DETROIT – General Motors Corp. has recently been in discussions about acquiring Chrysler LLC, according to people familiar with the matter, in a dramatic sign of the pressures mounting on the U.S. auto industry to restructure amid a deep slump in sales, The Wall Street Journal reported Friday.
The upheaval in financial markets has rendered inactive the talks between Chrysler owner Cerberus Capital Management LLC and GM, which wants to shed its stake in GMAC, these people said. However, if markets stabilize, the talks could be renewed because both parties want to move those assets quickly, these people added.
Central to the plan is private-equity firm Cerberus, which owns 80.1 percent of Chrysler and 51 percent of GMAC, an 89-year-old auto lender that has been seriously weakened by its moves into mortgage banking. Cerberus proposed a swap in which GM would acquire Chrysler’s automotive operations, and in turn give Cerberus its remaining 49 percent stake in GMAC, these people said.
Uniting two of the country’s Big Three auto makers would prove a watershed for an industry knocked down by high production costs and a looming recession. But at a time when both GM and Chrysler are actively dismissing talk among analysts questioning their futures, such a radical step may be part of an endgame that could further shrink Detroit. GM sees as much as $10 billion in cost-cutting if a deal were to come together, said a person familiar with its thinking.
“Without referencing this specific rumor, as we’ve often said, GM officials routinely discuss issues of mutual interest with other auto makers,” GM spokesman Tony Cervone said. “As a policy, we do not confirm or comment publicly on those private discussions, which in many cases do not lead anywhere.”
A spokesman for Cerberus declined to comment. GMAC spokeswoman Gina Proia declined to comment. Chrysler spokeswoman Shawn Morgan declined to comment.
Financial conditions have gotten the better of Cerberus, which originally viewed its investments in GMAC and Chrysler as relatively low-cost paths to owning some of the country’s biggest brand names.
In 2006, it agreed to buy a majority stake in GMAC for $14 billion, hoping to ride momentum at GMAC’s then-profitable mortgage arm, Rescap, and expand the car-lending business’s reach in a global auto industry that was projected to grow rapidly. Cerberus was also hoping that by de-linking GMAC from GM, the lending company’s credit rating would improve, therefore lowering its cost of capital.
Last year, Cerberus acquired its majority stake in Chrysler from Daimler AG, ending the 10-year-old merger of the maker of minivans and Jeeps with the German owner of Mercedes. Daimler gave Cerberus $650 million, while Cerberus agreed to contribute $7.4 billion into Chrysler, including $5 billion into its auto operations. Much of that cash hasn’t been spent.
At the time, Cerberus said a privately held auto maker would be allowed the time to straighten out operations outside the public glare, and that it was picking up Chrysler’s profitable finance arm for next to nothing. If the GM talks fall through, Cerberus will continuing exploring options for Chrysler. GM first considered, but backed off, a potential acquisition of Chrysler when it was shopped around by Daimler.
Little has turned out as planned. Chrysler has been hard-hit by the car industry’s downturn and is losing money. Chrysler said its September sales fell to 107,349 vehicles, down 33 percent from the same month last year, and year-to-date sales dipped 25 percent to 1.83 million cars and trucks. GM sales were down 16 percent in September. Overall, US auto sales fell by 26 percent in September to their lowest levels since 1993. For the whole year, U.S. sales are down about 13 percent.
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In recent quarters, the value of GMAC has fallen dramatically due to exposure to subprime home loans, car loans and leases. Its bonds trade at 36 to 53 cents on the dollar. Today the GMAC stake is valued roughly at $6 billion to $7 billion, say people familiar with the discussions.
For decades, GMAC has been a key cog in the GM universe. Its cheap lending was extended to GM dealers, who used it to keep their lots full of new cars. GMAC also extended financing to car buyers, who relied on it for discounted loans and leases.
GM is mulling various options for GMAC amid increasing difficulty in raising money for loans and an unwillingness at GMAC to continue offering dealers and buyers cheap financing.
Cerberus said last month that it is in talks with Daimler to buy that company’s remaining 19.9 percent stake in Chrysler. Cerberus is expected to keep Chrysler’s financing arm if a deal does materialize, this person added.
Despite the complications that would come from owning Chrysler, there are some attractions for GM. Namely, it could slash costs by cutting plants, blue-collar jobs and corporate overhead, according to people familiar with the matter.
Investors might worry that GM – whose stock closed Friday at $4.89 a share in New York Stock Exchange trading, down from a 52-week high of $43.20 – would be acquiring more troubled operations at the same time it is trying to fix its own problems. It would pick up the Chrysler, Jeep and Dodge brands and their dealers while it is trying to shed nameplates and dealers of its own. It would also be even more reliant on North America, where sales have tumbled by double digits this year.
Over the past 14 months, Chrysler has backed away from many capital-intensive projects – including building new component plants and developing several new cars and trucks. As a result, Chrysler has been able to hoard cash despite falling sales and production in its core U.S. market.
That, combined with billions in cost cuts, could aid GM’s fund-raising drive, which currently is slated to raise $15 billion over the next 15 months through asset sales, secured financing and cost cuts.
GM’s fortunes have tumbled rapidly this year, leading investors to value the company at the lowest level since the early 1950s and reigniting talk among some analysts that the auto maker eventually may have to file for bankruptcy protection.
GM put out a statement Friday morning saying, “Clearly, we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering.”
A GM-Chrysler deal would be a highly complicated maneuver, which would involve the rationalizing of more than 100 automotive plants and about 190,000 employees in North America. It would also likely force a streamlining of 11 automotive brands — from Chrysler to Cadillac — and more than 10,000 auto dealers in the United States, Mexico and Canada.
All of Detroit’s auto makers have been shunned by investors, with bond prices and bank debt trading at deeply discounted levels that reflect a concern that a default is as likely as not. Most GM and Ford Motor Co. bonds trade at 30 to 50 cents on the dollar. Chrysler bank debt trades at around 30 cents on the dollar.
The three companies have become so weakened in recent years that longtime automotive experts say their ability to avoid bankruptcy is largely dependent on factors outside their control, such as gas prices staying around $3 a gallon, a quick recovery in the U.S. and European economies and the timing of a $25 billion U.S. government loan to the industry.
GM is expected to announce more production capacity cuts in coming weeks, likely focusing on closing plants that stamp auto parts or build engines and transmissions. The GM-Cerberus talks were put on the back burner in the last couple days amid GM’s share-price drop and the overall market instability, said two people familiar with the matter.
One individual involved in the talks de
