October 31, 2008 / 3:20 AM / 11 years ago

GM, Chrysler merger on hold as aid hopes fade: sources

NEW YORK/DETROIT (Reuters) - A deal to merge General Motors Corp (GM.N) and Chrysler LLC has hit an impasse after the Bush administration ruled out funding for it, three people with direct knowledge of the talks said.

General Motors Chairman and Chief Executive Officer Rick Wagoner talks about cost cutting restructuring during a news conference at GM Headquarters in Detroit, Michigan July 15, 2008. REUTERS/Rebecca Cook

This puts any merger of the struggling automakers on hold until after the U.S. presidential election, the sources said.

The development adds a new element of uncertainty for the embattled U.S. auto industry as Detroit’s political allies warn the sector faces a deepening financial crisis that threatens tens of thousands of jobs.

It also opens the door for Cerberus Capital Management, which owns Chrysler, to restart talks with the Nissan-Renault alliance run by Carlos Ghosn. The private equity firm has seen that option as a backstop to an outright acquisition of Chrysler by GM, one of the sources said.

The sources declined to be named as they were not authorized to discuss the private talks. GM and Cerberus declined comment.

This week, Ghosn said he sees any deals among automakers involving a cash element as unlikely unless the cash came from outside, such as from the government.

Discussions with Nissan-Renault (7201.T) (RENA.PA) would likely start with consideration of an expanded product-based tie-up building on an existing deal between Chrysler and Nissan, the source familiar with those talks said.

A merged GM-Chrysler would be the largest automaker by sales, but analysts have cautioned it would struggle to turn around the overlapping Detroit-based operations of two firms that have seen mounting losses tied to a global downturn.

Chrysler, which has seen its sales fall 25 percent this year, said it was moving ahead with a cost-cutting plan and with plans for new vehicles, including a plug-in hybrid.

“We are taking the tough but necessary decisions to stabilize the business in the short-term and making the viable long-term business decisions to restructure the company for the future,” Chrysler spokeswoman Lori McTavish said.

GM and Cerberus have been in talks since September, according to sources.

GM had approached the U.S. Treasury in recent days about support for the merger through some $10 billion in new funding that would have included taking an ownership stake in the merged company, people familiar with the talks have said.


But a Bush administration official said on Thursday the Treasury Department was not negotiating direct aid for the merger.

Instead, the official told Reuters, the administration was working to speed the distribution of $25 billion in low-cost loans for automakers to retool factories, a move that was authorized by Congress last month.

With merger aid off the table, talks about combining GM and Chrysler are on hold until after the November 4 election when the parties hope to sit down with representatives of the new administration, the sources said.

A decision by the Bush administration to provide the government’s first funding for the auto sector since the $1.5 billion bailout of Chrysler in 1980 had been widely seen as the merger’s best chance for success.

Private investors consulted in the course of the talks have not expressed interest in providing funding for the controversial deal in the absence of government backing, people with knowledge of the talks have said.

In the absence of a deal, Cerberus pushed ahead with a restructuring for GMAC LLC, the money-losing auto finance and mortgage provider in which it owns a 51-percent stake.

The Detroit-based lender said it was in talks with federal regulators about becoming a bank holding company, which would make it easier for it to participate in a $250-billion bank recapitalization plan.

GM shares, down 76 percent since the start of the year, have reacted this week to word of its progress in the merger talks and its lobbying for federal aid. The stock closed down 10 percent on Thursday after the Bush administration official ruled out merger help from the Treasury.

Analysts have challenged the merits of a GM merger with Chrysler. Grant Thornton consultant Kimberly Rodriguez issued a study on Thursday estimating that a GM merger with Chrysler would likely cut jobs for up to 40,000 of Chrysler workers.

Slideshow (6 Images)

Democratic presidential candidate Barack Obama told NBC news in an interview he would meet with Detroit automakers and union representatives if elected.

“My hope is if I’m elected, that I’m immediately meeting with the heads of the Big Three automakers as well as with the United Auto Workers,” Obama told NBC. “And to sit down and craft a strategy that puts us on a path for an auto industry that can compete with anybody in the world.”

Republican John McCain’s campaign has said he favors moving to disburse the $25 billion in low-interest loans already approved for the industry as a first step.

Editing by Anshuman Daga

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