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GM Hit by Questions on Labor Pact

The automaker may have overstated the benefits of a recent deal with its union.
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Shares of

General Motors

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were mired further in a selloff Tuesday after a Wall Street analyst said the automaker overstated the benefits of a recent deal with organized labor.

Banc of America analyst Ronald Tadross lowered his outlook on shares of the world's largest automaker, noting that a summary of GM's health care deal with the United Auto Workers released by the union indicates that the company will save just $7 billion, before taxes, from the agreement. The automaker, which touted the deal as a major step forward in its quest to cut back on its burdensome legacy costs, has said it will result in $12 billion in savings, after taxes.

Tadross held his sell rating on GM and lowered his price target on the stock to $13 from $16. He also cut his price target on


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to $7 from $8, citing the company's forecast that it could save $5 billion by reaching a similar deal. Tadross pinned Ford's savings at $3.5 billion.

Shares of GM were recently down 64 cents, or 3.3%, to $18.78; Ford added 4 cents, or 0.5%, to $7.76.

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"Official UAW documents summarizing GM's recent health care deal with the UAW lead us to believe that GM may have to make further cash contributions to the

company's variable employee benefit account when the agreement expires in 2011," Tadross said.

According to the union, after the agreement ends in 2011, GM may be required to contribute more cash to benefits for employees. GM's forecast calls for a $15 billion reduction in the health care liability, but that estimate assumes the agreement extends beyond 2011.

Meanwhile, Tadross said another aspect of GM's turnaround plan also could be a disappointment. The automaker aims to sell off a portion of its finance arm, GMAC, in order to free the business from its bad credit ratings. A GMAC sale could also help the automaker pay down some debt or its health care and pension costs.

On the other hand, GM already has over $30 billion in cash on its balance sheet, and GMAC has been the company's best profit driver in recent years.

"If we assume half of GMAC is monetized and the capital is put in short-term yielding instruments, then GM would forego about $2.5 billion

or $4 a share in cash proceeds over the next five years," Tadross said. "In addition, GM management recently agreed with our view that there is a 'chance' that GM would have to write off all or part of their deferred tax asset in the event of a GMAC sale."

He values GM's deferred tax asset at $15 billion, or $26 a share after taxes. GM could be forced to write it off if it sells GMAC since the finance business has generated most of the company's profits.

Tadross does not have a financial interest in GM, but his firm has an investment banking relationship with the company.

All the cost issues at GM and Ford come against a backdrop of a top-line drain as both companies continue to lose market share to foreign-based competitors.

"Even if GM's expectations for its labor deals are accurate, that won't be much consolation for investors if it continues to lose market share at the rate that it is," said Argus Research analyst Kevin Tynan.