GM, Chrysler deal threatened by financing

GM, Chrysler deal threatened by financing
http://www.autonews.com/apps/pbcs.dll/article?AID=/20081020/ANA02/310209884/1128

Automotive News | October 20, 2008 - 7:45 pm EST

DETROIT (Reuters) -- General Motors has detailed a plan to slash costs
at Chrysler LLC but initial attempts to secure financing for the
controversial merger have been rebuffed, raising new doubts about
whether it can be completed without government aid.

GM Chief Operating Officer Fritz Henderson and the executive team
leading talks with Chrysler's majority owner Cerberus Capital Management
LP believe GM can strike a deal to pick up Chrysler's most valuable
assets and shore up its own cash position in the process, according to
people familiar with the talks who were not authorized to discuss the
negotiations.

But an acquisition would be expensive, and finding financing in current
markets for a merger between companies that have been losing billions
and burning through cash rapidly is proving to be a tall order.

Chrysler has $9 billion in debt that, under a change of control, would
have to be paid off if it cannot be refinanced.

Additionally, a cash-strapped GM needs between $4 billion and $5 billion
for payouts for the estimated 30,000 to 40,000 jobs that would be cut
through a merger and to close most of Chrysler's 14 assembly plants, the
sources said.

To put that additional funding in perspective, GM's market
capitalization was only $3.7 billion as of Monday.

GM had about $21 billion in cash at the end of the second quarter, but
it was burning through more than $1 billion a month. The automaker has
counted on its ability to raise up to $5 billion through a combination
of borrowing and asset sales to make it through 2009, but the recent
churn in credit markets has threatened that goal, analysts say.

GM wants access to Chrysler's cash -- about $11.7 billion at the end of
June -- in the event of a merger, sources have said. But some of that
cash would have to be used to pay down Chrysler's borrowing if it cannot
be restructured.

The risk associated with such a deal amid collapsing demand for autos in
key markets in Europe and the United States has scared off potential
investors already, sources said.

And the UAW, which has already loaned GM $1.7 billion at 9 percent, is
seen as a long shot to fund a deal that could cut Chrysler's factory
work force in half.

Ultimately, whether the deal gets done or not could come down to whether
the U.S. government steps in as lender and investor of last resort, one
banker said.

"It's like a Kabuki dance," another person familiar with the talks said.
"Everyone already knows the outcome. They are going to have to go to the
Fed for money."

Executives on both sides worry that the window to seek U.S. government
aid for the merger could close after the presidential election on Nov.
4, a race that has seen both Democrat Barack Obama and Republican John
McCain express support for the the troubled auto industry.

"There's a feeling that if this is not done in the next two weeks, it
won't get done at all," said one person briefed on the ongoing talks.

'A GREAT DEGREE OF APPREHENSION'

Representatives of GM and Cerberus have approached at least one major
investor with a pitch to invest in the deal, a source briefed on the
matter told Reuters.

The pitch for a capital injection for a merged automaker that would
control about a third of the U.S. light-vehicle market was met with "a
great degree of apprehension," the person said.

The result has been a volatile set of negotiations between Cerberus and
GM with both sides looking closer to a deal and then seeing it in danger
of falling apart, one person involved in the talks said.

Cerberus has also had talks with Renault-Nissan, the joint venture of
the French and Japanese carmakers, on its interest in Chrysler, sources
have said.

U.S. auto sales have slid to 15-year lows this year and are expected to
drop further in October as credit tightens for consumers. GM's sales
were off 18 percent through September. Chrysler's sales fell 25 percent.

There are no clear alternative sources for funding and both Cerberus and
GM have been hit by the extraordinary pressure on credit markets since
late summer.

Existing Cerberus creditors are also wary of restructuring the $7
billion bank term loan due in 2013, a person briefed on the financing
effort said.

Banks including JP Morgan, Citigroup, Morgan Stanley and Goldman Sachs
underwrote that loan, now trading at 36-40 cents on the dollar. Those
lenders are eager to see a deal done but are balking at helping finance
what is looked at as a risky investment, one source said.

Analysts have been deeply skeptical of the benefits of the merger,
arguing that it presents high costs upfront and uncertain prospects that
enough savings can be wrung out of the combined company fast enough.

JP Morgan analyst Himanshu Patel said a GM-Chrysler merger would
represent a "high-risk transaction," but could also position the
combined automaker to extract more concessions from the UAW and secure
new financing.

The key, he said in a note for clients, would be if GM is seen as
"saving Chrysler from insolvency."

 

If GM wants cash, why don't they buy an investment bank?

They should have bought Lehman Brothers or Wachovia, or Washington
Mutual when they had the chance...

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Explain this:

I'm selling my house. Say it's worth $200k.

I've removed all my personal stuff. Basically just empty rooms, a few
appliances.

I leave $100k in cash on the floor in the living room.

I offer to sell the whole thing for $300k.

The buyer will have to get a mortgage for $300k.

Instead of leaving $100k cash on the floor, I take it with me, and set
the asking price to $200k. The buyer will have to get a mortgage for
$200k. Maybe it's easier to get a $200k mortgage vs a 300k mortgage
today. If the buyer wants my house *and* $100k cash in his pocket, then
he can go get a personal loan for $100k.

If the buyer just wants the $100k cash - and not necessarily the house,
then how does buying my $200k house with $100k sitting on the floor help
him get it when he has to fork over $300k to me to get it?

What am I missing here?

 

The words "Byzantine" or "bizarre" seem to be the only words that come
slightly close to describing these convoluted deals. Normal human
understanding is out the window.

 

Nah, they already merged. Here is proof with the new Cadillac Ram.

http://s4.photobucket.com/albums/y124/thehuff/?action=view&current=CadilacRam2.jpg