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Delphi: A Helluva Bargaining Chip


Delphi Corp. had barely filed for bankruptcy on Oct. 8 when all eyes turned to General Motors Corp. () It's not hard to see why. In the weeks leading up to Delphi's announcement, many analysts had figured GM would never allow its former parts unit to file for Chapter 11. Doing so meant the already troubled auto maker could inherit up to $11 billion of Delphi's pension and health-care obligations. Even worse, a bankruptcy judge could force GM to pay more for some of the $14 billion in Delphi parts that it buys each year.

But GM is clearly gambling that a Delphi bankruptcy is well worth the risk. As Delphi Chairman and Chief Executive Robert S. "Steve" Miller Jr. closes plants that sell parts to GM, the auto maker can buy those components more cheaply elsewhere. More important, Miller will likely wrest major concessions from the United Auto Workers -- ranging from cuts in wages and retirement benefits to sharply higher employee contributions to health care and an end to the industry's costly practice of keeping laid off workers on the payroll for years. Whatever deal he gets could become a road map for talks between GM and the UAW, which must ink a new contract by October, 2007.

If the stakes for Delphi are high, they are another order of magnitude at GM. Its North American operations have already lost $2.5 billion this year. Corporate activist Kirk Kerkorian, whose Tracinda Corp. on Oct. 12 boosted its stake in GM to 9.9%, is increasing his pressure on management and may request a board seat. And the auto maker has been selling off assets, with much of the money going to fund pension and retiree health-care benefits. GM badly needs a new compact with labor. Getting that from a balky UAW is by no means certain. But as Miller told BusinessWeek: "[GM is] headed down the same Chapter 11 path as Delphi unless there is dramatic change in their staggering legacy labor burden."

But cutting labor costs alone won't be enough. That's why the market is abuzz with rumors that the carmaker is looking to unload more assets. Sources close to Kerkorian say the billionaire sees a cash hoard and saleable assets that could be liquidated, with proceeds being used to speed up a restructuring. The company already unloaded its 20% equity stake in Fuji Heavy Industries Ltd. (), which makes Subaru cars, on Oct. 5. Now the Street is speculating that GM is considering selling off chunks of its wholly owned General Motors Acceptance Corp. and eventually its 20% stake in Suzuki Motor Corp. () or its small piece of Isuzu Motors Ltd. () One much-discussed asset: GMAC's Residential Capital Corp. (), which makes home mortgages under the brand name ditech.com. In downgrading GM's debt, credit rating agency Standard & Poor's () said on Oct. 10 that the turmoil from Delphi's bankruptcy makes it "more likely" that GM will sell "substantial" interests in GMAC and ResCap.

Such a move could well make sense. Both units stand to lose value if GM doesn't separate them from the growing financial distress in its auto unit. GMAC already is paying higher interest rates to fund its lending because its parent's credit rating fell to junk levels in May. And ResCap 5-year bonds yield 1 percentage point more than those of rival Countrywide Financial Corp. (), says bond research firm Gimme Credit Publications.

Of course, this isn't the ideal moment for a fire sale. Potential buyers could try to take advantage of the company's distress and drive hard bargains. Instead, GM could gradually shrink GMAC to take cash out to pay severance and retiree benefits. "But they're not going to throw good money after bad if the union won't meet them part way," says Glenn L. Reynolds, CEO of CreditSights Inc., a New York research firm.

PAYING LAID-OFF WORKERS

The UAW has already said it will cut a deal to lessen GM's rapidly rising health-care bill, including boosting co-pays. But if the auto giant's financial position worsens, workers could be forced to swallow a dramatically less generous plan. GM wants union workers to pay the same 27% of their health costs as its salaried workers. That, say executives, could save well over $1 billion a year.

The big question is whether the concessions Delphi wins in bankruptcy will lay the groundwork for GM to win similar UAW givebacks. Miller says he's determined to end the benefit that pays furloughed workers up to 95% while they await a new assignment. GM will need to win some of the same concessions if it hopes to reduce labor costs. About 5,000 workers are drawing the bennie now, costing GM $750 million a year. Miller also plans to end defined-pension benefits for new hires at Delphi and replace them with a 401(k) plan, allowing the company to limit how much it contributes to the pension pot each year. GM's pension is fully funded, but the costs of supporting ever more retirees with a shrinking workforce could prompt the auto maker eventually to demand that the UAW accept 401(k) plans for its new hires, too.

With a bankruptcy judge in his corner, Miller will likely get the union concessions he's looking for. It won't be so easy for GM without that threat. If a wave of new GM vehicles sells well over the next 18 months, says UBS() analyst Robert Hinchliffe, "then the UAW will say that things are looking up." And if GM builds up its cash reserves by selling major assets, the union could have yet another reason to balk. But the status quo at GM is clearly not an option. "As long as you're burning the furniture, it stays warm," says Miller. "But at some point you run out of furniture."

By David Welch in Detroit, with David Henry in New York


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