GM Could Use Chrysler's Cash Reserves

GM could use Chrysler's cash
Money key reason for merger discussions
Robert Snell / The Detroit News
General Motors Corp. doesn't need Chrysler LLC's brands, workers or plants, but if the companies merged, the Auburn Hills automaker's $11.7 billion in cash could help GM survive the worst sales market in 15 years, analysts said Monday.
The cash, which Chrysler said it had on June 30, and an estimated cost savings of about $6 billion through combining automotive operations, is a key reason why GM and Chrysler-parent Cerberus Capital Management LP are discussing a possible merger that otherwise makes little sense for either company, analysts said.
Barclays Capital analyst Brian Johnson said GM needs $10.3 billion in fresh cash through next year, at which point the automaker could see significant savings from a new union contract and a possible sales boost from fuel-efficient models such as the Chevrolet Cruze and Volt, an extended-range electric car. A deal with Cerberus could quench GM's cash quest, said auto analyst Erich Merkle of Crowe Horwath.
"It's the smell of money," attracting GM's interest in any deal, Merkle said. "GM needs cash to live to fight another day."
Officials at both GM and Cerberus have declined to comment about their discussions.
Meanwhile, GM's shares rebounded Monday, jumping $1.62, or more than 33 percent, to close at $6.51 following news of steps being taken by major governments to support the global banking system.
But merger talks -- which have stalled amid the Wall Street turmoil -- did not improve the automaker's credit rating or convince analysts that GM would benefit from a potential Cerberus deal.
Standard & Poor's didn't budge Monday from last week's decision to place GM's credit rating on CreditWatch with negative implications, which means the rating could fall further into junk status.
Any merger would not solve GM's immediate challenge raising cash, said Robert Schulz, S&P's credit analyst.
"We would be skeptical that a GM-Chrysler transaction could easily address our primary concern by resulting in a substantial increase of current liquidity for the parties involved," Schulz said.
GM is burning through at least $1 billion a month. It had access to about $21 billion cash and $5 billion in available credit at the end of June and is in the midst of cutting $10 billion in costs by the end of 2009 and raising $5 billion through asset sales and borrowing.
Those cost-cutting moves intensified Monday when GM announced it was closing plants in Grand Rapids and Janesville, Wis. The moves affect about 2,500 hourly workers at plants that produce sport-utility vehicles and parts for pickups and SUVs.
The Grand Rapids facility will close by the end of 2009 while the Janesville factory will close ahead of schedule in December. GM officials had said in June the Janesville plant, along with three others, would close in 2010 as demand slumped for pickups and SUVs.
It was unclear exactly how much money GM will save by idling those plants.
S&P believes GM has enough cash and available credit for the rest of 2008 but the deteriorating industry -- GM's sales are down 18.1 percent this year -- will be challenging next year
Meanwhile, analysts remained skeptical about any GM/Chrysler deal three days after merger talks first surfaced.
Any short-term gain from acquiring Chrysler could come at the expense of long-term health, said Deutsche Bank analyst Rod Lache.
"The fact that there is so much product/geographic overlap between the companies is precisely the reason for the large ... savings potential in a GM/Chrysler combination," Lache wrote in a research paper Monday.
A merger would not have a significant benefit or address shared problems such as too many dealers, damaged brands, falling sales, overcapacity and inability to raise cash, said Aaron Bragman, an auto analyst with Global Insight.
A combined company would have larger market share and be in a stronger bargaining position with the United Auto Workers. Another round of talks is likely considering GM's struggles, he said.
"The negatives far outweigh the positives for any potential merger of GM and Chrysler," Bragman wrote in a research paper published Monday.
"The details of what a combined GM/Chrysler would look like point to a company that would immediately be in an even worse position than either of these companies are alone."
The real winner might be Cerberus if it swaps Chrysler for the 49 percent share of GMAC Financial Services owned by GM, Bragman said.
Cerberus, a private equity fund, acquired 51 percent of GMAC in a $14.1 billion deal in 2006.
The recently passed $700 billion Wall Street bailout bill is designed to buy up bad securitized mortgages and lobbyists are pushing to extend the bailout to include bad auto loans.
"That one-two punch would go a long way towards restoring the profitability of GMAC, making it an attractive business to have," Bragman said.