Financial roadblocks in road to Chrysler-GM merger

 Cerberus and General Motors Corporation are reported to be in a rush to the altar for their automotive operations but they are encountering issues with who is going to pay for the wedding and how much those payments might be.

Even though bankers like JP Morgan Chase & Co., which is a major player in the finances of both Chrysler and GM, are in favor of a deal, financial markets are not friendly to the amount of cash usually involved in deals this size. Cerberus has said it is willing to kick in some money, it is unclear how much the contribution would be. JP Morgan is already the largest holder of debt generated by Cerberus’ acquisition of Chrysler in August 2007 and that debt is currently trading only at a steep discount. In fact, reluctant investors have left a large portion of the debt still unplaced over a year after the transaction.

Reports from unidentified sources indicate GM has already identified a potential $10 billion in savings from the merger and is eyeing Chrysler’s reported $11 billion-plus cash hoard to buy it time to get to 2010, when new labor contracts allow it to unload its union healthcare obligations and fully implement the new, two-tier pay system for new hires in non-core jobs. One analyst estimates GM’s reserves are about $2 billion short of what it will need to get through 2009.

Cerberus, which is selling off non-core Chrysler assets, is looking to get the 49 percent of GMAC is doesn’t own and is likely to split Chrysler Financial from Chrysler LLC so it can retain Chrysler’s financing arm. Cerberus has also said it wants to retain a stake in Chrysler. Unclear at this time is how Cerberus or General Motors will deal with the 19.9 percent of Chrysler still owned by Daimler AG.

Chrysler CEO Bob Nardelli was on CNBC yesterday and said the steep decline in U.S. auto sales has created an environment for industry consolidation. During the interview, Nardelli said, “It certainly creates an environment for consolidation where you can get synergies of productivity that will allow you to be more competitive, not only here in the U.S. market, but on a global basis.”

While he declined to comment on the negotiations with GM, Nardelli said Chrysler and its parent company have been open about looking for partners and creating alliances. GM CEO Rick Wagoner is said to be pushing a deal but sources close to the talks indicate the GM board is resisting the merger.

Reuters has reported additional scenarios are in play at this time. These include a breakup of Chrysler with some assets going to General Motors and others going to a potential foreign buyer like the Renault-Nissan alliance (it’s conceivable Renault could wind up owning Jeep again). Italian industrial conglomerate Fiat has been cited as another potential buyer. Chrysler might also sell or spin off its Mopar subsidiary as a separate transaction.