GM details savings from UAW health care deal

Rick Wagoner, chief executive of U.S. car manufacturer General Motors, delivers a speech during a presentation at the international car show IAA in Frankfurt September 11, 2007. General Motors Corp on Monday said it would shift $16 billion from an existing trust fund to a new trust being established to take over a $47-billion obligation to pay for health care for some 270,000 union-represented retirees.

DETROIT (Reuters) - General Motors Corp GM.N on Monday detailed its expected gains from a new trust fund that will take over its $47 billion retiree health care obligation as it looks to capture even deeper savings from a still-pending round of buyouts for its union-represented factory workers.

GM, which just clinched a new four-year deal on wages and benefits for over 73,000 workers represented by the United Auto Workers, said it was negotiating a new round of buyouts with the union that would target workers nearing retirement.

Under the new contract, GM will be able to hire new workers outside core assembly jobs at a total cost of near $26 per hour compared with an existing cost of over $78 per hour.

GM Chief Financial Officer Fritz Henderson, speaking to financial analysts, declined to say how many GM workers would be targeted for buyouts, but said the turnover in the company's payroll could be "significant."

About 75 percent of GM's current blue-collar work force will be eligible for retirement by 2011 and could be replaced by tens of thousands of new hires without the costly retirement benefits enjoyed by their predecessors.

GM also detailed its financial obligations under a new Voluntary Employees Beneficiary Association trust, considered the centerpiece of its cost-saving deal with the UAW.

Under that deal, GM will pay about $31.9 billion into the new VEBA trust which will begin operations in 2010 and assume a $47 billion obligation for providing health care for over 270,000 union-represented retirees.

GM's promised funding was less than some analysts had expected, representing a larger savings. In addition, GM will be able to shift $16 billion from an existing trust fund.

GM said it expected to cut its cost for hourly production wages and benefits to $10.1 billion this year -- roughly 55 percent of what it had spent on factory labor in 2003, the last time it negotiated a UAW contract.

GM also forecast "significant cost reduction" over the term of the just-approved UAW contract without specifying a target.

Analysts said the details of GM's labor contract confirmed much of what investors had come to expect about the cost-cutting potential of the new labor contract during a five-week rally that has taken GM stock higher by 40 percent.

"At least from my perspective, it looks good that they are creating a new class of worker and capping their liability," said Pete Hastings, a senior corporate bond analyst at Morgan Keegan.

JP Morgan analyst Himanshu Patel said in a note for clients that GM's cash savings from the health care deal were largely in line with his estimates but said the company was holding out the prospect of deeper cost-cutting as current workers retire.

"The company seems to be expecting large savings down the road," he said.

VEBA SAVINGS DETAILED

GM said the retiree health care deal with the UAW would boost its cash flow by $2.8 billion in 2010 and represent $3.3 billion in positive cash flow by 2011, a year after the ground-breaking trust fund will have begun operations.

GM shares surged to their highest level since 2004 on Friday, boosted by expectations the automaker could see bigger savings than initially forecast from the VEBA deal.

The stock slipped almost 4 percent to $40.98 in Monday trading on the New York Stock Exchange.

GM said it would be able to count $3.8 billion that would have been paid out in wage and cost-of-living increases toward the new VEBA trust. Those funds would have been applied to a separate trust under a 2005 deal with the UAW.

That reduces new funding required for the VEBA trust to $31.9 billion. The remaining funding will include a $2.5 billion cash contribution, the $16 billion transfer from the existing trust fund for retiree health care and $4.37 billion in proceeds from the issuance of a convertible note.

That five-year note, which will be issued in 2008, could be converted into GM shares in the last six months of maturity or when the stock tops $48. If converted, the UAW could control about 16 percent of GM stock, Henderson said.

GM said the VEBA funding assumed the new UAW-run trust would achieve asset returns of 9 percent annually in the face of health-care cost increases of some 5 percent.

Morgan Keegan's Hastings cautioned those assumptions could be hard to meet, leaving the UAW facing a future shortfall. Health care costs have been rising at some 10 percent in the United States in recent years.

GM has promised to pay up to $1.5 billion in backstop funding to the VEBA, but also stressed the new deal takes the issue off the table for future negotiation. "The agreement is permanent," Henderson said.

GM and the UAW agreed on a new contract in late September after a two-day strike.

The union clinched a similar deal last week with privately held Chrysler LLC, which is awaiting ratification by some 49,000 workers at the No. 3 U.S. automaker. Health care costs have been rising at some 10 percent in the United States in recent years.

This latest round of contract talks have been seen as crucial to efforts of the Detroit-based automakers to recover from combined losses of $15 billion last year.

(Editing by Jeffrey Benkoe, Phil Berlowitz)