GM mulls move to break free of Delphi quagmire

DETROIT (Reuters) - General Motors Corp has been trying to wash its hands of Delphi Corp since it spun off the troubled auto parts supplier a decade ago.

But after taking on billions of dollars of liabilities and charges related to Delphi since 1999, GM is now being forced to consider taking back some unprofitable Delphi plants at a time when the automaker can least afford it.

Delphi, which filed for bankruptcy in 2005 and has been trying to emerge from it since last April, is once again looking to its former parent for a rescue.

The automaker started talking with Delphi last month about buying back parts of the supplier, including some plants, a source with direct knowledge of the talks told Reuters.

The talks could pave the way for GM to request U.S. government funding beyond the $13.4 billion it has already been pledged and resolve the lingering uncertainty over Delphi, analysts said.

Kirk Ludtke, senior vice president at CRT Capital Group, said taking back Delphi assets makes a lot of sense for GM as it could look to transfer the business to another supplier.

"It also will make GM more financeable because it's difficult for GM to raise third-party financing with the uncertainty surrounding Delphi," he said. "It makes sense for Delphi because they need to eliminate these money-losing plants and they need to reduce their reliance on GM."

Standard & Poor's equity analyst Efraim Levy said that GM's apparent willingness to take back some of Delphi's struggling operations could bolster its case for more federal money.

"Part of the strategy appears to be a way to apply for more federal assistance," he said in a note to clients.

GM faces a February 17 deadline to submit new restructuring plans to the U.S. government that would show the automaker was a viable entity.

Addressing the Delphi issue will have to be a key part of the plan as the long-running troubles at the parts supplier remain a big financial risk for GM, analysts said.

Delphi remains GM's biggest parts supplier, and GM is Delphi's biggest customer. The automaker has taken more than $11 billion in charges to help along Delphi's reorganization.

The potential move by GM to take back some of Delphi's assets would be similar to the bailout of rival auto supplier Visteon Corp by former parent Ford Motor Co.

Ford, which spun off Visteon in 2000, helped the ailing supplier in 2005 by taking back some plants and workers. Since then it has been trying to sell the parts plants -- but with limited success.

Ludtke said selling off individual plants was one option for GM.

"It could be that the assets are moved from Delphi to another supplier and GM doesn't take them back but pays for the transition," he said.

RUNNING OUT OF OPTIONS

Delphi is also running out of options.

It warned last week that the value of its business will be substantially below the $6.3 billion it had estimated in October and sought to eliminate health care benefits for its salaried retirees.

Fitch Ratings Managing Director Mark Oline said GM would want to ensure that it has a strong say in what happens with Delphi. "It doesn't want to cede decision-making to Delphi and the banks."

Delphi's exit from bankruptcy was held up when an equity plan to support the move fell through last April.

The risk that GM would have undue influence over the restructuring of Delphi was one of the reasons investors, led by Appaloosa Management, backed out of a $2.55 billion plan to support the parts maker's reemergence last April.

Delphi and other auto parts makers are under intense pressure after steep production cuts from all three U.S. automakers.

U.S. auto sales plunged 18 percent to 13.2 million vehicles in 2008. Analysts say the market is certain to fall further in 2009 after January sales plunged to a 27-year low.

"Most suppliers will have to make sure they can generate cash and operate in a 10 to 12 million unit market," Oline said. "That is a big challenge with Delphi's current leverage."

(Editing by Patrick Fitzgibbons and Phil Berlowitz)