Delphi Labor Deal Greases GM's Wheels

Goldman Sachs says the auto industry is poised to win key concessions from workers.
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With labor negotiations at

Delphi

fading into the company's rearview mirror, shares of

General Motors

(GM) - Get Report

jumped to a four-month high Monday on speculation that U.S. auto workers are succumbing to lower wages and fewer benefits in order to make their employers more competitive.

The tentative agreement that Delphi, GM's bankrupt supplier, said it

reached with the United Auto Workers union last week removes a major hurdle on the automaker's road to recovery as it faces its own landmark talks with the union this fall.

GM, along with its counterparts in Detroit, will seek to slash its wage and legacy costs to hourly workers in the upcoming master contract negotiations in September so it can better compete with foreign competitors that have lower cost models.

A Goldman Sachs analyst upgraded shares of GM to a buy rating from neutral on Monday, arguing that the stage is set for the industry to get what it wants.

"GM can make a compelling case to UAW members that material wage and benefit cuts are needed," Goldman Sachs analyst Robert Barry said in a research note. "And we suspect members and retirees are increasingly amenable to such cuts."

Barry raised his 52-week price target on GM to $42 from $29. The stock recently was trading up 83 cents, or 2.3%, to $36.29.

Shares of

Ford

(F) - Get Report

, the No. 2 U.S. automaker, came along for the ride. Ford's stock was adding 14 cents, or 1.5%, to $9.27.

"

GM's stock is pricing in a level of

labor concessions we think is highly probable," said Barry. "That implies little to no downside and potentially large upside from the real possibility concessions end up even larger than what is priced in."

For the analyst, the call amounts to a shift from a long-term view reflecting the company's challenging fundamental outlook to a shorter-term trading strategy.

The agreement at Delphi, which still needs to be ratified by UAW members, follows

DaimlerChrysler's

(DCX)

agreement to sell most of its U.S.-based business, the Chrysler Group, to private-equity firm Cerberus Capital Management. The UAW, which has initially taken a strong stand against a sale to private equity, ended up

embracing the deal in a tacit acknowledgement of the dire economic circumstances facing Detroit.

Both developments show the UAW in a position of weakness. Terms of the Delphi agreement have yet to be released, but the

Associated Press

reported Monday that the pact would result in legacy workers seeing their hourly wages cut from around $27 to between $14.50 and $18.50 beginning Oct. 1.

In return, three annual payments of $35,000 would be made to each UAW worker who previously had worked for higher wages at GM before it spun off Delphi as a separate company in 1999. During the so-called "buydown period," those workers could also try to return to GM, the

AP

reported.

A bevy of other financial incentives are included in the agreement, including early retirement payoffs and buyout offers.

United Auto Workers President Ron Gettelfinger criticized Delphi on a Detroit radio show Monday for its negotiating tactics, but he credited GM's leadership for orchestrating the agreement. The rhetoric evokes a spirit of cooperation between Detroit's Big Three automakers and the industry's largest labor union as the two sides head toward master contract negotiations.

Delphi's bankruptcy clash posed a grave risk to GM, since a strike at its chief parts supplier could've resulted in financial ruin for the automaker. While the industry is certain to seek major concessions from workers at the September talks, the current negotiating strategy adopted by the UAW suggests that a compromise is workable.

"That translates into progress on healthcare costs, work rules, and potentially on wages in 2007 union talks, helping to offset earnings and free cash flow pressures, raising option value around future restructuring, boosting sentiment, and pushing shares higher," said Barry.