GM, Cerberus's Chrysler Are Said to Hold Merger, Alliance Talks

By Jeff Green

Oct. 12 (Bloomberg) -- General Motors Corp., the largest U.S. automaker, is in early talks with Cerberus Capital Management LP's Chrysler LLC about a merger or partnership, five people with direct knowledge of the discussions said.

It's not clear an accord will be reached, said the people, who asked not to be identified because the matter is private. While Cerberus also is meeting with automakers including Nissan Motor Co. and Renault SA, the GM talks are the most serious, one person said.

Adding Chrysler, the third-biggest U.S. automaker, would cement GM's global sales lead over Japan's Toyota Motor Corp. and widen the gap with Ford Motor Co. The money-losing Detroit- area companies are under pressure to boost cash as the credit crisis dries up loans for dealers and buyers, helping send U.S. auto sales to their lowest since 1991.

``It would be a classic consolidation,'' John Casesa, a partner at consulting firm Casesa Shapiro Group in New York, said in an interview. ``The incentive would be to reduce cost by reducing overhead.''

GM spokesman Tony Cervone, Cerberus spokesman Peter Duda and Renault spokeswoman Nathalie Bourotte declined to comment. The New York Times reported the talks Oct. 10 and said yesterday that GM previously talked to Ford about a merger, citing people familiar with those discussions.

`Private Business Meetings'

``Chrysler LLC as a matter of policy does not confirm or disclose the nature of its private business meetings,'' spokeswoman Lori McTavish said in an e-mailed statement.

Any major partnership would be preceded by Cerberus's completion of its plans to purchase the 19.9 percent of Chrysler still held by former parent Daimler AG, one of the people said.

GM's U.S. sales slid 18 percent through September, while Chrysler's tumbled 25 percent, battered first by rising fuel prices and then by the credit crunch. Detroit-based GM has posted almost $70 billion in losses since the end of 2004, and Chrysler has said it won't be profitable this year.

``On paper, it looks like there would be significant cost synergies,'' said Van Conway, a partner at restructuring firm Conway Mackenzie & Dunleavy in Birmingham, Michigan. ``The potential cost savings is in the billions, even before you contemplate plant consolidation.''

GM has plunged 80 percent this year in New York Stock Exchange composite trading. The shares rose 13 cents, or 2.7 percent, to $4.89 on Oct. 10, the first advance since Sept. 30.

Conserving Cash

Conway said that with GM trying to conserve cash, any transaction likely would involve giving New York-based Cerberus stock in exchange for Chrysler.

Still, even acquiring Auburn Hills, Michigan-based Chrysler for little or no money would still result in a costly merger with the risk that revenue would keep declining, Casesa said.

``These are very challenging transactions with a very poor track record,'' he said.

Cerberus acquired 80.1 percent of Chrysler from Germany's Daimler in August 2007 and said last month it was trying to buy the rest. As Chrysler's fortunes soured, Daimler wrote down the value of its stake by 81 percent at the end of June to 171 million euros ($230 million) from the end of 2007. It paid $36 billion for Chrysler in 1998.

A Chrysler merger or alliance would add production back at GM as Chief Executive Officer Rick Wagoner shuts plants and eliminates jobs to restore profit. GM and Chrysler discussed a merger in 2007, people familiar with those talks said at the time. Daimler CEO Dieter Zetsche later said the companies discussed developing models together.

GM's lead over Toyota as the world's largest automaker dwindled to just 3,000 vehicles last year, with sales of 9.4 million units. Toyota led by 278,000 this year through June. Chrysler's 2007 total was 2.7 million cars and trucks. Ford sold 6.6 million vehicles last year, fourth behind Volkswagen AG.

U.S. Market Share

GM and Chrysler accounted for a third of U.S. sales in the first nine months, with GM's 22.3 percent market share twice as large as Chrysler's.

Most of their lineups overlap. Both have sedans, pickups and sport-utility vehicles, and both depend on light trucks for more than half of their sales, which left them vulnerable to car-focused Asian rivals as U.S. gasoline prices rose to a record in July. GM doesn't have a minivan; Chrysler models account for 29 percent of those deliveries in the U.S.

GM's eight U.S. brands are Chevrolet, Cadillac, Buick, Pontiac, Saab, Saturn, GMC and Hummer, for which the automaker has said it's considering options including a sale. Chrysler sells vehicles under its own badge as well as under the Dodge and Jeep nameplates.

Chrysler's Finances

In its first year under Cerberus, Chrysler couldn't reverse sliding sales or losses, though the company said it earned $1.1 billion through June before interest, taxes, depreciation and amortization. Chrysler isn't required to report financial data.

Chrysler said Sept. 25 it will fire about 250 employees as part of a plan to shed 1,000 salaried positions by the end of last month. A month earlier, the automaker said it is trying to sell the Dodge Viper sports-car brand.

The Chrysler purchase was the second auto-related U.S. investment in a year for Cerberus, which was founded in 1992 by former Drexel Burnham Lambert Inc. trader Stephen Feinberg. The firm bought a majority stake in GM's former finance unit, GMAC LLC, in 2006.

With the auto industry faltering and GMAC posting losses as the housing slump saps its Residential Capital LLC mortgage unit, Feinberg has sought to reassure investors including pension funds such as the Pennsylvania Public School Employees' Retirement System that the auto bets constitute a small portion of Cerberus's holdings.

Cerberus's Investments

Of the $15 billion Cerberus paid for Chrysler and GMAC, the firm put up $3 billion to $4 billion, a person with knowledge of the deals said earlier this year.

GM, Ford and Chrysler all face the risk of a forced bankruptcy filing as the credit crunch damps U.S. sales, according to Standard & Poor's analyst Robert Schulz.

``Macro factors could overwhelm them at some point'' even as the automakers vow to stick with their turnaround plans, Schulz, S&P's lead automotive credit analyst, said in an Oct. 10 Bloomberg Television interview in New York. The companies said they have no plans to seek bankruptcy protection.

Last month, GM tapped the $3.4 billion left in a $4.5 billion credit line, a step suggesting its ``second-half cash burn remains quite severe,'' Citigroup Inc. analyst Itay Michaeli said in a Sept. 22 report.

To contact the reporter on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net.