Road not yet clear for Chrysler-GM merger

News sources are reporting Cerberus and General Motors have reached agreement on general terms of a merger but significant obstacles remain.

While progress has been reported on GM’s attempts to gain federal funds for the merger, the amount being discussed is only about half what the automaker anticipates it will need to implement the deal. GM has said it will need $10 billion for employee separations, plant closings and other expenses. At this time, the administration is trying to expedite $5 billion in low-cost loans from funds designated for factory upgrades.

In addition, Cerberus must either refinance or redeem at least $7 billion in debt from its acquisition of Chrysler last summer. Cerberus must also obtain the remaining 19.9 percent share of Chrysler from Daimler AG and repay or refinance loans from the German automaker. This Cerberus could be looking at needing $9 billion or more to settle all its outstanding debt. Some of the financial institutions involved have recently expressed interest in working with Cerberus, but that interest is based on the federal funding.

The biggest stumbling block may be the United Auto Workers union. GM has already approached the federal govenment about aid with $3 billion in pension liabilities, which is normally only available in cases of bankruptcy, but a larger hurdle is the Voluntary Employee Beneficiary Assocations, or VEBAs, the union and all three Detroit automakers approved in the UAW contracts adopted last year and approved by U.S. courts. The VEBAs are intended to shift the burden of retiree healthcare expenses to the union in exchange for large investments by the automakers. Under the approved plans, Chrysler and General Motors are required to make payments totaling billions of dollars in order that the plans can become effective in 2010. General Motors has already tried to delay making its first payment and may try to bring the union back to the negotiating table to modify the agreement. However, UAW President Ron Gettelfinger has already publicly stated the union will not negotiate on the VEBAs. Without an agreement from the UAW, General Motors’ only recourse may be to file bankruptcy under Chapter 11 and ask the court to set aside the existing labor contract.