that many of those would be in danger of being shut if it merges.

Once the deal closes, GM is only interested in keeping Chrysler plants where the No. 3 U.S. automaker has made significant investments in retooling, the sources said.

That could include Chrysler's truck plant in Saltillo, Mexico, the Jefferson North Jeep plant in Detroit and its Belvidere, Illinois car assembly plant, one source briefed on the talks said. The sources were not authorized to discuss the talks since the companies are saying nothing on the record.

But such a deal would involve the loss of thousands of jobs, deepening a slump in rust-belt states like Michigan and Ohio that has been a key issue for both presidential candidates.

It would also mean the end of Detroit's "Big Three," sending the curtain down on Chrysler after a turbulent 80-year run that saw it lurch from booms to busts and back while setting smart designs with products like the first minivans and the 300 sedan.

"This would basically mean the end of Chrysler," said Global Insight analyst Aaron Bragman.

GM could not be immediately reached for comment. Cerberus and Chrysler had no comment.

UNCERTAINTIES ABOUND

It was not clear how Chrysler's obligations to a health-care trust affiliated with the United Auto Workers union or how Chrysler creditors representing $9 billion in debt would be treated under a merger with GM.

Sources familiar with the thinking of Cerberus have said the private equity firm wants to keep a stake in any merger of Chrysler with another automaker.

Both Cerberus and GM have been hit by the growing pressure on credit markets in recent weeks.

Detroit-based GMAC, now 51-percent owned by Cerberus, has seen its access to funds pressured by the financial market turmoil and has sharply restricted loans to GM car buyers.

Recent trading in GM bonds suggests that its cost of funds would be above a punitive 20 percent, analysts have said.

With new borrowing off the table, GM has shifted its attention to getting a fast share of $25 billion in recently approved, taxpayer-backed loans from the U.S. government and the Chrysler deal, people familiar with the talks have said.

GM burned through $3.6 billion in cash in the second quarter and is expected to show an even faster rate of cash burn in the current quarter as auto sales slumped further and it recorded charges to cut some 5,000 salaried jobs.

GM ended the second-quarter with $21 billion in cash and has said it needs to maintain $11 billion and $14 billion.

Analysts say it is not clear how much of that would be left for GM after payouts to cut unionized factory jobs and to dealerships the merged company would no longer need.

U.S. auto dealerships are independent businesses protected by franchise laws. GM spent an estimated $2 billion to shut down its Oldsmobile brand in 2000.

"How much of the Chrysler cash is left remains to be seen," said Global Insight's Bragman. "A good chunk would have to go toward closing hundreds if not thousands of dealers."

GM has about 6,550 stores for its eight brands, the most of any automaker. Chrysler started the year with just over 3,500 dealerships but has been looking to reduce that number and shift more of its retail outlets to dealerships that carry all three of its brands: Chrysler, Jeep and Dodge.

Chrysler sales are down 25 percent and GM sales are down 18 percent through September, a decline coupled with tighter credit that has caused deep losses for many dealers.

The National Automobile Dealers Association warned that some 700 of the nation's 20,000 franchised car dealers could shut this year because of the downturn even before talk of the GM deal for Chrysler surfaced.

"You would see a lot fewer Chrysler dealers if this deal came to be," said Harry Lane, a Knoxville-based auto commentator and a former Chrysler dealer.

The degree of opposition from GM's unions in Canada and the United States to a Chrysler acquisition is another wild card.

Even after a recent buyouts, GM has 64,000 hourly workers in the United States, almost all represented by the United Auto Workers union. Chrysler has 33,000.

When Daimler opted to sell Chrysler in February 2007, it had first approached GM, seeing the top U.S. automaker as the strongest potential buyer. But GM executives balked at a deal then because of concern about provoking the union with deep job cuts ahead of a recent round of contract talks, a person familiar with those negotiations said.

(Editing by Kim Coghill)