Chrysler: a lemon at any price for GM?

NEW YORK/DETROIT (Reuters) - It's not just the slow-selling trucks and SUVs from Detroit that are being marked down sharply for quick sale: U.S. automakers are also desperate to make a deal for themselves.

At the center of the sales efforts: Chrysler LLC, the No. 3 U.S. automaker that traveled from federal bailout to German takeover to private equity ownership over three decades.

Cerberus Capital Management, which has owned Chrysler since 2007, has proposed swapping Chrysler's loss-making auto operations for GM's remaining 49-percent stake in finance company GMAC, sources familiar with the matter said.

Analysts see that as the kernel of a brilliant deal for Cerberus and a potential quagmire for GM at a time when its ability to ride out a deepening downturn in global auto sales has been scrutinized by investors and creditors.

In recent weeks, Cerberus has had talks with automakers from Italy to India and could still clinch a deal with General Motors Corp to offload the Chrysler, Jeep and Dodge brands, according to people familiar with the talks.

Cerberus, headed by Stephen Feinberg, once talked of its $7.4 billion deal to buy Chrysler from Daimler AG in 2007 as a chance to rescue "an American icon."

Now, the more pressing focus seems to be rescuing an exit strategy for Cerberus and its co-investors, including the talks with GM that have hit a snag over how much Chrysler is worth, according to people familiar with the talks.

"It makes sense for Cerberus because it gets them out of the car-making business and keeps them 100 percent in the financing business, which is an area they understand better," said Michael Robinet, an analyst with CSM Worldwide.

In 2006, Cerberus paid $7.4 billion to GM for a 51-percent stake of GMAC, which has been hurt by its exposure to the troubled U.S. mortgage market. GMAC's mortgage lender, ResCap, has lost money for seven straight quarters -- $7.2 billion over that period.

Under the deal proposed by Cerberus, the private equity fund would take full control of GMAC just as the U.S. government is preparing to buy up distressed assets from financial institutions with a newly approved $700 billion fund. That could provide an immediate boost to GMAC's balance sheet.

Cerberus would also be able to combine GMAC with Chrysler Financial to wring more cost savings out of the combined financing company, analysts and bankers said.

By contrast, Chrysler's value -- like GM's -- has plunged over the past year. GM shares are down 80 percent this year and its market value last week neared $2.6 billion, below the roughly $4 billion it was worth in 1929.

The Cerberus acquisition valued Chrysler, including its finance unit, above $9 billion. GM has suggested the auto operations could now be worth less than $1 billion, according to one person familiar with the talks.

BUYER BEWARE

But a crucial problem is what GM would be getting by taking over Chrysler even at that price.

On the one hand, it would quickly control a third of the U.S. auto market and could retake its position as the largest automaker by global sales from Toyota Motor Corp -- a point of pride for decades at GM.

But GM would also be saddled with a total of 11 auto brands and over 66,000 employees -- boosting its payroll by about 25 percent at a time when it is desperate to conserve cash.

GM would also own dealerships throughout the United States that would suddenly be squaring off across the street with line-ups that remain tilted heavily toward the trucks and SUVs that American consumers have shunned.

In one twist, GM would get the iconic Jeep SUV brand, known around the world for its off-road prowess, just as it is looking to sell its own Hummer brand, which it built up as a competitor.

The combination of Chrysler, Dodge and Jeep brands with GM's existing eight brands, including Chevrolet, Pontiac, GMC and Saturn, could actually hurt sales because of their large overlap, a risk one investment banker described as "negative revenue synergies."

The urgency of GM's turnaround plans reflects the deep slump in sales and its own cash burn, which averaged $1 billion a month over the past quarter.

Chrysler's sales have plunged 25 percent this year amid an overall decline of 13 percent in U.S. industry sales. GM's own sales are down 18 percent.

U.S. auto sales, already hurt by rising gas prices and a weak housing market, have been whacked by an escalating credit crisis that has Americans either walking away from vehicle purchases or stymied by a lack of financing.

For GM, whose stock plunged to its lowest level in almost 60 years this past week, taking on another struggling automaker could make already worried investors even more jittery.

"Once you get past the flat-out absurdity part of it, it really doesn't hold together because the last thing GM needs here is a company with too many models, too many divisions and too many dealers," said Peter DeLorenzo, publisher of Autoextremist Website, said.

If GM bought Chrysler, it would have to cut costs even more deeply than the $10 billion in cuts it has already pledged through 2009.

"It will certainly mean job cuts, which none of us like but is the way of the world," said Tim Ghriskey, chief investment officer with Solaris Asset Management. "The only way you do this is if you could make significant cuts."

(Additional reporting by Ben Klayman in Chicago)

(Editing by Bernard Orr)