Updated from Feb. 17
For GM, the possibility of a calamitous labor strike at its bankrupt auto-parts supplier has been averted for the time being, but the risk of a crisis remains.
, once a subsidiary of the world's largest automaker, said last week it would postpone any action to cut retiree health benefits until March 31 at the earliest. Such a cut, if taken, could inspire a strike by the union that represents hourly workers at GM and Delphi. A strike could drain GM of its healthy cash position and push one of the nation's largest debt issuers into a bankruptcy of its own.
In its attempt to alleviate its burdensome cost structure, Delphi has threatened in its bankruptcy proceedings to reject collective-bargaining agreements and to terminate hourly post-retirement health-care plans and life insurance.
"While major obstacles and difficult issues remain to be resolved, the discussions to date with GM and our major unions helped frame the concerns and objectives of each organization," Delphi said in a statement.
GM and the workers union, the United Auto Workers, welcomed the temporary stalemate as progress toward an acceptable resolution.
"While there are many significant issues to be resolved, Delphi's decision to delay the filing of the Sections 1113 and 1114 motions provides the opportunity for that process to work and is certainly a positive action," said a statement from Ron Gettelfinger, UAW president, and Richard Shoemaker, union vice president and head of its GM and Delphi departments.
An accord between Delphi and the UAW isn't guaranteed. Any agreement reached between Delphi and the union could have major ramifications for GM in its dealings with the UAW, as a new round of contract negotiations between GM and the union are scheduled for 2007.
Bernstein Research analyst Brian Johnson said in a recent research note that the market is now discounting a 20% to 30% chance of bankruptcy for GM, measured by credit default swaps. He lowered his price target on the stock to $22 from $35, citing its poor performance despite a slew of positive catalysts.
Last week, the automaker announced it would cut its dividend in half and bring Jerry York, a representative for Kirk Kerkorian's investment firm Tracinda, onto its board of directors. Before then, the automaker said mass layoffs and plant closings are on tap and it laid out plans for the sale of its finance business. The company also reached an agreement with the UAW for immediate cost cuts.
Still, the stock hasn't really budged, having lost about half its value in 2005 -- a year in which its credit ratings were reduced to junk status. On Tuesday, Moody's Investors Service pushed GM even further into junk territory with another downgrade to B2 from B1, retaining its negative outlook, which implies further downgrades are likely.
The agency also said that the sale of GMAC that GM is trying to get done may not win its finance arm an investment grade credit rating. That calls into question GM's main rationale for spinning off its most profitable unit. A sale would presumably provide the company with a larger cash cushion, but liquidity concerns surrounding GM are mainly focused in the short-term on its labor relations.
"We believe the key reason GM stock has not responded to any of the catalysts is due to the heightened risk of labor strife," Johnson said (he does not own shares of GM, but his firm does disclose a noninvestment banking relationship with GM).
Burnham Securities analyst David Healy says the Delphi negotiations could benefit from having GM involved in talks for a longer period. Given GM's liabilities to Delphi's workers that stem from its spinoff of the company, the automaker may be persuaded to take on more of the cost burdens to avoid a strike. Now, the automaker is lobbying for a spot on Delphi's creditors' committee, saying its interests aren't being represented by the current committee as Delphi reorganizes in bankruptcy court.
"GM has a liability of $3.8 billion on its books related to the Delphi bankruptcy, but it could end up costing the company as much as $13 billion," Healy says (he owns some GMAC notes). "GM gets a large percentage of its parts from Delphi, so a strike would be very costly. It would take GM a while to line up a different supplier if it had to."
GM's sales and earnings have continually disappointed Wall Street, and pessimism abounds about the company's ability to make products that can effectively compete with the competition.
"Fixing the top-line problems at GM is probably a three- or four-year process," says George Mangliano, director of automotive industry research with Global Insight. "They are not going to have enough of their new products in the showrooms by next year for things to improve dramatically."
If GM's sales problems don't go away for years, it will need to win substantial cost reductions from the UAW next year to maintain liquidity. Before he became a GM director, York said the company could run out of cash in an estimated 1,000 days. The UAW has so far shown fierce resistance to the kind of cuts that could be required.
"I think the UAW will eventually make concessions," Mangliano says. "The question is whether those concessions will be big enough, and how painful the negotiation process ends up being."