Chrysler LLC may be sending a message to President Barack Obama’s autos task force by saying the “best option” for survival is a merger with General Motors Corp that both sides have labelled dead.
Chrysler, propped up like GM with federal aid, is suggesting a new appraisal of a tie-up in hopes that the auto panel meeting for the first time today might force a “shotgun marriage,” said Brian Johnson, a Barclays Capital analyst in Chicago.
“I can’t imagine GM doing that without being forced into it by the government, but that’s a possibility,” said Kimberly Rodriguez, a principal at consulting firm Grant Thornton LLP in Southfield, Michigan.
Obama’s task force will start reviewing $21.6 billion in new loan requests that include Chrysler’s comment on the advantages of a GM combination. GM, the biggest US automaker, abandoned merger talks in November and said it is focused on its own survival, not hooking up with third ranking Chrysler.
Chrysler, in talks with Fiat SpA on an alliance, said in its February 17 filing for $5 billion in fresh aid that a GM tie-up “would create a company better positioned to compete with Toyota and other non-US automakers.”
“We knew we would get asked questions about our earlier discussions related to proposed alliances, so we decided to be very upfront and put it all in the presentation,” spokesman Stuart Schorr said in an e-mail late on Thursday.
No GM talks
That doesn’t mean Chrysler is renewing negotiations with Detroit-based GM, he said. Chrysler has agreed in principle to trade 35 per cent of its equity to Turin, Italy-based Fiat for small-car technology and access to global markets.
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“We are in exclusive talks with Fiat,” Schorr said in an interview.
GM Chief Executive Officer Rick Wagoner reaffirmed January 13 at the Detroit auto show that he wasn’t pursuing a merger with Auburn Hills, Michigan-based Chrysler, and that position hasn’t changed since then, GM spokesman Steve Harris said last night.
Both companies are pinning their hopes for viability on new federal assistance to bolster their cash as they shed jobs, shut plants and dump brands to end losses. Cerberus Capital Management LP’s Chrysler said it lost $8 billion last year. GM’s losses since 2004 have totaled almost $73 billion, and it’s asking for as much as $16.6 billion in loans after getting $13.4 billion.
GM-Chrysler Scenarios
GM and Chrysler discussed a number of scenarios for combining before GM announced November 7 it was breaking off talks, people familiar with the discussions said at the time.
One included a plan through which the companies would merge as part of a so-called prepackaged bankruptcy, with financing arranged in advance, while another option was a merger backed with some government backing designed to attract additional private capital, the people said.
Obama hasn’t signaled what tack might be taken by his task force, which is led by Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers and includes as an adviser Ron Bloom, a former Lazard Ltd vice president and United Steelworkers of America aide who worked on the consolidation of the steel industry.
“There’s no doubt that some change and some restructuring is on the horizon for the domestic auto industry,” White House Press Secretary Robert Gibbs told reporters yesterday on Air Force One as Obama flew back from meetings in Ottawa. “Now we just have to figure out what that means.”
In its aid request, Chrysler said the Fiat alliance would improve operating earnings by $7.4 billion and its cash flow by $6.9 billion over the next seven years. Chrysler is asking for $5 billion more in loans after an initial $4 billion.
GM Versus Fiat
Yet while disavowing interest in new GM talks, Chrysler also gave an accounting of the merits of a merger that showed greater benefits than tying up with Fiat.
Joining with GM would boost operating earnings for the combined company by as much as $58 billion over the next 7 years, and cash flow by as much as $54 billion, Chrysler estimated.
A merger would yield savings by melding purchasing, product development, distribution and technology investments, while merging the automakers’ finance units would help Chrysler dealers and customers, because GM’s part-owned GMAC LLC is now a bank- holding company able to accept and insure deposits, Chrysler said.
The presence of Bloom, the ex-banker, as a task force adviser also leaves open the possibility that the government might embrace a merger as the best way to spur repayment of the automakers’ federal loans and the companies’ return to profit.
“With what Ron Bloom did in steel, he has a track record in consolidation,” Grant Thornton’s Rodriguez said.
Still, with US auto sales plunging to the lowest level since the early 1980s, GM may not even be capable of taking on Chrysler, Rodriguez said. Grant Thornton studied the proposed merger last year and projected that it would lead to as many as 40,000 job losses at Chrysler.
“Combining the entire Chrysler organisation into GM probably would be too much,” she said.