Cerberus exploring multiple options for Chrysler

Cerberus is looking at a variety of strategies for Chrysler, according to a source close to the discussions. The person did not provide specifics on any of the alternatives to the widely reported merger talks with General Motors, simply stating there were “numerous” options.

The news of the Chrysler-GM discussions took the automotive world by storm when the story broke last Friday. Actual talks have been suspended since the major market meltdown and no meetings between the two companies are scheduled for the week ahead but the GM board of directors has appointed a committee to oversee the discussions. The GM board had a formal meeting last week to review the issue and had a telephone conference on Friday. According to the Wall Street Journal, the board’s reaction to the proposal has been cool.

GM approached Ford with a similar opportunity in July, but the Dearborn-based car company, which has the best cash position of any of the Detroit automakers, nixed the idea.

While industry analysts say talks of mergers and joint ventures are common in the industry, they are trying to come up with a scenario that addresses the challenges facing both GM and Cerberus, including a serious problem with short-term liquidity and credit. Rumors of a possible GM bankruptcy have been floating freely around the investment community in recent weeks as GM’s stock has traded at fifty-year lows.

Most experts say Chrysler and GM need to reduce cash burn, something that would be complicated by a merger. Even though there would ultimately be savings through increased purchasing power and elimination of personnel and facility redundancies, such savings would not be realized in the fifteen months before significant savings from the UAW contracts adopted last year kick in and major new products hit the market. With forecasts calling for less than fourteen million light vehicle sales in 2008 and 2009, both automakers are likely to need infusions of cash, either from asset sales or new lines of credit which would be very costly for junk-rated GM and Chrysler. On Friday, financial publication Barron’s reported GM has approached the Federal Reserve for a loan but GM says no such move has been taken and is not anticipated.

A Chrysler-GM merger would leave a single company with eleven brands and a huge amount of excess capacity and overlap in product lines. However, it would give General Motors an opportunity to do a major overhaul of its brands. General Motors is already shopping Hummer and could replace that brand with Jeep, which has a stronger position in the market. In addition, GM could replace GMC and Pontiac with Dodge which has more sales than the combination of the two GM divisions and brings a performance-oriented, rear-wheel-drive platform to replace the Holden-sourced platform GM is using for vehicles like the Pontiac G8. It would also give GM a strong position in the police vehicle market, which will be opened up when the Ford Crown Victoria is discontinued.

Based on numbers reported through the end of September, a hypothetical GM composed of Cadillac, Chevrolet, Dodge, Jeep, Saab and Saturn would have had year-to-date sales 12 percent ahead of actual results.

Another challenge to a merger is the fact GM and Chrysler have a combined base of about 10,000 retailers and both companies are trying to make deep cuts to their dealer ranks in an effort to boost sales and profits at the remaining operations. In addition to the expenses involved with terminating franchises, various state laws could hamper efforts to speed up or even implement the desired cuts.

Possible tie-ups between the two companies have included discussions of a swap where Cerberus would cede Chrysler’s automotive operations to GM in exchange for GM’s remaining holdings in GMAC. However, it’s reported GM’s leadership is not enthusiastic about such an arrangement as it would leave GM saddled with billions of dollars in debt from Cerberus’ leveraged acquisition of Chrysler from Daimler AG.

Other potential options for Chrysler include joining the Renault-Nissan alliance. Chrysler already has an agreement with Nissan and CEO Carlos Ghosn is said to be watching the situation closely but has already said he is not looking to make any major moves in the current market. An alternative partner might be Italy’s Fiat. However, that scenario overlooks the fact Fiat, which is involved in a variety of industries, has been trying to unload its automotive operations for years including a deal with General Motors that fell through when GM paid Fiat a multi-billion-dollar penalty rather than assume the car line.