October 24, 2008 / 3:05 PM / 11 years ago

GM, Cerberus step up Chrysler sale talks: sources

NEW YORK/DETROIT (Reuters) - General Motors Corp (GM.N) has intensified talks to buy Chrysler LLC’s auto operations from Cerberus Capital Management in a deal that would also involve a transfer of ownership of GMAC, people familiar with the talks said on Friday.

A row of new Chrysler Jeep Commander SUVs are seen at a dealership in Silver Spring, Maryland, July 1, 2008. REUTERS/Yuri Gripas

GM intends to seek U.S. government aid to support any deal, the sources said, potentially injecting a polarizing and urgent question of economic policy into the final stretch of the presidential campaign.

Cerberus, the private equity firm that controls Chrysler, also remains in talks with other parties, including Nissan Motor Co Ltd (7201.T), about a deal for the struggling automaker.

GM, Cerberus and Chrysler declined comment.

But the GM talks are the most advanced and involve at a working level GM Chief Operating Officer Fritz Henderson and senior Cerberus representatives, sources said.

Chrysler Chief Executive Bob Nardelli has not been directly involved in the talks but remains in close touch with Cerberus negotiators, they said.

Cerberus, which owns 51 percent of former GM finance arm GMAC, is interested in an increased stake in the unit, sources said. GM retains the other 49 percent of GMAC at present after selling a controlling stake to the private equity firm for $7.4 billion in a 2006 deal.

Cerberus is also interested in offloading the auto operations but would like to have a significant stake in the combined company, the sources said.

Both parties remain interested in reaching a deal, but GM is working to clarify Chrysler’s pension liabilities and the risk the automaker’s suppliers could face from a merger, the sources said.

Analysts and others close to the talks have suggested that 30 percent of Chrysler’s current suppliers could be at risk if GM completed an acquisition and worked to cut Chrysler’s slower-selling and weaker models.

In addition, GM is considering contingency plans in case the Cerberus talks failed to produce a deal, sources said.

Those alternative scenarios include approaching an outside investor and asking the government for stepped-up assistance of some kind, one person briefed on the talks said. GM has lost more than $50 billion in the last three years.

With auto sales slowing sharply in Western Europe and on track to drop to 18-year lows in the United States this month, GM is under increasing pressure to slow a cash burn rate that stood at $3.6 billion in the second quarter and is expected to have accelerated since.

A major motivation for GM in acquiring Chrysler has been access to the smaller automaker’s remaining cash, sources have said. Chrysler lost about $1 billion in the first half of the year and ended June with $11.7 billion.

“UNIMAGINABLE TIMES”

Chrysler has been hit hardest by the slump in the U.S. market with its sales dropping 25 percent to date. GM’s sales have dropped 18 percent.

Partly for that reason, analysts have challenged the logic of a merger, arguing that the struggling automakers are saddled with many of the same problems, including a surplus of workers, plants, brands and dealers.

Chrysler told employees on Friday that it would cut up to 5,000 salaried jobs and limit capital investment and other spending.

“These are truly unimaginable times for our industry,” Nardelli said in a stark letter to staff. “We continue to be in the most difficult economic period any of us can remember.”

GM would prefer to keep as much of the combined sales volume as possible from a Chrysler acquisition but recognizes that some of the automakers’ slower-selling models would have to be culled, sources close to the talks said.

A GM acquisition of Chrysler would also likely trigger 30,000 to 40,000 job cuts as the combined automaker rushes to cut costs, people familiar with the talks have said.

But by working now to detail the impact on suppliers from a Chrysler deal, GM could also be laying the groundwork for a request for U.S. government aid on the basis that any funds provided would help protect jobs beyond Detroit.

Members of Michigan’s congressional delegation earlier this week urged the Bush administration to consider dramatic steps to prop up the U.S. auto industry, including bailouts similar to the initiative now underway for banks or the kind of loan guarantee that saved Chrysler nearly 30 years ago.

The request from key lawmakers to U.S. Treasury Secretary Henry Paulson highlighted the auto industry’s importance in the economy. Automakers employ about 355,000 American workers and provide jobs to another 4.5 million in related industries, including suppliers.

Reporting by Jui Chakravorty Das and Kevin Krolicki; Editing by Derek Caney, Gerald E. McCormick and Gunna Dickson

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