General Motors Corp. and Chrysler LLC have reopened talks on combining some of their businesses, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions.
With cash running low at both car companies, Cerberus took the initiative to restart discussions that sputtered just weeks ago. At that time, both GM and Chrysler viewed a business combination as impractical and as a distraction from their mounting liquidity problems. The auto makers’ finance arms — GMAC LLC and Chrysler Financial — have been the chief focus in any recent discussions of a combination of businesses. The discussions are one of many options on the table.
The renewal of the talks could be a way for Cerberus to show Washington — which is weighing a $14 billion rescue package for the auto industry — that it wants to cooperate in restructuring the industry, say people familiar with the buyout firm’s thinking. And it could offer the firm a way to protect its stakes in GMAC and Chrysler Financial, the two distressed auto-finance companies, which are crucial to the survival of the Detroit auto makers.
GM on Thursday denied a report in The Wall Street Journal that talks had been restarted.
Cerberus holds a majority stake in GMAC, GM’s former finance unit. It also controls Chrysler’s Chrysler Financial unit. Part of Cerberus’s strategy, say people briefed on the matter, is to protect its majority investments in these two units.
A person familiar with the GM-Chrysler talks said that Cerberus is eager to make concessions in order to arrange a combination of Chrysler’s finance arm with that of GM. One way in which Cerberus might make concessions could be to give away some of its principals’ stakes in Chrysler as part of a broader restructuring. That could mean giving a future government auto czar discretion to distribute Cerberus’ stake to the United Auto Workers union or even to GM.
“That is one of the core goals,” this person said. In order to achieve that end, according to this person, Cerberus feels it has to be flexible on the use of its ownership stake in Chrysler.
It isn’t clear what effect the renewed talks might have on the intricate political calculus hanging over a government rescue of the auto makers. Wednesday, Chrysler said it would suspend output at all 30 of its plants for a month starting Friday.
Earlier this month, Congress pressed Cerberus to inject fresh capital into Chrysler as part of any rescue plan. So far, the firm has rejected the idea, saying shareholders of rivals GM and Ford Motor Co. aren’t being asked to contribute more capital, and that its investment charter prohibits such a move.
Cerberus’s equity in Chrysler has already been valued at zero by Daimler AG, which still owns 19.9% of the auto maker. But Cerberus hopes lawmakers would view flexibility on its stake as a contribution to the restructuring of the troubled industry, says a person familiar with its thinking.
Chrysler is asking the government for a $7 billion bridge loan by Dec. 31. The company told lawmakers earlier this month that the financing required for even a short bankruptcy would be higher — between $12 billion and $15 billion for a proceeding lasting just one year. But its argument got a harsh reception from many lawmakers who questioned why Cerberus couldn’t provide the financing.
For now, the White House isn’t planning to force GM or Chrysler into bankruptcy as a condition for receiving government aid, an option that had been on the table earlier, people familiar with the matter said. The administration is still wrestling with how much money to give the auto makers and how long the aid should last, according to one of these people. On Thursday, White House press secretary Dana Perino discussed the possibility of an “orderly” bankruptcy. “The president is not going to allow a disorderly collapse of the companies,” Ms. Perino said, according to the Associated Press. But she added, “There’s an orderly way to do bankruptcies that provides for more of a soft landing.”
Chrysler Financial and GMAC are constrained by the tight credit markets. Because they could be classified as banks, they are central to Detroit’s argument for receiving government money from the Troubled Asset Relief Program, set up for the financial industry.
One developing problem in the auto makers’ pursuit of government rescue funds is the state of Chrysler’s collateral. Unlike GM, which has assets it can pledge or use as collateral for a federal loan, Cerberus is believed to have pledged all of Chrysler’s assets in the summer of 2007 as security for $10 billion in bank debt.
GM, by contrast, could pledge its substantial operations in Europe, China and elsewhere, along with trademarks.